Netflix risk may be worth it over long haul

Shares of video-streaming giant Netflix (Nasdaq: NFLX) have averaged annual growth of nearly 50 percent over the past decade, turning $1,000 into almost $50,000. It’s not too late to invest in the company — if you can handle volatility.

Netflix is likely to offer investors a bumpy ride, with short-term returns far from guaranteed to be positive. The company is currently investing every spare dollar into its ambitious overseas expansion program, which should see Netflix streaming services becoming available in pretty much every nation on Earth within the next two years. Thus, only a few pennies per share are making it to the bottom line right now.

On the other hand, Netflix is growing briskly, adding 3.3 million net new members in its last quarter, and boasting more than 60 million paying members globally. CEO Reed Hastings expects the company’s red ink to turn black once its overseas rollout is finished. Netflix’s stock may seem pricey today, but by 2020, if there are several hundred million Netflix subscribers and annual earnings in the billions of dollars, as some analysts predict, today’s price will have been a bargain.

Consider adding some shares to your portfolio if you’re a long-term believer. If you’re on the fence, perhaps wait and hope for a big price drop – which may or may not come. (The Motley Fool has recommended and owns shares of Netflix.)

Ask the Fool

Q: How is inflation measured? – L.C., Cadillac, Michigan

A: Inflation is typically measured by the Consumer Price Index. According to the Bureau of Labor Statistics, the CPI is “a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” (Note that these “urban consumers” make up about 87 percent of the U.S. population.)

The “basket” includes items such as coffee, milk, computers, cars, sweaters, toys, postage, college tuition, medications, hospital expenses, haircuts and even funeral costs. The index shows that if you bought such items for $100 in 1980, in 2011 they would have cost you $275. Some variations of the main CPI figure exclude particularly volatile categories such as food and energy.

The CPI is used as an economic indicator and a means of adjusting dollar values, among other things. Learn much more at bls.gov/cpi/cpifaq.htm.

Q: I’m a new investor with about $10,000 to spend on stocks. How should I invest it so that it’s safe and grows? – K.T., Conover, North Carolina

A: First off, don’t put your money anywhere without understanding and being confident in what you’re doing. Understand, too, that the stock market is a great way to build wealth over the long run, but its returns are not guaranteed.

You might park your money in a CD for a few months while you read up. Later, you might want to move some or all of your long-term money into a low-fee, broad-market index fund, such as one based on the S&P 500. If you’re willing to do more research, you might begin investing in carefully selected stocks and mutual funds.

My dumbest investment

My dumbest investment involves a data storage company. Buying the stock wasn’t the mistake; selling it was. I got in early, sold out after a 30 percent gain, and missed a huge run-up after I got out that would have multiplied my investment about 100 times. Friends of mine who worked there retired very comfortably. – C.R., online

The Fool responds: Selling too soon is a common investor mistake, made by novices and seasoned investors alike. Ask yourself why you sold. If you thought the stock was significantly overvalued and more likely to fall than rise, or if you had lost confidence in its growth prospects, then selling was the right thing to do.

Many times, though, investors bail after achieving a certain percentage gain. That’s fine, if your goal was, say, a 20 percent or 50 percent gain. But if you just figured that a 30 percent gain was pretty good and you didn’t know enough about the company to hang on, then you did your portfolio a disservice.

A lot of great wealth has been built by folks who bought into great, growing companies and then sat tight for years, if not decades, through ups and downs. Never hang on blindly without keeping up with a company’s progress and prospects.