Watch out with the return of the GameStop foolishness; How a painful short led to the best investment of my career; Congratulations to my eldest daughter on her graduation from business school

1) I continue to shake my head at the return of the foolishness surrounding GameStop (GME)...

With the stock around $11 per share six weeks ago, Keith Gill reappeared. Known by the moniker "Roaring Kitty" on social media, he's the guy who first turned GameStop into a meme stock in early 2021.

With his return, speculators quickly sent GME shares to close at nearly $49 on May 14. Shares then fell to less than $20 the next week... but spiked to almost $50 once again late last week when Gill announced he was going to host a livestream to (presumably) pump the stock even further.

GameStop is wisely taking advantage of this surge from speculators and retail investors by selling as much stock as it can because its business is collapsing.

Almost lost amid the noise, the company reported first-quarter earnings on Friday that we nothing short of disastrous. Revenue fell a shocking 29% from the same quarter last year, net loss was $32 million, and free cash flow was negative $115 million.

By all rights, GameStop should already be bankrupt. But at this rate, that's going to take years because the company has been able to raise so much cash by issuing stock at artificially high prices thanks to its meme-stock status.

The terrible earnings and stock sales combined with a comically inept livestream by Gill (if you're morbidly curious, you can watch it here) sent GME shares down 39% on Friday to close at $28.22.

Mark my words: The silliness will pass as the speculative mob moves on, and the stock will soon be back to $10 per share... Look out below!

2) Continuing where I left off in Friday's e-mail...

In it, I explained how I shorted Netflix (NFLX) back in early 2010 and quickly experienced a lot of pain as the stock more than doubled against me.

This led me to publish my thesis in December that year, to which then-CEO Reed Hastings replied publicly. We met soon afterwards in February 2011 – and as I explained on Friday:

Both he and his vision were so impressive and compelling that I finally realized that shorting Netflix was a terrible idea.

So I covered the position the next day and publicly admitted that I had been wrong...

It was initially a great call... The stock, then at $33 per share [adjusted for a subsequent seven-for-one split], rose to a high of $43 per share by July. "Phew," I thought to myself... "Dodged a bullet!"

With Netflix up from less than $1 per share in 2003, it was one of the greatest growth stocks of all time.

And Reed (I use his first name because I know him personally) was a media darling – Fortune even named him its 2010 Businessperson of the Year:

And then it all fell apart...

I think this extreme success may have gone to Reed's head a bit and led him to make a terrible mistake: to pursue the exciting nascent opportunity in streaming video, he decided in late 2011 to spin off the company's DVD-by-mail business into a separate business called Qwikster.

Subscribers rebelled, furious that they would now have to sign up for two services (and pay twice). The company later reported losing 800,000 subscribers in that quarter alone and revenue growth declined from 30% year over year to about 10% for a quarter or two.

In less than two months, Netflix's stock had crashed by more than half to $18 per share. To stop the bleeding, Reed issued a "mea culpa" letter... but didn't kill the Qwikster idea, so customers remained angry, and the stock continued to fall.

Having gained an appreciation for Reed and the company based on my earlier experience when I was short the stock, I was tempted to buy it – but first needed to see Reed fix that self-inflicted wound, so I wrote him a lengthy e-mail on September 22, 2011 (you can see the full text here), in which I concluded:

There is absolutely nothing (except your pride) to keep you from writing a second mea culpa letter, fixing your mistakes...

So get out of your bunker, eat some more humble pie, and fix your mistakes.

If you do, your stock is a great buy – and we'd love to make some money being LONG your stock!

Soon afterward, Reed did as I suggested – issuing a second mea culpa letter and killing the Qwikster idea.

But the damage was done...

A month letter, Netflix was down another 37% to less than $12 per share, so I began to buy it. Now down 75% in only three months, I figured it couldn't possibly go any lower, but of course it did...

By November, it bottomed at $9.12 per share. Then, I had to endure another year of pain, as the stock gyrated between $10 per share and $18 per share until it finally bottomed at $7.78 per share by October 1, 2012.

I remember that day well...

That morning, I had pitched it as my favorite stock idea to the 500 attendees of my Value Investing Congress. And immediately afterward, on national television on CNBC, I had said it was this decade's Amazon (AMZN), which had risen 20-fold in the previous decade. (You can see the slides I presented here.)

We all know how this story played out...

Netflix focused on buying and developing great content and expanding internationally. It executed those moves superbly, attracting tens of millions of new subscribers every year. Additionally, the company was able to raise prices, so annual revenue growth quickly rebounded to above 20% by the end of 2013 and the accelerated to more than 30% by the end of 2016.

That turbocharged the stock, as you can see in this chart I included in my 2018 presentation on my "make money" investing approach:

Ultimately, Netflix turned into one of the greatest moonshots of all time – soaring 90-fold in eight years!

The lessons from this are similar to the ones I've been discussing in my recent e-mails on successful investing principles...

First, to really make money on a stock, you need to have an edge – for examples, see my three e-mails last week of case studies of the A-class shares of Berkshire Hathaway (BRK-A), McDonald's (MCD), and CKE Restaurants.

In the case of Netflix, I had been studying the company obsessively for more than two years... I knew the bear case by heart because I had been short the stock... I had conducted a survey of more than 500 Netflix subscribers (you can see the results here)... and I had met with and was e-mailing regularly with the CEO.

All of this gave me the insight to see that Netflix subscribers loved the streaming service, the growth opportunities were massive, and the company had a huge lead over its competitors (with 30 million paying subscribers, it was far larger than the No. 2 player, Hulu).

The second lesson is that you must have the courage of your convictions.

For an entire year after I bought the stock, the market told me I was wrong. But I hadn't lost faith and kept reminding myself of the legendary Warren Buffett's maxim, "Mr. Market is your servant, not your guide."

So, having nailed not only the stock but the very day it bottomed, how come I'm not retired – sipping piña coladas on a beach somewhere?

Well, I'll cover the sad story of how I snatched defeat from the jaws of victory in tomorrow's e-mail... Stay tuned!

3) After four days in London and Scotland with my parents last week, I flew to Boston on Thursday afternoon and caught a bus to Dartmouth College in New Hampshire to attend the graduation of my oldest daughter, Alison, from Tuck School of Business last weekend.

In addition to my wife and two younger daughters, my sister and in-laws were also there. We had a wonderful weekend! Below are some pictures (I've posted more on Facebook here):

Congratulations, Alison... I'm so proud of you!

Best regards,

Whitney

P.S. I welcome your feedback – send me an e-mail by clicking here.