Do you remember Home Shopping Network? It’s the channel that sells merchandise on TV; jewelry, sweaters, can openers, almost anything they think they can sell to their viewers. It is still on the cable lineup, one of those channels most people move right past looking for something interesting.

But that’s not how it was in the 1990’s. In the 1990’s HSN was all the rage. It was considered the next big thing, the transforming idea that would change how media is used. The market capitalization, that is the cumulative price for all the stock in the marketplace at the time, exceeded the market capitalization of CBS, Inc.  HSN, a one studio operation in St. Petersburg, Florida was considered by investors to be worth more than the venerable television and radio conglomerate that produced All in the family, MASH, Hawaii Five-O and Simon and Simon.  The excitement didn’t last as people soon became bored of the concept and moved back to watching sitcoms and dramas on CBS, NBC and ABC.

Moving to the present, the share price of Netflix grew so significantly in 2015 that the market capitalization of Netflix marched past CBS, Inc. in April, 2015 and never looked back. The investing public became so infatuated with Netflix’s growth, so certain that like HSN, Netflix was the next big thing, that by December, 2015 they were willing to pay a premium for Netflix shares equal to 448 times their expected 2016 earnings.  That is, their P/E ratio of Netflix was 448:1 while the entire S&P 500 P/E ratio as of December 24th was 22.95.

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By all reasoning, Netflix is overpriced and overpriced by an amount that confounds the common sense of most investors.  Does that mean that Netflix shares are poised for a fall anytime soon? Not necessarily. An irrational market can remain irrational for an irrationally longtime.  It is possible Netflix will double in price again. But I wouldn’t bet the farm on it.

So the decision is what to do now?  The answer is you do now what you should have been doing all along and that is to diversify and balance.  Your investment portfolio should include assets classes from all the major sectors and geographic areas.  A diversified portfolio is the best bet against not missing the next Netflix while hedging against chasing the last fad with the majority of your hard earned investments.  Creating a diversified portfolio is simple but not easy.  There is actually a significant amount of thought and financial engineering that goes into making a diversified portfolio that provides balance and opportunity.

 

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