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.
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.