Stop Checking on Your Netflix Stock
Last Friday, the closing price of a share of Netflix was $103.96. Today, it was $101.52.
That makes it sound like it’s been a pretty uneventful couple of days for everybody’s favorite purveyor of animated-talking-horse humor, Washington drama and prison humor/drama. It hasn’t been. Just take a look at the chart.
Monday was the craziest. The stock dropped 16 percent at the open, rose 25 percent from that low by 12:30 p.m., then fell 11 percent from there. I’m not aware of any significant news about the company coming out during the day. With a forward price-earnings ratio of 293, even the slightest changes in investors' assessment of Netflix’s future earnings prospects can drive big and perfectly rational swings in valuation, but I think it’s probably fair to say that the bulk of Monday’s price movements weren't driven by such calculations. They contained no information about Netflix.
Obviously there’s money to be made on such volatility, but for most investors, most of the time, the lesson here is simply not to check the value of your portfolio all that often. It seems like cheating to quote Nassim Nicholas Taleb two days in a row, but the retired dentist from his book “Fooled by Randomness” inevitably springs to mind here.
This dentist has taken up investing, and is quite good at it, averaging a 15 percent annual return with 10 percent volatility. If he checks his portfolio just once year, it will be up 93 percent of the time, and he will be very happy. If he checks it every minute, though, it will only be up 50.17 percent of the time. Writes Taleb:
At the end of every day the dentist will be emotionally drained. A minute-by-minute examination of his performance means that each day (assuming eight hours per day) he will have 241 pleasurable minutes against 239 unpleasurable ones.
Losses give us more pain than commensurate gains give us pleasure. This dentist is in constant misery, for no good reason. And if you own Netflix stock and you haven't checked the price this week, you're surely a lot calmer and happier than if you'd been looking at the ticker all day. Probably wiser, too. Knowledge is power, but information isn’t always knowledge.
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