First let me say I don’t have the answers, but I’m confident I will have someday. I feel a quick recap of my investing past is worthwhile for the sake of this post. For almost score years I was a growth investor. Sometime during the naughties I was bitten by the value bug, perhaps it was after reading David Dreman. I then tried to fold value into my growth investing. I’m still trying.  This post continues my retrospection on what has and hasn’t worked.

Here are a few of my guiding principles applicable to investing.

1. There is no black and white.
2. There is almost never certainty and most people who are certain normally have faith rather than certainty.
3. Mistakes are in a way considerably more valuable than successes.
4. Keep it simple.
5. Happiness, enjoyment and play old fun are among the numerous things more important than money.

You may disagree with one or all of those, it would be a boring world if we all agreed. That is not a definitive list, they are simply the first five principles that popped into my head. The numbers are meaningless, except that it makes it easier to refer back to them.

Before I continue, the above picture is by my six year old daughter. She discovered Paint last week and has been producing art at pace every since. The other day when she was having a problem applying a colour she sheepishly came to me to confess that she’d used up all the blue on my computer and could I get some more. It seems she does not yet have a mental divide between the physical and digital worlds.

Where was I? Principles. I find balancing number four with one and two is incredibly difficult. It would be simpler to adopt one approach than to try and fuse multiple approaches. Fortunately number five comes to the rescue, I enjoy the challenge and find investing a lot more fun trying to forge my own path rather than following a clearly sign posted road. My aim is to achieve fusion and make it simple.

Investing successes are wonderful, but it is my mistakes I find more instructive. With that in mind let’s dig into Netflix. I’ve invested successfully in Netflix a few times, most notably for a double from June 07 to Feb 09, when I parted ways for a price around $40. Fourteen months on Netlix (NFLX) closed last night at $100. With patience my 100% gain could have been a 400% gain. So why did I sell? I think my mistake was applying value thinking to a growth stock during the sell decision. I’ll say that again, applying value techniques to when to sell a growth stock is a mistake.

I believe momentum works, i.e. stocks which have outperformed over the last period (various definitions of period exist, but let’s say 6-12 months) are likely to outperform gong forward. However, most of the same studies show that longer term outperformance generally results in future underperformance, i.e. eventually companies revert to the mean. I knew the Netflix story well and it’s growth was reasonably certain as it had successfully fought of all challenges and most importantly the CEO has the same fist name as my son, Reed. So why did I sell? As I said in Jan 2009 “It is now essential to value the company and trim or sell if NXLX becomes overvalued.” Wrong, wrong, wrong. David Gardner at TMF patiently tried to guide me back to the growth path when I made sell calls on growth companies based solely on valuation. David loves it when analysts call stocks overvalued and I now finally realise why. Growth stocks are not about valuation, they are about the story.

Good times to sell growth stocks include when the story changes and when they reach the inevitable upper part of their sigmoid curve, when growth slows and the company begins to reverts the mean. Bad times include when the current ratios and valuation point to an overvalued company.

So where does value fit in? The buy decision. The greatest outperformance can be achieved by buying growth stocks using a value framework.  Put simply, aim to buy growth stocks when they’re cheap. That does not only restrict you to buying them early on in their growth, all growth stocks become cheap at various points along their growth cycle. That point is brilliantly illustrated by Bruce Greenwald in in Value Investing From Graham to Buffett and Beyond using Intel. It’s a fantastic book for experienced investors.

In summary, I’m going to use value to buy growth stocks and momentum to sell.  Congratulation to all Netflix longs who have remained invested  since 2007 or before.

[Update: Catching up on some discussion board reading this afternoon and I came across this comment. “Amazon is a great consumer business. Netflix is a great consumer business. Vistaprint is a great consumer business. Chipotle Mexican Grill is a great consumer business. Apple is a great consumer business. Blue Nile is a good consumer business. There have been numerous short write-ups on all of them — all based on valuation, many of which were 100, 200% and 300% ago.

My only opinion, never go short a basket of great consumer oriented businesses based on valuation arguments unless you want to get fried or have tight stop prices in place (did I really say that? Huh).” DRWHISKEY Deranged Monkey Criticism

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