Netflix (NFLX) is reporting earnings tonight and the market is abuzz with anticipation. Will Netflix beat earnings expectations or flop? The only thing most of us know is that the swing is bound to be big in either direction. And there’s little I love more in the market than watching big swings.

As some of you know, for a few years I was almost exclusively a short-term trader (hence the site name). My methods of choice were swing trades (finding a stock that seems to move back and forth between two set points and trading it up and down) and earnings plays (picking a side shortly before a stock’s earnings announcement and then exiting the position right after the earnings are announced).

Netflix earnings days are nostalgic for me because they remind me of one of my best trades of all time; my Netflix earnings play of 2013. It may be hard to believe, but Netflix back then was in a serious drought. It had gone from highs of $300 a share in 2011, then shattered all the way down to $64, and then finally started to head back up in January of 2013.

Netflix earnings
It’s been a wild ride, Netflix

As a former TV addict I saw a lot of Netflix potential, even in 2013, and thought it was time to get in. So I bought 100 shares of Netflix at $161.83 per share a couple of weeks before the April earnings announcement.

Netflix used those April earnings to show they were fully exiting their downslide. The stock shot up to $214.92 a share.

I made $5,308 in 2 weeks.

Granted, it’s nothing compared to what a lot of professional traders make in a day. But for me? A then 23 year old full-time consultant? It was awesome!

Like any quick money making scheme (I’m looking at you, Herbalife), there was a catch. While my win was great for the short term, my focus on the short term cost me dearly.

Because Netflix today is not worth $214.92. It’s worth $475 – more than twice as much. If I had kept my money in Netflix instead of selling after those earnings, my $16,300 investment would be worth $47,500 today. That’s a $31,300 profit!

In other words, selling Netflix too quickly cost me $26,000 in potential profits. Ouch.

And that my friends, is why I became a long term investor (read more on my reasoning here). Unless you’re a quant genius, the path to riches is paved with investments, not trades. Warren Buffett (an idol of mine) would tell you the same.

I’ll admit, I haven’t fully given up short term trades and earnings plays – they’re way too fun for me (nerd alert). But, I keep them limited to a very small portion of my portfolio. The vast majority of my portfolio is long term investments I believe in and plan to hold for years.

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2 Comments on Netflix Earnings: How My $5,000 Win Cost Me $26,000

  1. Rachel
    April 15, 2015 at 4:12 pm (2 years ago)

    But what about using the $5000 to reinvest in earnings and other event-driven strategies? I don’t think it’s fair to estimate your gains long term holding that amount because most people our age can’t afford to have $16k tied up for a year, and it would certainly be unwise to do that for only one stock. NFLX is an anomaly, not the norm compared to other stocks. Investing a $16,000 account yields less than 10% diversified long term in stocks ($1600), 15-17% in an aggressive index fund ($2400), and for an event-driven strategy yielding $100 per week after commissions which is certainly doable, $4800. Using options correctly you could generate an even large amount. Would love to hear your thoughts.

    Reply
    • The Day Tradette
      April 15, 2015 at 4:42 pm (2 years ago)

      Thanks for the feedback! You’re right – an event driven strategy has the potential to be profitable for some people. And as I mentioned, I still make some event driven trades for fun. I write from my experience, so I would never advocate a reader blindly take one approach over another – everything I write should be considered within the frame your own personal circumstances.

      However, that profitability relies too much on you being right a lot of times – in the case you give, 52 times a year – and exiting positions quickly enough to avoid huge losses. In an event driven strategy, with big swings (like Netflix), you could get hit with a big surprise loss that wipes out all of your $100 wins in one trade. The real issue is, it’s nearly impossible to consistently predict how the market will react to an event. Even if you’re an excellent chart reader, sometimes the market is just irrational. I’m sure someone could make a correct estimate 10 times, but I’d be hard pressed to find a non-professional trader who can make correct predictions 50 times a year with no big incorrect predictions.

      On top of that, you’re at a tax disadvantage, as short term trades are taxed at a higher tax rate than long term investments (held at least a year).

      And to answer your point on the amount of money involved – no matter how much I put in, I would have made a 300% return if I had kept my Netflix investment. So even just putting in $2,000 would turn into $6,000 (a $4,000 profit – not bad).

      I think it’s much more practical for the average investor to evaluate companies, not events. Unless you pick only stinkers (highly unlikely), long term holds tend to go up over time provided you are patient.

      Reply

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