Thursday, October 24, 2013

What can an individual investor learn from Icahn’s $800 million Netflix profit?

Earlier this week, the news spread like wildfire: Carl Icahn had sold part of his stake in Netflix—making $800 million in the process. How did he do it?

Icahn follows a contrarian, value investing philosophy—similar to Wade Financial Group’s ConVal® process. The main idea is simple—buy quality companies when their price is low, and then sell when the price recovers.

This much easier said than done. It’s easy for individual investors to get caught up in the emotions, and not want to sell their stock. They’re proud that they “made” so much money (because the stock price has risen) and maybe a little greedy…thinking that if they just stay in a little longer, they can make even more.

Trouble is, no one can tell exactly when a stock has hit its peak…so the investors are liable to get caught holding too much of a stock when its price starts to slide.

As an investor, you have to spread your risk. Remember, it’s not what you make, it’s what you keep that counts. An independent financial advisor can help take the emotion out of investing, and help you make those difficult decisions.

That’s how Icahn made this money—he not only got in when the stock price was low, he got out when the stock price was high. Where is the Netflix price going to go from here? Who knows. Maybe he could have made a bit more by staying in. Maybe he got out at just the right time.

Regardless, I think his $800 million profit will help him feel good about his decision.

One final thought—a common theme I see with many investors is that they hold too much stock in the company where they work. They’re proud to be employees. They love the company, its products, and their friends working at the company. They think the company is on the right path. This opens them up to a lot of risk:
  • That they’re over-invested in a single company, which by itself is extremely risky
  • Not only their investments, but their day-to-day income is tied up in that same company!! What happens if something goes wrong!
Overinvesting in one company—even a company you love—is a bad financial idea, but a trap that many fall into.

--Jerry Wade, CFP®, CFS
Chief Investment Officer
Chief Wealth Advocate

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