Why Carl Icahn is a smart fellow

Most people think that good investors are able to buy undervalued companies. People forget that good investors also know when to sell. Take a look at Netflix (NFLX):


Carl Icahn apparently went in at $58/share, and sold half his stake in the $300s.

The headline quote in the media articles:

… as a hardened veteran of seven bear markets I have learned that when you are lucky and/or smart enough to have made a total return of 457 percent in only 14 months it is time to take some of the chips off the table.

I’d say this is a pretty good rule of thumb for anybody to follow if they are so fortunate.

Just as a matter of arithmetic, if you invested $100 in something that went up 457% and then sold half of it, you still have $278.50 worth of something left over, not an insubstantial amount in relation to the original investment. Another way of looking at this is you would have to sell 18% of your investment to play with “house money”, so to speak (although this is a huge misconception in retail finance as there is never such a thing as house money – it is your own!)

Shaw and Netflix – Bandwidth vs. Content

This is probably old news to a lot of people, but I’m awfully curious how the competition dynamics between Netflix vs. the bandwidth providers (e.g. Shaw/Rogers/TELUS) will play out. Shaw announced a streaming movie service recently.

I look at a company like Netflix (Nasdaq: NFLX) and ask myself how many more legs the company has before it starts to hit a competitive wall like TiVo (Nasdaq: TIVO) did.

I’m not going to call winners here, although I am quite aware that it is necessary for bandwidth providers to exist in order for companies like Netflix to exist; the question is where is the most profit to be obtained in the value chain? Is it about the bandwidth, or the content?

The biggest pure play on bandwidth has to be Level 3 (Nasdaq: LVLT), which has successfully been losing money since its history and is a darling of Southeastern Asset Management and the Canadian Berkshire-equivalent, Fairfax (TSX: FFH).

Time will tell, but I’m sticking to the sidelines.