Reed Hastings only invests in index funds and Netflix

“The few occasions I’ve accomplished investing, I’ve misplaced my shirt,” he stated in an interview on the Tim Ferriss Podcast. 

Hastings, who has an estimated web price round $6 billion, chalked up his poor monitor file to his demeanor, which he stated isn’t finally well-suited to the world of investing.

“I notice I’m simply so optimistic,” Hastings stated. “Anyone who appears to have a good suggestion, I’m like, ‘Positive!’”

Hastings moved away from taking a extra energetic hand in his investments when he realized his optimism meant he wasn’t wired the identical method the perfect buyers are. “It’s a unique DNA than [what] differentially good buyers have,” he stated.  

Hastings stated he’s discovered his lesson and now depends on funds that preserve tempo with the market as a substitute of making an attempt to beat it in addition to his stake within the streamer he based. “I’m a pure index-fund investor. I’m Netflix plus index funds,” he stated.

In keeping with SEC filings, Hastings owns about 3 million shares of Netflix inventory valued round $1.9 billion on the time of publication. 

One current notable exception has been Hastings’ funding in Powder Mountain, which Fortune beforehand reported on. He purchased the ski resort after the primary group of buyers didn’t make good on their concept of turning it into the Burning Man of the slopes. 

In any other case, Hastings appears to have a moderately conventional funding technique of counting on index funds and company-granted inventory choices. 

Index funds are secure investments in unsure occasions

Index funds are investments that monitor a given benchmark, just like the S&P 500 or the Dow Jones Industrial Common. They’re usually thought-about a secure method for buyers to have their investments develop on the fee the market does. As Hastings’ remarks present, it may be very troublesome for even the savviest individual to beat the market. 

Traders usually put their cash in index funds as a result of they’ve a file of outperforming actively managed funds the place an knowledgeable picks what to put money into. A research from 2022 discovered that out of two,132 actively managed mutual funds, not a single one outperformed its benchmark index. That’s been a constant development for years now amongst funds. Final 12 months marked the 14 consecutive 12 months the vast majority of actively managed large-cap inventory funds, which put money into corporations with excessive market capitalizations, carried out worse than the S&P 500. 

That may clarify why they’ve turn out to be so widespread even amongst institutional buyers this 12 months when financial forecasts are considerably nebulous. There’s been chatter of a recession for nearly two years now, the Fed nonetheless hasn’t provided agency commitments about rates of interest, and who is aware of if the unemployment fee will stay regular. In the meantime, markets are rallying in the intervening time, however many buyers are uncertain if positive factors will proceed, whereas others are satisfied they gained’t.

Regardless of all these unknowns, the S&P 500—some of the widespread benchmarks for index funds—has been up 27% during the last 12 months. A lot of the S&P 500’s development was powered by tech shares, together with Netflix. However there are indications it may begin to broaden to different sectors, which might bolster buyers’ portfolios.  

Index funds’ critics say they focus an excessive amount of energy in too few individuals

The rise of index funds, first began by Vanguard in 1975, elevated a brand new sort of finance govt, like BlackRock CEO Larry Fink. BlackRock, for instance, manages $4.9 trillion {dollars} in its index funds, making it one of many main asset managers on the planet. 

Index funds have additionally began a extra theoretical debate in regards to the constructions of the market. Some contend that their effectiveness is proof of idea for “market socialism” as a result of index funds characteristic widespread possession of collective property. Bloomberg opinion author Matt Levine, who has lined index funds extensively, disputes the thought on the grounds that simply because an index fund permits its buyers to have collective possession of an organization, it doesn’t require all of them personal the identical quantity. 

One other concern on the coronary heart of the dispute over index funds is who precisely manages them. Supporters say that as a result of they’re passively managed with no portfolio supervisor or funding skilled they minimize out monetary middlemen, decreasing charges for on a regular basis buyers. Most index funds have charges, known as bills ratios which might be beneath 1%. Nonetheless, critics say they’ve concentrated energy within the palms of just some corporations—BlackRock and Vanguard amongst them. In a 2018 paper, Harvard regulation professor John Coates argued that solely 12 individuals would finally make all of the funding choices concerning index funds. An analyst from Morningstar acknowledged that could be the case, however it hurts middlemen not retail buyers. “Indexing has most considerably affected the financial-advice trade,” the analyst wrote. 

No matter what occurs to the index fund trade or to his particular investments in them, Hastings can all the time fall again on his Netflix shares. The inventory is already up 35% this 12 months, rising Hastings’ web price by about $496 million.