MONEY investing strategy

How to Invest Better By Paying Less Attention

The secret to investing is not caring what happens.

Jiddu Krishnamurti spent his life giving spiritual talks. As he got older, he became more candid. In one famous moment, he asked the audience point-blank if they wanted to know his secret.

He whispered, “You see, I don’t mind what happens.”

I’ve spent the last five years as an investor trying to do the same. I’ve made a concerted attempt to care less about what happens in the investment world. I still pay attention, of course. It’s my job. But I’m far more selective about what I read. It has helped more than I could have possibly imagined.

Caring gives a false impression that what you’re thinking about is important. If I pay attention to quarterly earnings, shouldn’t I be a better investor? If I check what the market did this morning, am I not more informed?

Common sense tells you yes. But it’s wrong. More often than not, not caring is the way to go.

My journey started with a realization that the more media investors paid attention to, the worse they did. The more they analyzed, the more decisions they had to make. The more decisions they made, the more chances they had at being wrong, letting their emotions take over, and doing something regrettable. Find someone who has mastered personal finance, and you’ll find someone with a pathological ability to not give a damn.

There are so few exceptions to this rule it’s astounding. Where is the evidence that paying attention to every last piece of market news makes you a better investor? I’ve looked. I can’t find it.

So I stopped caring about a few things.

1. Finding the perfect portfolio

Investors crunch numbers to find the perfect number of international stocks they should own at a certain age, the precise amount they should allocate to bonds, and exactly when they should cut back on stocks when historical models show they’re overvalued.

Here’s the truth: None of these models are perfect, so back-of-the-envelope, “good enough” estimations will usually do just fine.

Harry Markowitz won the Nobel Prize for creating modern portfolio theory, a formula that precisely calculates the optimal asset allocation to maximize return at a given level of risk.

With his own money, he found this too complicated.

“I visualized my grief if the stock market went way up and I wasn’t in it — or if it went way down and I was completely in it,” Markowitz once said. “So I split my contributions 50/50 between stocks and bonds.”

Good enough.

2. Quarterly earnings

The median company in the S&P 500 was founded in 1949. So it’s 66 years old. Therefore quarterly earnings tell you what happened in the last 90 days, or 0.3%, of its life. The odds that groundbreaking developments will occur in such a short period of time are slim, and they approach zero as time goes on. It’s the equivalent of judging how your day is going by analyzing the last four minutes.

Amazon.com CEO Jeff Bezos says he runs his life on a “regret minimization” framework. His goal is to look back at age 80 and regret as few things as possible.

What are the odds that I’ll be 80 years old and say, “Man, I wish I paid more attention to Microsoft’s Q2 2011 revenue”? Pretty low. So I choose not to care.

3. Wondering why the market fell

The Dow fell 0.4% on Wednesday. Why?

Lots of reasons were given. One article blamed fluctuating interest rates. Another cited “Greece worries.” Others pointed to the Fed, weak GDP growth, and falling energy prices.

“Random, unidentified marginal sellers were a little bit more motivated than random, unidentified marginal buyers” wasn’t mentioned. But it’s the best explanation for why stocks fell. The same goes for almost every day.

4. Getting other investors to agree with me

Let’s say your weather app says it’ll be 78 and sunny tomorrow, and mine says it will be 74 and overcast.

Would we argue about this? Go on TV and duke it out? Call each other names?

Of course not. We’d say, “Eh, let’s just see what happens. Probably doesn’t matter either way.”

Investors don’t think this way. The fights people get into about whose forecast is right are off the charts.

Unlike weather, money is an emotional subject. And unlike tomorrow’s temperature, our investment decisions are in our control. So many investors get offended when others disagree with them. But once you realize that A) your views are just as biased as everyone else’s and B) there’s a good chance you’re both wrong, you stop seeing any reason to argue. Debate, sure. But life’s too short to argue.

Investing is so much more fun when you come to terms with these things. Set up a portfolio that suits you — one that lets you sleep at night and gives you a reasonable chance of meeting your financial goals. Give it room for error. Have a backup plan. It’s the best you can do.

After that, you see, I don’t mind what happens.

For more:

Contact Morgan Housel at mhousel@fool.com. The Motley Fool has a disclosure policy.
TIME Currency

This Experiment Shows Why You Should Take Bitcoin Seriously

Newest Innovations In Consumer Technology On Display At 2015 International CES
Ethan Miller—Getty Images A general view of the Bitcoin booth at the 2015 International CES at the Las Vegas Convention Center on January 8, 2015 in Las Vegas, Nevada.

NASDAQ is using a key bitcoin technology

The technology that powers the cryptocurrency bitcoin could soon become much more important to the global financial system.

NASDAQ is planning to pilot a new transaction-tracking system on one of its smaller markets that makes use of blockchain technology, a key component in the bitcoin system. A blockchain is a public ledger that keeps track of transactions within a digital currency by logging them across various computers. The computers work in tandem to ensure the authenticity of a transaction. This automated process allows for transactions to be decentralized from a central bank or money issuer, which speeds up the rate at which a buy or sell can occur.

Instead of using bitcoin, NASDAQ will apply this technology to securities bought and sold on a market for private companies. Shares in these companies are often bought and sold using a slow, informal system in which lawyers must manually verify transactions, according to the Wall Street Journal. The blockchain could significantly increase the pace at which trades can be executed.

NASDAQ calls the plan to use blockchain technology an “enterprise-wide initiative.” The financial sector has expressed a keen interest in bitcoin and its tech. The New York Stock Exchange and Goldman Sachs, among others, have already invested in bitcoin-related companies. Even if bitcoin fails as a currency, many observers have said the blockchain technology behind it could have promising use cases in finance and other fields.

MONEY Markets

How One Man Could Tank the Stock Market

business person pulling piece out of jenga tower
Alamy

It's unlikely that a single person caused the 2010 "flash crash" in which the Dow momentarily lost 1,000 points. But here's how the Feds say one guy helped trigger it.

Imagine for a second that you want to make money on Craigslist—and you have no scruples.

How might you go about it?

One creative idea: You make a bunch of fake Craigslist posts pretending to sell something lots of people want—say, a recent model of the iPhone. Other people selling that phone on the site notice your posts, get nervous about the glut of competitors, and start cutting prices aggressively so they don’t get stuck holding a worthless model. When prices plunge low enough, you swoop in and buy a bunch of (cheap) phones—and then delete all your fake posts. Suddenly, it seems like the supply of that iPhone is low, and prices go back to normal. And that’s when you sell the phones…at a big profit.

Sounds pretty nefarious, right? Well, that’s essentially what federal prosecutors claim British trader Navinder Sarao was doing during the 2010 flash crash, when U.S. stocks lost a trillion dollars in value before rebounding moments later. Except instead of iPhones on Craigslist, he was selling E-mini S&P 500 contracts in the futures market (buyers of these futures contracts are betting the market will rise; sellers that it will fall).

According to an FBI criminal complaint, Sarao made nearly $1 million the day of the crash by posting bluff sales orders priced so they would never actually be executed and then buying up contracts once prices dropped as a result of his orders: an activity called “spoofing.” In the hours before the crash, the Feds claim he was responsible for more than 20% of the downward price pressure on the market.

In fact, the government says Sarao has been using spoofing techniques for years, turning to computer automation to post huge orders quickly and en masse—and cancel them anytime they got close to actually going through. His profits since 2010? About $40 million, according to the complaint.

You might wonder, “well how did this guy get away with making so much money with such big fake orders without anyone noticing?” The answer, according to emails obtained by the government, is that Chicago stock exchange authorities did notice. And when they contacted Sarao to tell him to stop, he reportedly told them “kiss my ass.” Between that and the fact that he set up a corporation (on a tax-free Caribbean island) literally called “Nav Sarao Milking Markets,” it’s pretty wild it took authorities five years to arrest him.

As Michael Maiello at The Daily Beast says, “They saw Sarao entering phony trades and responded by sending him letters… this is no surprise. Exchanges don’t make money by kicking people out of the game.”

Now, as distasteful as his alleged actions sound, nobody is really claiming Sarao caused the flash crash singlehandedly. An early report from the SEC acknowledged many other factors were at play, including “unsettling political and economic news from overseas concerning the European debt crisis,” which made the markets much more skittish than usual.

“99.99 percent of the time, a spoofing strategy is not going to cause a flash crash,” says Larry Tabb, founder of the research firm TABB Group.

Indeed, Sarao allegedly kept spoofing enormous orders for years after the crash without another one occurring.

But it’s clear that one individual can at least have an outsized influence on the market, says Spencer Mindlin, a research analyst at Aite. When investors are already nervous and there is the illusion of big sellers trying to unload a bunch of securities all at once, it can spread a contagious fear that the market is headed downward, which then becomes a self-fulfilling prophesy.

One theory is that Sarao’s spoofs triggered futures contracts sales by Kansas-based investment company Waddell and Reed—to the tune of $4.1 billion—and it may have been that huge movement that led to the cascade of sell-offs.

“Nobody wants to catch falling knives,” says Mindlin.

So what does this all mean for you and other ordinary investors minding their retirement portfolios? On the one hand, this news is pretty discouraging. As Matt Levine at Bloomberg says, “It’s not … confidence-inspiring to read that a guy with a spreadsheet can trick everyone into thinking that the market is crashing, and thereby cause the market to crash.”

But there’s good news.

For one, it’s theoretically less likely that a similar flash crash could occur today, thanks to new circuit breakers used by exchanges that pause trading temporarily when the values of stocks and other securities drop too rapidly over a short period of time.

The time when trading has halted “allows supply and demand to recalibrate,” says Tabb.

Additionally, a flash crash generally won’t affect long-term investors who don’t day-trade, since it lasts just a few moments and prices bounce back almost immediately. The only people hurt are those on the other side of lousy trades, which today are typically high-frequency traders using robots. Though there are exceptions, of course, like one retail investor who was ill-fated enough to sell right at the minute of the flash crash in a move that cost him nearly $20,000.

More importantly, just because you don’t lose money in a flash crash, it doesn’t mean you aren’t affected by it. Arguably, the worst thing about a flash crash is how it erodes confidence in the fairness of the market.

Investment firm Glenmede estimates that the nearly $2 billion of outflows from equity mutual funds in 2010 was at least in part because of investor fear following the flash crash.

“That’s money pulled out of the market that then couldn’t be used to work for the economy and help companies grow,” says Mindlin.

In other words, it’s money that could have—but didn’t—end up in your retirement portfolio in the form of higher returns.

TIME Telecom

Why Nokia’s Blockbuster Merger Turned Into Such a Mess

Nokia's chairman Risto Siilasmaa, Nokia's Chief Executive Rajeev Suri, telecommunications company Alcatel-Lucent's Chief Executive Officer Michel Combes and Alcatel-Lucent's chairman of the supervisory board Philippe Camus shake hands prior a press conference on April 15, 2015 in Paris.
Chesnot—Getty Images Nokia's chairman Risto Siilasmaa, Nokia's Chief Executive Rajeev Suri, telecommunications company Alcatel-Lucent's Chief Executive Officer Michel Combes and Alcatel-Lucent's chairman of the supervisory board Philippe Camus shake hands prior a press conference on April 15, 2015 in Paris.

Nokia marrying Alcatel-Lucent will have a huge impact

The big headlines in tech M&A come when they involve growth – Facebook buying Instagram or WhatsApp, for example – but more often they tie together two aging companies in established but still important industries. Ideally, in those cases, the merging partners will complement each other’s weaknesses, making for a stronger corporate marriage.

Take the mature but competitive telecom-equipment industry. If selling and maintaining the arcane gear that quietly keeps the Internet humming is hardly a sexy industry, it’s crucial if you want to watch a video of a dog trying to catch a taco in its mouth. Last week, when one industry giant (Nokia) offered to merge with another (Alcatel-Lucent) in a $16.6 billion deal, it seemed like a textbook tech M&A deal, one that analysts have been expecting for years.

Instead, the announcement of the deal seems to have left everyone unhappy. Analysts lined up to argue why the tie-up would be troubled, while investors wasted little time in selling off shares of both companies. Since the deal was announced Wednesday, Nokia’s shares have lost 4% of their value and Alacatel-Lucent’s have lost 21%.

This is the rare M&A deal that everyone has long-expected to happen and yet seems to please almost nobody. The telecom-equipment sector has been rife with consolidation and restructuring for years, as companies scramble to grab control of technologies that power broadband, wireless networks, networking software and cloud infrastructure.

Both Nokia and Alcatel-Lucent have been undergoing wrenching restructuring to compete with Sweden’s Ericsson, the market leader, and China’s up-and-comers Huawei and ZTE. Nokia sold its handset business to Microsoft for $7.2 billion in 2013, which helped return the company to profitability last year. Now that Nokia is alsoshopping around its mapping software, a merger seems like an important step toward strengthening its remaining operations in the telecom-equipment business.

Alcatel-Lucent has been having a harder time in the past decade. In 2006, the stock of France’s Alcatel was trading near $16 a share when it paid $13 billion for US-based Lucent. But clashing cultures, rigid bureaucracies and a failure to innovate led to years of losses at the combined firm, pulling Alacatel-Lucent’s stock down as low as $1 a share. Years of restructuring brought tens of thousands of job cuts but also, in recent quarters, signs the company may be making a fragile comeback.

So why did everyone expect a Nokia-Alcatel merger to work when the Alcatel-Lucent one failed? For one, there was a complementary fit in terms of the product and geographical markets both companies served. Also, both companies had just emerged from painful restructurings holding smaller shares of a competitive market. By combining, they could command a market share rivaling Ericsson’s and also marshall resources needed for the high R&D costs of next-generation gear.

That was the theory on paper, and for years reports surfaced periodically that the two were talking about joining forces. Talks of Nokia buying Alcatel’s wireless business fell through in 2013, and another report of a merger last December went nowhere. Now that it’s happening, the conversation has shifted from speculation about the deal to the details of how it would work. And some of the details aren’t pretty.

Any large-scale tech merger requires years of integration of sales, engineering and managerial ranks. In the best case, it takes years to complete. In the worst, it leads to entrenched fiefdoms and a bureaucratic hall of mirrors. And in areas where there is overlap, job losses will follow. But Alcatel-Lucent is partly owned by the government of France, which sees the company as a strategic national asset. It will fight massive post-merger layoffs in France, and the Finnish government is likely to do the same.

Analysts expect the trouble that all this work involves will hamper Nokia for some time. Some argued Nokia should have bought only Alcatel’s wireless assets, but since that didn’t didn’t work Nokia offered a discount for the whole company. And what a discount: Nokia’s bid is worth only 0.9 times Alcatel-Lucent’s revenue last year, well below the average figure of 2.5 times revenue for recent telecom deals. Alcatel-Lucent’s shareholders feel the discount is too much, leading to last week’s selloff.

So as inevitable as a combination of Nokia and Alcatel-Lucent seems, there are regulatory, integration and cultural issues that will complicate things for years. In the meantime, few investors are pleased about the deal. Throwing these companies together may be like, well, that taco heading toward the dog’s mouth: the appetite is there, but in the end all you have is a mess.

TIME Markets

Bloomberg Terminals Experience Outage Across the Globe

The United Kingdom's Debt Management office announced that it had postponed the sale of £3 billion in treasury notes

Bloomberg financial terminals across the globe went dark Friday disrupting operations in the financial world and leading some financial professionals to delay deals.

Shortly before the opening of markets in the United States, a Bloomberg spokesperson told TIME that the company had restored service to “most customers.”

“There is no indication at this point that this is anything other than an internal network issue,” the statement said. “We apologize to our customers.”

Bloomberg terminals are the leading provider of real-time financial data to traders and other financial professionals. The technology’s chat function is also a popular form of communication between traders.

The outages, which began at the end of the trading day in Asia, primarily disrupted markets in Asia. The United Kingdom’s Debt Management office announced that it had postponed the sale of £3 billion, or $4.5 billion, in treasury bills in response to the outage.

Bloomberg terminals are the crown jewel at Bloomberg LP. They reportedly cost $24,000 a year per user and are used by more than 300,000 people.

MONEY stocks

Why Netflix Is Splitting Its Stock

Headquarters of Netflix, Inc., in Los Gatos, California
Tripplaar Kristoffer—Sipa USA Headquarters of Netflix, Inc., in Los Gatos, California

Netflix is asking shareholders to pave the way toward a drastic stock split. But it really doesn't matter -- with a few notable exceptions.

Netflix NETFLIX INC. NFLX -0.18% shares are about to split, probably in a drastic manner. The company is asking shareholders for permission to go as far as a 30-for-1 share exchange. It sounds very dramatic, but most investors really shouldn’t care at all.

Here’s why.

What’s new?

Netflix just filed a preliminary version of its 2015 proxy statement, asking shareholders to vote on seven proposed actions before the June 9 annual meeting. Among the typical issues, including approving Netflix’s chosen auditing firm and reelecting a tranche of directors for the next three years, is a more unusual request straight from the board of directors.

In Proposal Four, Netflix asks for a simple majority vote to approve a vastly expanded reserve of capital stock. This is an important first step toward splitting Netflix shares, which have looked rather pricey in recent years.

The board is currently authorized to issue as many as 160 million common shares. If the fourth proposal is approved, that limit will soar to 5 billion potential certificates.

This move could lead in many directions:

  • Some companies raise their share counts before selling a heap of additional certificates back to shareholders. That’s one way to raise capital — and dilute the stock’s value for current shareholders.
  • It could also go toward a generous stock-based compensation program, which would artificially boost bottom-line earnings, but with another helping of share dilution.
  • Netflix even said the extra shares could be used for share-based buyouts, paying off the target company’s current owners with fresh Netflix stock instead of cash. Again, dilution follows.

Netflix made no bones about the intended purpose, though. The company said it “does not have any current intention” to explore any of the activities I just listed, other than supporting the share-based compensation strategy that is already in place.

Sure, the board reserved the right to issue additional shares for these purposes at a later date, without asking stockholders for another share count expansion. But there’s no reason to expect any of these things to happen anytime soon.

No, this is all about powering “a stock split in the form of a dividend.”

Simmer down now

Now, just because Netflix is likely to get its wish doesn’t mean you should expect the entire 5 billion shares to hit the market right away.

For example, Netflix doesn’t use its entire 160 million share allotment today. The company only has 60 million shares on the market at this time, and could do a simple 2-for-1 split without even asking for shareholder permission.

In fact, it’s absolutely normal to have a large reserve of approved but unprinted shares. Netflix said it set the 5 billion share count to be “consistent with the number of shares authorized by other major technology companies.”

Following that trail of cookie crumbs, you’ll find IBM INTERNATIONAL BUSINESS MACHINES CORP. IBM -0.43% has 988 million shares on the open market but a shareholder-approved maximum allotment at 4.7 billion stubs. Microsoft MICROSOFT CORP. MSFT -1.1% is allowed 24 billion shares but has only issued 8.2 billion. Apple APPLE INC. AAPL 0.88% lifted its approved share count from 1.8 billion shares to 12.6 billion just before running through a 7-for-1 split last year, but has only issued 5.8 billion tickets so far.

All of these major tech stocks sit on approved share counts somewhere in the same ZIP code as the proposed Netflix target. They also have the power to execute a modest stock split anytime they like, or to put their share reserves to work in any of the other actions I mentioned earlier.

It’s just a nice buffer to have, and I expect the Netflix split to stop far short of the maximal 30-for-1 ratio. Something like a 10-for-1 split would leave plenty of future wiggle room while lowering Netflix’s share prices well below the psychological $100 barrier.

What’s the big deal?

In most cases, stock splits are nothing but a massive play on investor psychology. Buying 10 Netflix shares at $470 each serves exactly the same purpose as picking up 100 stubs for $47 each. In both cases, you built a $4,700 position with a single commission-spawning transaction.

But a $47 stock certainly looks more affordable than a $470 version, even if all the usual valuation ratios stay unchanged. And the move actually does make a difference every once in a while.

For example, Apple would not be a member of the Dow Jones Industrial Average today if it hadn’t performed a radical stock split first. On the price-weighted Dow, the pre-split Apple ticker would have overshadowed the daily moves of the other 29 members, and the Dow was never meant as a proxy for Apple investments.

Netflix isn’t exactly in position to snag a Dow spot anytime soon, but you never know. Extreme share prices can make for some strange and interesting situations. Keeping share prices low (but not too low!) can save Netflix some sweat if the company ever gets close to a Dow Jones seat — or any other price-based honor that could boost the company’s market status.

Finally, the single-share price might matter to very modest investors who could afford a couple of $47 Netflix shares but would have to save their pennies to get a single $470 stub. Options contracts also become more affordable at lower prices, since they often represent 10 or 100 shares each.

So when capital is tight, lower share prices actually matter. From that perspective, stock splits are shareholder-friendly moves.

NFLX Shares Outstanding Chart

Final words

I expect this proposal to pass, because such plans rarely meet much resistance. Investors tend to like stock splits, and it doesn’t hurt to give the company’s board and management some extra financial flexibility.

Then, we’ll see Netflix pay out a special dividend. For each current share, Netflix owners will receive another four to nine additional shares for a final split ratio between 5-for-1 and 10-for-1.

The move won’t change Netflix’s total market value. Nor will it affect the direct value of your current Netflix holdings. We’ll all get more granular access to the stock. So we can make smaller trades and have more control over the size of our Netflix investments.

This is a fairly nice move with no real downside. But it’s also no reason to break out the champagne bottles and order up fireworks.

It’s ultimately just another housekeeping item that won’t move Netflix stock at all. Or if it does, the change will be based on nothing but day-trader psychology and will fade quickly.

Feel free to buy or sell Netflix shares based on whatever happens in Wednesday afternoon’s first-quarter earnings report. But for all intents and purposes, you can ignore the upcoming stock split.

TIME Media

Why Investors Are So in Love With Netflix Right Now

The Netflix company logo is seen at Netf
Ryan Anson—AFP/Getty Images The Netflix company logo is seen at Netflix headquarters in Los Gatos, CA on April 13, 2011.

Nothing is ever straightforward about Netflix earnings–and last quarter was no exception: Netflix shares surged 12% in after-hours trading Tuesday after it reported earnings per share of 38 cents, a long way from the 63 cents a share that analysts had been expecting.

To explain that disconnect, you either have to conclude that Netflix investors have lost their minds or that there’s something else they saw and liked in the numbers. With Netflix, it can be both at once.

Because it’s as if there are multiple companies being analyzed here: the one poised to take over the world, or the one that is breaking the bank to get there. The stock that’s risen 4,000% over the past decade, or the speculative stock with the PE ratio above 160. In the case of Netflix, there’s plenty of room for both arguments.

One reason investors were willing to overlook the big earnings miss is that much of it was caused by the strong US dollar, which lowered international revenue 48%. Without the foreign-exchange losses, Netflix would have reported a 77-cents-a-share profit, above the Street’s expectations. As it was, Netflix reported a $14.7 million net profit, less than half the $35.8 million profit a year ago.

Investors, it seems, are willing to overlook that because of another metric, one that’s particularly scrutinized at Netflix these days: new subscribers. In the US, Netflix added 2.3 million new subscribers net of cancellations, which was well above the 1.8 million adds it had expected. Internationally, Netflix added 2.6 million net subscribers, also above the 2.25 million it forecast.

That was largely because of new original programming the company has creating, like the third season of House of Cards and the debut of new Netflix creations like Tina Fey’s Unbreakable Kimmy Schmidt and the star-studded drama Bloodline. Netflix has been cultivating series that can appeal in the US as well as abroad, and the new subscriptions suggest it’s working for now.

This quarter, the company is rolling out even more original content, such as the Marvel series Daredevil, released last Friday; a documentary series, Chef’s TableGrace and Frankie, a comedy starring four Emmy award winners; Sens8,a scifi series created by the Wachowskis; and the return of Orange Is the New Black. Those should keep new subscribers signing up, but they’re also adding to spending.

It’s the mounting spending that the Netflix bears often point to. Streaming content obligations (basically, licensing fees for titles coming in the future) rose to $9.8 billion in the last quarter from $7.1 billion a year ago. These figures don’t necessarily affect the current income statement as much as give an indication of how spending will happen in the future, but they are daunting numbers nonetheless.

For the last quarter’s spending, Netflix offers another home-brewed metric, contribution profit. It’s revenue minus content spending and marketing expenses, so it excludes tech infrastructure or administrative costs. It’s an unorthodox metric, but it at least shows how, as Netflix pushes into new markets, content and marketing are performing against revenue.

In the last quarter, the contribution profit from US streaming operations rose 55% year over year to $312 million, or 32% of revenue. International streaming, however, incurred a contribution loss of $65 million, up from a loss of $35 million a year ago. In the current quarter, the contribution loss will swell to $101 million.

On a video call discussing earnings (like its home-brewed metrics, Netflix has its own style of conference call, where a pair of rotating analysts ask questions on a Google hangout), CFO David Wells was asked about how long the spending would keep growing. He reiterated a warning Netflix has made before, that the losses could grow throughout 2015, thanks in good part to marketing in newer markets in Europe and Asia.

“We’ve said we are committed to running the business at global breakeven and we have ambitious plans for international growth,” Wells said. “We’ll have some bigger launches, and we’ve described them as meaningful and significant investments in back half of this year. So you should expect those losses to trend upward and into ’16, and then improve from there.”

The case Netflix has been making has been that it’s spending aggressively to take advantage of a global, long-term trend away from traditional broadcast and cable TV and toward TV streamed over the Internet. Others, like HBO, Hulu and possibly Apple are approaching the same market, but Netflix is racing less to compete with them today than to be ready as the audience and demand for Internet TV emerges.

To get there, Netflix has made it clear it will spend what it needs to, even at the risk of losses or shrinking profits this year. Future content obligations are growing, Wells said, but not faster than current revenue. The company’s big bet is the spending today will translate into faster growth and more profit starting in 2016.

This explains why subscription growth is so closely watched. It’s the clearest measure of whether the spending on new programs and new markets is actually delivering. The bulls believe this long-term growth will come as Netflix has promised.

What it doesn’t explain is why the stock sees such volatile swings whenever Netflix reports its quarterly earnings. For that, you need to look to the stock speculators, who have for years driven Netflix shares to euphoric heights that make its executives uncomfortable, if not themselves.

Netflix’s business may be as bullish as ever, but that doesn’t mean the stock price is fairly valued. It rose $56 to $531.50 on Tuesday’s earnings, making it worth 162 times the profit Netflix is expecting this year. Netflix is making some risky but realistic investments in its future growth. But that risk is nothing compared to what investors are taking on by buying at such a crazy valuation.

TIME Retail

People Are Buying More Fancy Toilet Paper Than Ever

And that could be a good sign for the economy

You may not be able to poop gold, but at least you can wipe with luxe toilet paper.

Luxury toilet paper sales reached $1.4 billion last year, outselling regular toilet paper for the first time in 10 years, reports the Washington Post, citing data from market research company Euromonitor International. Luxury toilet paper sales have grown more than 70% since 2000, and are expected to grow another 9% over the next five years.

Analysts say that while luxury toilet paper (the cushy, quilted, scented varieties) is more expensive than regular toilet paper, it doesn’t break the bank for most consumers—which means it’s a small luxury many Americans feel they can afford.

That’s why some experts say luxury toilet paper sales may even be a sign of economic strength. The last times the luxury brands outsold generic toilet paper were in 2005 and 2000, both boom years for consumer spending.

[Washington Post]

MONEY stocks

Why You Shouldn’t Reach to Grab New Stocks

150312_ISK_SkepticalInvestor
Taylor Callery

As Shake Shack's recent slide demonstrates, while the IPO boom gives you lots of hot companies to take a flier on, you’ll most likely fall flat.

Do you regret missing out on the stunning debuts of Alibaba ALIBABA GROUP HOLDING LTD BABA -0.65% and Shake Shack SHAKE SHACK INC SHAK 1.37% ? Are you now waiting to hail Uber or snap up Snapchat when they go public, as expected?

Before you jump in, remember that when you pick a stock, you’re already taking a leap of faith—but with a newly public company, you’re taking two leaps. First, do you really know enough about the business? Second, has the market had sufficient time to draw its own conclusions so that you are buying at a fairly rational price?

“Anything that’s been trading for a while has been vetted by a whole host of investors,” says John Barr, a manager with the Needham Funds. Not so at or just after an initial public offering, and that’s why you have to tread carefully.

You’ll pay for the honeymoon

IPOs attract big headlines on day one, but surprises inevitably crop up. From 1970 to 2012, the typical IPO gained just 0.7% in its second six months, after the honeymoon effect had a chance to wear off. That’s five percentage points less than other similar-size stocks, finds Jay Ritter, a finance professor at the University of Florida. The year after that, the average IPO lagged by eight points.

Chinese e-tailer Alibaba, which soared 38% on its first day in September, is getting its dose of reality a bit ahead of schedule. Shares are down 28% lately, after the company surprisingly missed revenue-growth forecasts.

Themes get overdone

It’s easy to be lured by a story. Shake Shack doubled on its first day, thanks to the buzz surrounding high-quality fast-food chains like Chipotle CHIPOTLE MEXICAN GRILL INC. CMG -1.09% . But riding a food trend is hard. A decade ago, overexpansion killed investors’ ravenous appetite for Krispy Kreme doughnuts KRISPY KREME KKD -0.63% , and the company’s shares remain 56% off their peak.

Shake Shack has also entered a crowded battle for foodie dollars: the Habit Restaurants HABIT RESTAURANTS HABT -8.08% , Potbelly POTBELLY CORP COM USD0.01 PBPB -0.65% , and Noodles & Co. NOODLES & CO COM USD0.01 CL'A' NDLS -0.27% all went public recently, and all more than doubled in the first day. Odds are the market is overoptimistic about most of them. Since 2013, 15 stocks have doubled on day one; only two—both biotech firms—are trading above their first day’s close.

The fact is, unless you gain access to an IPO at a great price at issuance, you can’t view those stocks as buy-and-hold investments. And you should avoid any richly priced new stock altogether.

Shake Shack trades at 650 times its earnings. To justify that valuation, Ritter figures the burger chain must grow from 63 stores to nearly 700, each half as profitable as a Chipotle restaurant. That’s a big leap indeed, given that Shake Shack locations aren’t even a third as profitable at the moment.

This story was originally published in the April issue of MONEY magazine. Subscribe here.

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