Imagine the year is 2017, and there you are sitting at your kitchen table, chewing on a pencil. You’re making a personal budget and weighing up your Netflix subscription. You can afford $10 a month, but is there something smarter you could do with that money?
In 2017 the great smashed avo debate is raging, the financial press is full of stories about how you could own a home faster if you gave up one take-away coffee per week, and the Barefoot Investor is on top of the best-seller lists.
You want desperately to be financially prudent. You crave the feeling of owning your own home. So you make a big decision: cancel that subscription and invest the money in Netflix shares instead.
Would that have been a good idea? What happened if you took $10 a month over the last five years and diligently invested it in Netflix instead?
As the next chart shows, you would feel great about your choices right up until 2022. And since then, yikes.
To be clear, you’d still have more money left in 2022 if you invested rather than spent it. Spend $10 a month on Netflix for 5 years, that $600 is gone. If you invested, hey, you have maybe $400 left. But the value of watching Netflix over 5 years has been pretty high.
The company was spending a lot of money making some pretty good TV, and giving it away quite cheaply: Stranger Things, The Crown, Squid Game, etc. You could potentially be experiencing major investor’s remorse.
That great value offering is why Netflix’s share price went down. Ultimately, Netflix prioritised customers over investors, and eventually investors were like, hey, this company doesn’t make enough profits to justify its share price.
Netflix’s tragic third act is shared by the majority of the technology sector. It’s not just Netflix - you’d feel crummy if you turned your Spotify subscription into an investment too. As the next chart shows, if you compare Disney, Spotify, Apple, News Corp (owner of Kayo), Nine (Stan) and Amazon, only Apple has made impressive price gains since 2017. If you cancelled an Apple TV subscription and used that money to invest in Netflix shares rather than Apple shares, boy oh boy, that would give you triple buyer’s remorse.
Also by Jason Murphy:
Why did some businesses fall apart in 2022 and some didn’t?
Low interest rates were evidence of patient investors. People didn’t need to have cash right now, they were willing to wait. They were happy to accept low returns to stash their money, hoping for a payoff later. Now investors are less patient. They are unwilling to stash money in companies with long-run dreams and more eager to invest it in companies that pay off short term. Apple is very profitable right now, which is why it is doing well.
As rates rise, expect more of the same. Businesses that can generate profit right now will outperform those with aspirations to do so later. This is why Netflix is bringing in advertisements – it needs to show fatter profits to those investors it has left!
The tortoise and the hare
The idea of cancelling a regular payment and investing the money instead hasn’t been a good one if you invested in certain tech companies. But the principle is sound – as the charts above show, it was working – until quite recently.
Regularly investing a set sum of money is a strategy known as dollar-cost averaging. Here’s a simplified example: Imagine you will invest $10 each week for three weeks. You spend $10 when shares are $1 each. You now own 10 shares. Next week, shares are $2 and you get 5 more shares for your money. The week after shares are $10 and you get one share. At the end of 3 weeks you spent $30 to own 16 shares and the majority of your holdings were bought at the lowest price.
Dollar-cost averaging helps investors buy more stock when prices are low and less when prices are high, compared to buying a set amount of shares each week. This advantage is illustrated in the next chart.
Of course, it would obviously be even better to time the market and put in all your money when shares are priced low! But timing the market is exceedingly challenging. Dollar-cost averaging can be seen as the wise investor’s alternative to hubristic attempts at predicting when the market has hit its bottom or its top.
Guessing what will happen next? That’s a game best saved for when you’re watching episodes of Bridgerton - and in a trashy period drama, it’s much less costly to get the answers wrong.