Investing in common stocks is something that almost everyone should be doing. I feel this is especially true for teens and young adults who have many decades of future compound returns on their side.
But for those just starting out, investing in stocks can seem confusing and often intimidating. Wall Street and many in the financial media only exacerbate the issue much of the time. Even a curious young investor might find it hard to focus on the long-term road to riches when watching the roller-coaster market reactions to a company's quarterly financial results.
Take Netflix Inc., for example. Last week this Internet TV pioneer announced its third-quarter results. They didn't add quite as many new subscribers as management had forecast. Specifically, Netflix added only 3.02 million subscribers during the quarter, compared with their original estimate of 3.69 million. Management figures that the slight increase in pricing implemented last quarter hurt subscriber growth. Netflix also pointed out that it expects to miss estimates pretty often because the guidance it issues is its own internal target.
The day after this report, Netflix stock crashed almost 20 per cent. Why did Wall Street hate the results when, as anyone looking at the long-term performance of the business could easily argue, things are going very well? Netflix is adding plenty of new subscribers and pleasing them with much more original content. Profitability in the core U.S. market is still on the rise. Netflix also revealed that it is profitable in Canada, along with nearly 40 other countries only two to three years after launching its service in each market.
The occasional miss on an internal subscriber-growth estimate isn't going to sway me from seeing the bigger picture here. Internet TV is an enormous growth market. Netflix is the clear leader with 53 million global subscribers today. A decade from now, I think Netflix could be the dominant subscription service for original and licensed TV programming around the world. I think that future leader will be valued far higher than the $20-billion (U.S.) Netflix is worth today.
Younger adults are perhaps the best positioned to understand the importance of major technology trends such as Internet TV. They are the ones who've been growing up with YouTube and quite possibly never developed a cable or satellite TV habit. To them, it's a no-brainer that almost all viewing will move to the Internet, causing major problems for companies fighting to hang onto the old model. Yet these same young investors can easily be turned off by major stock price swings that they can't understand.
When we raise kids, we expect them to fall down a lot as they learn to walk and run. We don't panic and give up on them because of a scraped knee. Instead, we kiss it better and move on with life. Netflix, in this metaphor, is a six-year-old. He's smarter and faster than most of the other kids. He fell down last week and had a good cry. It's no big deal. One year down the road, we'll have totally forgotten about it. That kid will be even bigger and stronger.
If we can teach our kids to think long-term about their investments, and convince them to save regularly from an early age, they'll go on to become wealthy. The math is undeniable. Our government has given our children a wonderful gift in the form of the tax-free savings account. This investing vehicle lets anyone over the age of 18 tuck away $5,500 per year and never pay tax on any of the gains or withdrawals. A young adult that fully utilizes this tax shelter and generates a long-term market-average 9-per-cent return on investment can be a millionaire by about the age of 50.
My kids aren't 18 yet. But I'll be adding Netflix to their Registered Education Savings Plan (RESP) accounts this week. The timing is good, given the stock price correction, and the power of compounding is on their side.