He's at it again!

If you're an avid reader of Foolish articles, you've probably spotted many references to Mr. Market and his mood swings. The story, usually attributable to Warren Buffett, is that investing is a lot like negotiating with a Mr. Market, who offers you a different price every day (or minute). When Mr. Market is in good spirits, the asking price is high, but when he's gloomy, you can pick up shares of great companies at a significant discount.

I think it's an apt analogy. Consider the stock price movements of Netflix (NASDAQ:NFLX) over the past 10 months.

In September 2004, Netflix shares bounced around in the $14-$16 range, rising to $17 in anticipation of the Oct. 14 earnings release. But anyone who jumped in hoping for a lift was in for quite a shock. Citing fellow Motley Fool Stock Advisor pick Amazon.com's (NASDAQ:AMZN) rumored entry into the DVD-rental marketplace, Netflix slashed its subscription prices and switched its business model. Where it once generated oodles of free cash, Netflix would now run at a breakeven/slight loss in exchange for capturing greater market share. After the announcement, no less than eight brokerage houses downgraded the stock, and three issued the all-too-rare "sell" rating.

As one can imagine, Mr. Market's reaction to this news was harsh. On Oct. 15, Netflix shares traded below $10. But fast-forward seven months to early May 2005, when Netflix shares again traded at $15+ per share.

What changed in the meantime for Netflix shares to gain 50% since their October 2004 lows? Not much, actually. The company reported two sets of quarterly earnings; neither was earth-shattering. Meanwhile, Carl Icahn won a seat on rival Blockbuster's (NYSE:BBI) board. While this reshuffle will likely corral new spending, it likely won't end the price war that has kept Amazon.com from entering the domestic market. After all, Netflix's price on its most popular rental plan is still 18% lower than it was before October 2004 (an amount taken directly out of earnings), with no price hike in sight.

Yet, valuation-wise, Mr. Market has slapped today's unprofitable Netflix with the same price tag as the Netflix of yesterday -- back when the company was forecast to earn $1.31 per share in fiscal 2005. Future expectations aside, valuing both versions of the company at $800 million just doesn't make any sense, even to an optimistic shareholder like me.

Keep this story in mind next time a stock in your portfolio takes a beating and everyone heads for the exits. While you certainly shouldn't hold on blindly and wait for the price to magically rise again, there is no reason to accept Mr. Market's gloomy outlook, either. Instead, ignore the direction of the price movement and rely on your own analysis of whether the company is still a good investment. If it is, be patient -- it's likely that Mr. Market will undergo yet another mood change soon.

We've got more Netflix takes in our queue:

Netflix is a two-time Motley Fool Stock Advisor recommendation. Want to see which other companies have made the cut? Subscribe today with a six-month money-back guarantee.

Fool contributor Marko Djuranovic owns shares of Netflix but not of any other company mentioned in this article. The Motley Fool has a disclosure policy.