Is There Anything Wrong With Diversification?

Are there benefits of diversification? What if you split up your capital across 3-5 different companies in different industries? Not talking about a basket of 20 stocks, but doesn’t some diversification make sense?

You can do everything right and still have an unforeseen event sink your battleship. Like a natural disaster that wipes out your company. Or a misinformed short selling attack out of nowhere that may be totally false but can wipe out half your investment.

You may have some of these same questions when it comes to stock diversification, so let me answer them for you.

Is Diversification Overrated?

The short answer is that diversification, in general, is overrated, but 3-5 businesses hardly counts as diversification by the standards of the financial services industry.

If you are managing someone else’s money and are not a genius and do not want to be criticized by their accountant, you’ll spread their money across cash, bonds, real estate, commodities, and stocks and call yourself a pro.

And you’ll also have about a snowball’s chance of producing a significant return on invested capital.

If you are managing your own money and want to be and stay rich, I’d recommend doing what the best investors in the world do: Learn how to invest Rule #1 style.

How to Diversify Your Portfolio

Diversification is simple: Focus your portfolio on businesses you understand, that you know you are buying cheap, and let the diversification happen naturally.

It is worse to be in things you don’t understand than to be un-diversified in industries you do understand.  If you’re doing your work well, you shouldn’t have an industry-wide permanent bad surprise.

The number of stocks I own, and thus my diversification, such as it is, will ebb and flow as I find great businesses to buy.

Sometimes I have 10 stocks…

Sometimes none.

I buy real estate like I buy businesses. Same Rule #1 rules.

Commodities like Gold? I hedge by trading like I showed you in my first book, Rule #1.

The Best Way to Invest $1,000 vs. $100,000

The amount you’re investing matters, too.  With $1,000 you can buy one stock.  Trading friction will eat up your return otherwise.

With $100,000 you can do 5 to 10 if you can stay on top of that many.  Lou Simpson, who ran Geico’s $2 billion fund, had an average of 8 stocks.

For Rule #1 investors, diversification is a by-product of finding companies to buy.

Company A is cheap, I buy it. It goes up and it’s not cheap anymore so I’m done buying, but I still have money to invest.  I find Company B and buy it.  It goes up and it’s not cheap anymore so I’m done buying, but I still have more money to invest… And so it goes.

I’d argue that diversification is not a free lunch at all. I think it costs quite a lot in time and education to be able to successfully buy businesses in many industries and across asset groups.

Invest in Companies You Understand

Let diversification happen naturally.

I think it’s a better, safer investment strategy to buy one right thing over and over again, rather than many wrong things once.

Novice investors who are concerned about losing money on their first investment should not invest more than they can afford to lose.

Or, even better, they shouldn’t invest at all.  Just paper trade until their confidence goes up to a point where they sleep well at night knowing they bought a great company.

Getting to a place where you are comfortable takes time.

If you are investing a million dollars that you can’t afford to lose, you might take a few years to get to a place where you are comfortable with that responsibility.  Until then, either sit in cash or diversify by buying market wide ETFs, like SPY, or trade carefully and gradually add great businesses that you know you understand.

To learn more about Rule #1, click the button below to get my Quick Start Guide to Rule #1.



Phil Town is an investment advisor, hedge fund manager, two-time NY Times best-selling author, ex-Grand Canyon river guide and a former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence. You can follow him on google+, facebook, and twitter.

  • So, you stop buying the one and let it sit? But, when do you sell it? When it is 120% of sticker price? Or when you need the cash to use in a different investment? Or both.

    Read the “Dhando Investor” and I’d like to learn a little more about exit strategies.

    • Oliver Hauschke

      Hope you didn’t only buy it because it was was cheap. You bought it because it was a great company, too. So, why selling a great company. But when to sell? When the fundamentals of the company changed and they are not as good as before. Or sell when you need the money to buy a better company.

      • Correct. Wonderful company. And I’ve held it for a couple of years. It’s increased nearly 200%. When do you “bank” your earnings? Since this post, I’ve decided I must pre-determine an exit strategy. But I need to solidify that strategy. Thus the question – When is enough “enough”?

        • Oliver Hauschke

          I will begin my answer with a quote from Mae West: ” Too much of a good thing can be wonderful!”
          So, when is enough “enough”? A really good question. I bought my first stock 1990 at the age of 18 and I still have it. I still haven’t enough of that stock. But if the fundamentals would change to the worse I would have enough. That means if liquidity would get worse or dept would increase to a level I don’t like. It could be also that ROE or net margin gets worse. I don’t like a negative cash flow either.
          I never sold any stock just because it increased x%. If it’s still great (in my opinion) I will keep it.

          • Clever. I lik the quote, Oliver. And I couldn’t agree more with you but there is a point where I’d like to “bank” my earnings and then maybe buy back into my wonderful company. Say during a rare time when their stock might plummet in value. Then I buy it again when it splats on an old floor.

          • Oliver Hauschke

            Yes, I understand you, but you will never know if and when the stock will rise or fall. Maybe you bank to early or after selling, you miss the point to buy back again. This game is to risky and costs too much money. I didn’t know the correct quote in Englisch, but I found this one: “Too much trend-chasing leads to the poorhouse”.
            So, because you can’t predict the movement of a stock, you never know the right time to bank and buy back again.

  • Jeff

    One place you may want diversification is in your banking. Banks have limits on the insurance they provide for your money and even more important, they may not be able to protect your money at all if there is a problem with the bank. There are entities that can move in and take your money if the bank cannot cover its liabilities – think 2008. Know which bank to put your money in so that your money doesn’t get taken if there is another banking crises. Check out the assets to derivatives on the top 25 banks at:
    Look for Table 1 (pdf page 26) and look at the derivatives.

    Banks one through four are in deep trouble if we have a repeat of 2008 – unless of course they are too big too fail.

  • Garrett Woolley


    From Jan 26, 2016 to today, April 22nd (2 months, 27 days) I’ve recovered 64% of my ZINC losses. (Jan 26th was actually the last time I updated the portfolio)

    How has that happened? What’s the “Event” that triggered such a tick up in my portfolio?

    It’s the effects of NIRP or the growing trend of central banks to institute Negative Interest Rate Policies.

    That kind of tick up in the portfolio is pretty amazing in such a short period of time. Of course, I definitely expect a pullback in some of those holdings. But it’s a result of doing a lot reading and my Rule #1 homework. Yes, there’s always some luck involved here

    So while it’s encouraging, I fully acknowledge I have a ways to go to get back to even again. Those ZINC losses hurt. ZINC was my second largest investment allocation next to the real estate holdings.

    I want to share how I recovered a fairly significant portion of those losses so quickly and why I think those investments I’ve made are going to prove to be very valuable in the long-term.

    Previously, I wrote up “My Story” for investing a portion of my portfolio in Gold / Silver assets since central bankers have decided to implement Negative Interest Rate Policies (NIRP) and how that decision drove me to invest a larger portion of my portfolio into gold, gold mining, gold exploration, gold streaming and gold royalty companies.

    I was surprised that there were no comments at all on that post. Perhaps it was just too long for most Rulers. I do believe it’s important information to understand regarding what’s happening in the ongoing historical global central banking fiat monetary printing experiment.

    I started gold type allocations in earnest about two years ago and built them over time and more so after Mario Draghi took the European Central Bank into NIRP. Then even more in January 2016 when the Bank of Japan went NIRP.

    Here’s the rest of my thesis on what’s happening and how you can’t fight the IMF and the Global Central Bankers.

    Greece, Italy, Portugal, Ireland, Spain…they’re all bankrupt. Sure, those are small economies. But look what’s happening. NIRP has spread from Denmark, Sweden, Switzerland, Europe, Japan and now China.

    Just last month, China became the latest major player to implement NIRP. The overnight Hong Kong interbank offer rate (“Hibor”), which determines the rate that banks in the city have to pay to borrow Chinese yuan from each other, fell to negative 3.725% annually. Insane, right? Are you going to pay nearly 4% to keep your money in the bank?

    The governments can’t finance their debt so NIRP Exits. This is the last act of a desperate central bank. It’s sure to destroy capitalism but it does buy them time and inflate assets prices in the stock market.

    Since 2015, the US Mint has been selling out and breaking records each month for the amount of gold and silver coins they’re selling. They even ran out of inventory last year. Consider that we aren’t even close to an all-out panic, yet people sometimes find they’re on back-order to buy American Gold Eagle Coins because inventory levels are so low.

    So here’s what’s going to happen. Eventually you’ll want to buy gold because you finally realize something is happening. Unfortunately, you won’t be able to buy it. It won’t be available. It would be like trying to buy home owner’s insurance when the tornado is in your neighborhood. Better to be 7 years to early than 1 day too late.

    Today, our version of the tornado is NIRP. It hasn’t hit the US yet and hopefully it won’t, but Janet Yellen has said it should be considered and it seems inevitable that the US must follow this trend in order to weaken it’s currency.

    The United States has some serious problems regardless if the Fed institutes NIRP or not. This is where gold can play an inflationary hedge against global NIRP policies and the United State’s $19.2 Trillion growing debt.

    Were you investing in 2008 when the market crashed? I was. Here’s some interesting facts that aren’t being broadcast on major news networks as of April 2016:

    1) “There is $1.7 trillion in junk bonds outstanding – a trillion more than in 2008. Some of these are sure to default in the months ahead.”

    2) U.S. corporate profits have been in decline since the second quarter of 2015.

    3) Globally, 36 corporate bond issues have defaulted so far this year – up from 25 during the same period of 2015.

    4) Economists at JPMorgan Chase put the U.S. economy growth rate for the first quarter at 0.7% – down by over one-third from earlier estimates.

    NIRP is the reason my portfolio has spiked – billions of dollars are flowing into a safe haven and gold is part of that equation. The reason is because very influential and powerful “Goldman” and “JP Morgan” Types are preparing for a massive run on gold.

    (Please see my previous post about ex-Goldman partner John Thornton leaving to become the CEO of the world’s largest Gold Mine – Barrick Gold)

    So who is buying all the gold? And how would a US Government respond to a run on the banks when NIRP comes to the US? How does capitalism get put back together?

    We have to acknowledge that NIRP is spreading globally.

    America is next . Don’t know when. But I’m preparing now for the future. That’s what retirement is all about.

    It’s as simple as this…and the major media can’t blast this or panic will happen – if the world’s going NIRP, the Fed will have to follow. Our US banks don’t have enough cash to cover even 10% of the US Population from withdrawing their cash from checking accounts. If 10% did that, the entire system would collapse overnight. Do you think this has our governments attention? You bet. That’s why there are daily limits how much cash you can withdraw.

    What if the Fed doesn’t go NIRP?

    The dollar will SOAR and crash our economy. People go to war over this stuff. And remember I said that Japan dropped a nuclear bomb on the currency war when they went negative in January.

    If all the major banks are charging negative interest rates, where will trillions of dollars go next?

    In March, the world’s second largest reinsurance giant, Munich Re’s CEO spoke openly about NIRP. Here’s a quick link:

    Munich Re is a $300 billion insurance company for insurance companies. Now, instead of earning interest on their required cash reserves their company is being forced to pay to keep capital safe. They can’t do that. Nobody can. It’s insane.

    What about companies like JPMorgan, Chase or Japan’s Sumitomo Mitsui Banking? What will they do with their reserves in light of NIRP?

    There are numerous types of insurance companies that need to keep huge cash reserves to pay claims should they arise – Millions of people around the world have paid to have their homes, businesses, properties… even entire cities insured and protected.

    Munich Re is holding almost 300,000 ounces of gold. And looking for more. That’s about $360 Million in US Dollars.

    What will individuals do? How would you keep your money safe if/when NIRP comes to you?

    Gold has had it’s best quarterly returns in 30 years. And yet everyone is just going on like this is normal. It’s NOT normal! There’s a shift happening in monetary policies and elites, sovereign wealth funds, insurance companies…they’re positioning themselves before the stampede into gold. There’s a plan for gold to become part of our monetary system again after we reset the global debts with the next financial collapse and greatest transfer of wealth ever.

    That’s why China’s currency became part of the IMF’s world currency the SDR. It’s also why China is buying massive amounts of gold all around the world. They need to increase their gold holdings when the “great reset” happens. Gold is going to come back to world currencies. I’ll explain a little how later.

    Here’s what Bloomberg reported :

    “Institutional investors including insurers, savings banks, and pension funds are debating whether it may be worth bearing the insurance and logistics costs of holding physical cash as overnight deposit rates fall deeper below zero and negative yields dent investment returns.”

    Rulers, please let that absorb into your brain. NIRP could trigger a massive global “run on the banks” as cash gets hoarded and institutions buy gold to avoid penalties being charged by central banks for using their paper money.

    The only thing that makes paper money work is confidence. That confidence is clearly and obviously eroding.

    US policy makers are completely cognizant of this risk and it’s implications. This isn’t a doomsday scenario. This is no kidding happening RIGHT NOW. This is why gold has had its biggest run in more than 30 years and why I’ve recovered 64% of my zinc losses in about three months.

    Here’s what’s being proposed at the G-20 meetings and IMF to clean the balance sheets of global debt.

    Every central bank is aware that their country can NEVER pay off their debt. They all know it will end badly. Nobody knows when that will happen (or they don’t say) but there is a plan in place for what do to during the panic. Here’s part of that plan.

    Between the US, Japan and Europe there is well over $35 Trillion in sovereign debt. That debt will be revalued or reset overnight by “The Five” global central banks: the Fed, European Central Bank, Bank of Japan, People’s Bank of China and the IMF.

    “The Five” control 2/3 of global GDP and control over 2/3 of all the gold (China has more gold that isn’t officially listed with the IMF but they aren’t required to disclose it through some loopholes)

    According to the IMF’s World Economic Outlook (as of Feb 2016) The largest economies according to GDP in Trillions are:
    US: $19.2
    China: $12
    Japan: $4.3
    Europe: Germany $3.5 , UK $3.0 , France 2.5 Trillion ($9 Trillion total)

    That’s why these guys set the rules.

    Here’s the central question the Fed, ECB, POB, BOJ and IMF are asking themselves:

    How will the world’s central banks regain control when the existing monetary system breaks down? How will they get people to stop hoarding cash, stop buying gold and put their money BACK into the banking system?

    The following is how it will be done. This is the plan for the inevitable. And you can see the money flowing to prepare for it.

    There is only one sure way to regain confidence. Use gold. Currently the U.S. Treasury owns more gold than anyone else in the world. However, I’ve read too many other books and newsletters to suspect that China has the same or more at this point.

    …and it’s getting time to wrap this up. So I’ll have to spell out the plan later.

    To Your Wealth!

    • Josh

      Very nice article Garrett. I do not like the current path of all this zero/negative interest rates. Eventually it should give all us Rulers a market drop and opportunities to load up the truck.

    • noel

      Lots of great information, Garrett. looking forward to the next post! Noel

    • Steve

      Good article Garrett! I’ve been looking at gold for a while. Where do you suggest buying gold without overpaying? Or are you only investing in gold funds?

      FYI here is an interesting article on getting cash out of your bank accounts:

      • Garrett Woolley

        Thanks sharing the link to the article. I’m pretty sure I’ve had several SARs reports filed on me. We’re all suspected felons since the passing of the Patriot Act.

        To Your Wealth!

    • Jonathan Payne

      Woah. I mean, you can “smell” something going down, but this makes me more than a little nervous. I’d love to hear your thoughts on where to look for gold. I’ll go check out your previous comment as well.

    • Kevin P

      Do you have a gold portfolio to follow?

  • Great quote!  Where did you find that?
    Sent from my iPhone

  • Will

    Ok here is my assessment of their moat. I believe they have a brand moat. Think watching movies off the Internet and most people will say Netflix. They were considered by most to be a great company before the price increase and dividing the company into two separate entities. No doubt their brand took a big hit over this. However, they lost 4% of subs according to their last quarter report. The stock dropped 75%.
    The second moat is not as strong but should be discussed none the less. It is a switching moat. Their service is available in over 700 devices from all of the game consoles, direct to your computer, all of the Apple devices, most new televisions, DVD players and so forth. I personally use it through my Apple TV. I like it so much I bought a second Apple TV for our second home.
    Their third moat is a low cost provider. They offer their streaming for $8.00. As well, this is for the largest online library of movies and TV shows on the planet.

  • Clay

    Phil, Thank you for the guidance! I don’t trust management after the buyback / debt debacle. I think their only moats are any exclusive contracts with media companies. With Apple building an enormous “iCloud” server in North Carolina and as both Mike P. and M. mentioned Google and Amazon getting into the space the Netflix ship has just struck an iceberg. I don’t believe they have a switching moat either as it only takes a few minutes to download an app to stream video. I would have been much more comfortable shorting this puppy at $300 than buying it at $75… But that’s just me.
    Happy Thanksgiving everyone! Enjoy your families.


    Here’s what Buffett had to say when asked about diversification:
    “If you really know businesses, you probably shouldn’t own more than six of them. I mean, if you can identify six wonderful businesses, that is all the diversification you need and you’re going to make a lot of money, and I will guarantee you that going into a seventh one rather than putting more money into your first one has got to be a terrible mistake.
    Very few people have gotten rich off their seventh best idea. So I would say for anybody working with normal capital who really knows the businesses they’ve gotten into, six is plenty, and I’d probably have half of it in what I like best. I don’t diversify personally”

  • Tom!  Not the case.  You rock!!!  Keep it coming!  As to BRLI, I'm still in research mode: trying to stay neutral.
    Sent from my iPhone

  • LOL!  Garrett! 
    Sent from my iPhone

  • Will, that lesson is worth the price.  You can not be a successful investor for life without learning the game.  Copying someone like Whitney isn't a bad idea if you could do everything he does to cover the losses but you won't see those trades.  These guys are great and they do derivative trades all the time.  Whitney made a ton of money shorting nflx right up until he went long.  He has room to be wrong.  
    Sent from my iPhone

  • Excellent post.  Thank you.
    Sent from my iPhone

  • Love it!
    Sent from my iPhone

  • Garrett

    I sold GOOG and MCD the other day based on “The TOOLs.”
    Made a nice little profit, but not enough to change the world, nor replace what paper losses I have on BRLI at the moment.
    To Your Wealth!

  • Garrett

    Will!!!! Dude! I love your post today!!! You’ve got:
    …….and Integrity
    …………………and Humility!!!
    You’ve made us all a little wiser and smarter this week. Yes, it stinks to loose money (BRLI for me right now), but we press forward to the mark and run the race ahead of us.
    Well done!

  • Garrett

    Until Phil throws in his $.02, take a look at the long post I wrote regarding Options. It’s buried deep down in the comments from Phil’s weekly headline Blog Titled “Garrett Digs Dirt on Streetsweeper (BRLI).” The specific post you should read is from “Garrett” posted on Nov 13th. I’d normally copy and paste it here for you, but I don’t want to clog the blog with excess duplication!
    I counted 7 things in your brief post that I would like to expand upon! Instead, I’ll just throw in some insights from some of my huge losses.
    Before you speculate with your 5% and loose it or end up on the hook to owe someone $100,000 because you misunderstood your Option Contract, take some of my B.S.(Belief Systems!) and keep the following in mind before you execute your speculative option order.
    “There is always time to make more money.”
    Don’t rush into speculation. I absolutely agree, “Ya gotta have some fun!”…and perhaps you can use that 5% as an investment in your education to learn option strategies.
    I read something, somewhere, sometime ago that always stuck in my head.
    “First learn how to create a dollar.”
    If you can make a $1.00 without any risk, then you can keep on doing that to create more wealth. Options can help you do that IF you understand your strategy, and you already know Rule #1 and PBT. If you don’t, then skip options for now.
    I’m CONSTANTLY learning that I have a whole lot more to learn. And that usually costs me thousands of dollars…uggg…Sometimes I wonder how I’m not living in a tent! (Well, sometimes I do because I love to backpack…but that’s voluntary!)
    Here’s another lesson I learned from another mentor of mine. He’s Robert Kiyosaki’s adviser, Tom Wheelwright.
    “There are no self-made millionaires”
    It takes a Team of people to create and protect your wealth. Start thinking of who you want on your team. CPA’s, Mentors, Partners…I consider Phil’s Blog members part of my team.
    There are always questions that I won’t know the answers or questions I would not have thought to ask. These guys are good. If you’ve been following the blog daily, you’ll have learned a TON about NFLX and have followed Will’s decision making process and how he rationally considered making or not making an investment in NFLX.
    Learn how to create a buck…not earn a buck. Big difference. Most of us are already pretty good at earning dollars. In order to create wealth, we need to create income not earn income.
    I’m heading down to Orlando this week to visit family for Thanksgiving and meet with a manufacturer that’s in the process of designing a product I hope to bring to the market. To me, that’s an example of how to create income vs earning it. If I’m successful at getting it to market, it will be created income.
    Don’t be so eager to speculate. I’d suggest you take that 5%, wait awhile, learn ONE option strategy that you can understand, create your Option Contract with ONE Wonderful Company and try to make a $1.00.
    Phil mentioned one strategy that would be a place to start. Consider focusing on selling “in-the-money puts” at a floor for a deep discount to purchase your “Wonderful Rule #1 Company.” And I’ll tell you right now, Banks aren’t the one for you. Since they’re a “black box” to you, that means they have no MEANING and we don’t invest in Company’s that have no MEANING.
    Be patient. That 5% you want to speculate could make you more money investing in things you know. It’s good that you want to add another level of sophistication to your investor toolbox. Take a few weeks to studying how to “Sell Puts” and learning a new vocabulary.
    If you can’t find my previous post on Nov 13th, email me at and I’ll forward it to you.
    Happy Thanksgiving!

  • Clay

    Sometimes, I think we learn more from our bad investments than our good ones. What you glean from this venture may make you money or keep you from losing money in the future.

  • Will

    I just don’t know anymore. I thought I did. But in light of recent events such as, the issuing of stock and covertible bond to raise 400 million. The questions about the stock holdings of the CEO. The expected increase in content prices. I just don’t know. I feel terrible!!! But I am getting out. I still am working on understanding this company better. I thought I did have a good understanding of it. However, the more I learn about it the more I realize I didn’t know all that much. I am going to get out while I still can. With a loss!!! But not a significant or a total loss. Thanks for keeping me honest about this. I appreciate all the feedback.

  • Kevin

    Thanks for your books and willingness to keep these discussions going. I am in the market because of you. Thank you. I have a question for the board. I am a rule #1 investor and have done well owning companies I understand. However, I have a desire to speculate a little, no more than 5% of my portfolio. I want to buy banks. I know I can not understand them. They are a black box to me. However, I want to speculate 5 %. I can loose 5%. Is this best accomplished by buying the shares directly or by buying LEAPS? I have no experience with options. I would not be doing anything on margin. This is pure speculation. Any ideas would be helpful. I am most interested in the process of buy a option and what it will actually cost me. Once I buy and option can I sell it at a later time or do I have to exercise or let it expire? Are there any hidden cost to owning and holding options? Thanks for the comments in advance….Kevin

  • Mike P

    And don’t forget they both own their own data centers too, as does Apple.
    Where does Netflix host its data? With Amazon. What do you when your own hosting company (who happens to also be the Wal-Mart of the Internet) wages a price war against you (and everyone else) by launching it’s own streaming media tablet (Kindle Fire)? This has bad written all over it for Netflix.
    Will they be around in 100 years? Or even just 10 or 20? That depends, do you believe in miracles?

  • Mike M.

    Don’t forget that Google and Amazon are both getting into this space and they both have tons of cash which Netflix needs and doesn’t have.

  • Will

    I appreciate the feedback. Still working on my case and will post when I am done. It is going to be a long post as I have learned lots about this company.

  • Will
  • Clay

    Will, they just announced the NFLX CEO doesn’t own shares on CNBC… is this true?

  • Clay

    Will, I think worrying about how different companies stream media isn’t as important as who owns the rights to stream it. If I want to watch “Easy Rider” and Netflix doesn’t have it, delivery method is a non-issue. If they have exclusive long term content contracts I’d feel better… Do they?
    As for losing 75% of price, it’s all relative. If it was overpriced by 100% to begin with I’d say it has 25% more to go… it’s all relative. What’s your MOS?

  • Will

    I agree with that concept. However, the reason I asked the question is this a tech company in the first place was to confirm that it isn’t and that insulates a bit better against some new way of streaming movies over the internet. What new technology that could destroy their moat has yet to be determined. In any event, would it not make sense that the leader in the industry who was proactive enough to actually invent and create the industry would be in the best position to benefit from any new technology?
    They lost 4% of their subscribers and the stock lost over 75% of its price. Tell me there is not a disconnect their and an opportunity?

  • Tom

    Just be aware that 5 years from now Netflix could be nowhere because Technology has changed everything.
    Think about Netflix as RIMM before the iPhone. Now think AppleTV or anything in the same direction.
    Be ready when someone comes along and changes everything.

  • Clay

    I’m not tryin’ ta pick on ya Will… I’d want someone to do the same for me if my $$$ was involved. When I heard about the Buybacks at $200-300 and issuing debt at $75 the first thing that comes to mind is “POOR MANAGEMENT”… even Whitney Tilson has come out saying it wasn’t a great move. The 1 Billion “off balance sheet” number was thrown out there too which makes me wary. Accounting can be a black art (at least to me) and I’d hate to get smoked on an investment because of it.
    Don’t dig your heels in too hard… what’s the Keynes saying “when the facts change, I change my mind…” I’ve found the many times I was wrong that the sooner I acted to preserve capital the better my outcome.
    As always feel free to tell me I’m clueless. Theres no shame in my game!

  • Will

    I hear you loud and clear Clay! Is it debt or is it equity? I appreciate all of your and everyone else’s opinion on this. It is forcing me to really do my homework! I want to make sure I am being realistic and rational with this and not just falling in love with a hard luck story. I am writing my case for and against and will share when I am done.
    Happy Capitalism,

  • Clay

    Wil, what’s your opinion of management that buys back it’s stock at $200/share and a quarter later issues debt at $75/share?

  • Garrett

    Hey Tom! I STILL didn’t buy anymore BRLI because I just don’t know! Again, BRLI had MEANING to my wife and she understands the MOAT better than I do. If BRLI went to $6 a share after December’s earnings would I be happy? No.
    If BRLI went to 13 because the entire market was a sell-off, then I’d probably be salivating to buy more at a cheaper price. But this was different and since CEO Grodman doesn’t live next door to me and we can’t go to BWLD to get a beer and burger, I just have to wait it out and see what happens. Kind of a crappy place for me to me…but it isn’t the end of the world.
    Always enjoy reading your posts. Thanks for stimulating more thought!

  • Will

    Thanks Tom and Clay,
    I still like NFLX. I like it more as it keeps going down! The underlying business has not changed. In fact it may have gotten even better. They lost less than 4% of their subs. They are growing at 27% and the stock got whacked by more than 75%. Of the subs who accept the price increase, they will provide NFLX with a cash cow of a 60% premium. They are expanding into Canada, Latin America and the UK while they are still growing in the US. They are by far the leader in online video and TV show streaming. They have the largest library in the world. They are gearing up to provide even more content which in turn drives more subs. They are integrated in over 700 devices such as all the major game consoles most new TV’s and Blueray players, Apple TV, iPhone, iPod and iPad. Far more than any other competitor. That in my opinion is a huge advantage that will take years for any competitor to overcome. I think they have a huge brand moat, price moat being the low cost provider which worked against Blockbuster who was supposed to kill NFLX and a switching moat. They have for sure fallen out of favor. There has been so much bad press about the company it’s stock and the CEO. But this in my opinion is a perfect example of a rule #1 company that is being mispriced by Mr. Market. I am long NFLX and will continue to be.
    Happy Capitalism,

  • Clay

    One last piece of info for Will…. It looks like Netflix is issuing 400 million in convertible debt. It’s my understanding that this should be considered dilutive to current share holders. I’d have to get out my copy of The Intelligent Investor to check, but if my poor memory serves me Ben Graham looked at it as such. I am sure though that it raises the debt load….

  • Clay

    Re Netflix: Samsung and Google near an agreement to include Google TV in new TV sets…. And shame on me I forgot to mention Apple TV earlier. I agree with Tom… Stay away.