Life is More than Compounding Money.

On January 9, 1995, 101 year-old Anne Scheiber left a $22 million fortune to Yeshiva University’s Stern College for Women. The school had never heard of Anne Scheiber before. Virtually nobody had heard of Scheiber before.

Anne Scheiber

But her story got people’s attention. It continues to draw attention, for the wrong reason.

Scheiber wasn’t born rich. Nor was she a savvy entrepreneur. She had retired in 1944 after a 23-year career as an auditor for the Internal Revenue Service.  

It was in the stock market Anne Scheiber gained her wealth. She lived significantly below her means, bought and held. She compounded her money. Headlines read how she turned $5,000 upon her retirement into a $22 million portfolio 51 years later. A 17.8% compounded annual return for five decades is truly head turning.  

Below is her stock portfolio in 1995.

Whatever amount Anne Scheiber started with, her attorney and estate executor said she likely started with $21,000 in 1936, Anne’s story should be more of a cautionary tale. Lust for fortune can consume more important things in life.

Life is more than compounding money.

Delicate Balancing Act

Imagine passing away and your attorney says the following:    

“She was the loneliest person. I never saw her smile.” - Benjamin Clark    

That is sad.

Anne Scheiber was a successful investor. She possessed textbook frugality, austerity, and rationality. She benefited from living a long life, amassed a fortune and gave it away.  

But this all came at a cost.    

Anne Scheiber was a recluse. She didn’t have a family, nor did she try to form meaningful relationships with those around her. This stemmed from a deep distrust of others. Her attorney Benjamin Clark and financial broker William Fay were her only acquaintances.    

Virtually all of her time was spent following the stock market.   We can’t confuse the destination with the journey necessary to get there. Scheiber deprived herself from what makes life worth living.    

“I don’t think she knew what it was like to love or be loved. That was the saddest thing of all.”  - Benjamin Clark  

One can be inordinately consumed by the markets and stocks. The same can be said about frugality.  

Don’t Take it Too Far  

Would you like to be remembered for over-the-top frugality?    

For instance, Anne Scheiber once took food from a meeting of shareholders and consumed it over the next three days.    

Anne Scheiber habits weren’t much different than other misers of the past such as: John Elwes; Hetty Green; Ephraim Lopes Pereira, Bardon d’ Aguilar; Alfred P. Shonts and Daniel Dancer.  

The Real Ebenezer Scrooge  

John Elwes (Bennet Dictionary)

John Elwes was the inspiration of Ebenezer Scrooge in Charles Dicken’s 1843 novella, A Christmas Carol. Elwes’ father died when he was four. The father left nearly a hundred thousand pounds to John’s mother. She would starve herself for fear of becoming too greedy.  

In 1763, Elwes inherited his uncle’s fortune of £250,000 (approximately $63 million or 420 crores today). Despite possessing a fortune, Elwes lived like an unhappy pauper. A biographer recounted:  

“He would eat his provisions in the last stage of petrifaction rather than have a fresh joint from the butcher, and at one time he wore a wing about a fortnight which he picked out of a rut in a lane and which had apparently been thrown away by a beggar.”  

That wasn’t it. Elwes miserliness came at the expense of others. He owned property and consciously forbade repairs. His tenants and servants went without fires to save on costs even when many windows were without glass. That left them frequently catching colds. Everyone despised the man.  

To save bed coverings, before his death, he would go to sleep completely dressed with boots and hat on.    

John Elwes died miserably, his mind weakened by worry and privation.      

Witch of Wall Street  

Hetty Green was daughter to one of the richest whaling families in New Bedford, Massachusetts. By her early 30’s, she inherited around $7 million dollars from various family members. Then through shrewd investing, she parlayed the fortune into more than $100 million becoming the richest woman of her generation.  

Read more about Hetty’s investments in bonds, real estate, railroads and mines here.   Hetty’s frugality was legendary despite her fortune (~$5 billion today). She always dressed in worn out black shabby dresses, as shown below. And she had a permanent scowl on her face. A reporter followed her in the late 1890s, he recounted an episode at a hotel, “The hotel clerk smiled as he passed the bill through the little window, but she [Hetty] did not smile in return.”    

Hetty Green (St. Louis Post-Dispatch Oct 1907)

When her son Ned broke his leg Hetty tried to cut costs by getting him admitted to a clinic for the poor. This led to delays on Ned receiving proper initial treatment. Ultimately after years of trying to repair the damage, Ned’s leg had to be amputated.

And when a Chicago minister couldn’t make a monthly payment on the $50,000 mortgage on his church, Hetty said: “You had better pray for my soul then, because I am going to foreclose within thirty days.” She did.      

“Starvation Farmyard”    

Ephraim Lopes Pereira

Ephraim Lopes Pereira, Baron d’ Aguilar, spent his early years at an Austrian court where he lived a life of indulgence. Then in 1756, he moved to England and increased his fortune by marrying daughter of Moses Mendes da Costa. A lifestyle of decadence didn’t satisfy him, however.    

Ephraim, now worth about $1 million, retreated the “good life” to becoming a farmer. He traded in his gowns for dirty clothes and refused to spend money on new ones. His farm quickly won the name “starvation farmyard” because his livestock looked to be starving. It wasn’t due to poor funding but to Ephraim’s stinginess. Ephraim insisted that peasants couldn’t feed the livestock unless he was present. He wanted to make sure that nothing was stolen or wasted.  

Alfred P. Shonts  

As I wrote in Anti-Fanatic: Theodore P. Shonts Operator of New York City’s First Subway System, Alfred Shonts love for money hurt NYC’s subway passengers. Shonts found old, antique tickets and recirculated them to save money. It was only later that the public found that the tickets disintegrated in their pockets. Thus, their tickets were useless and they lost their money.    

Daniel Dancer    

Daniel Dancer

Daniel Dancer, and his sister, acquired a large tract of farm land when his father passed away in 1736. In spite of this, Daniel and his sister lived as if they were the poorest people in town. When Daniel’s sister was dying from cold and starvation:  

“[Daniel] refused to summon medical aid on the ground that he could not spend his money for medicine, because if the ‘old girl’ was going to die the doctors couldn’t save her anyhow.”    

To save on money, Daniel didn’t cultivate any of his farm land. He decided it was easier to live a miserly lifestyle. And when neighbors worried Daniel’s dog was killing their sheep, and threatened to have Daniel pay future damages, Daniel chose to do the least costliest thing. He took his dog to the local blacksmith and had all the dog’s teeth broken off.   Instead of using his capital in ways to benefit society, Daniel hid money in various places throughout his house, “or rather the heap of ruins.” Ten thousand pounds was also found hidden in a manure pile.  

The Right Balance  

All of us are interested in stocks, markets and business. What we need to watch out for, however, is focusing all of our time and attention on “the game”. That is obsessing over the gathering or preservation of our personal account.    

As Wang Wenjian, founder of Sunny Optical up 9,500% since 2008 said:

"When money gathers, people will be apart; when money is scattered, people will gather."  

Money to Anne Scheiber, and the misers above, was an end to the means. Not a means to an end. Unfortunately their quests for money split them from the rest of the world leaving them to live a lonely life.  

A better example of frugalness to follow would be Bob Kierlin of Fastenal.    

While Anne Scheiber gave $22 million away, she might have led a more fulfilled life by actually spending some of it on herself and others during her lifetime.    

Would you rather have $22 million at your death and have frugality be your God or would you rather enjoy your life, cultivate relationships while being generous in the present and have $5 million in the end? I’d rather have the latter.    

The sin of obsessive frugality is just as bad as the sin of greed. Both are sins of selfishness.    

Life is More than Compounding Money.      

World’s Most Powerful Trading Principles

A book review for Brent Penfold’s book ‘ The Universal Principles of Successful Trading: Essential Knowledge for All Traders in All Markets”

This book is excellent for traders that are ready for it. You need a foundation in trading to understand its importance and take the principles seriously. Once you are through the rainbow and butterfly phase of trading and realize that you will not be a millionaire in a year, this book will help you get focused and get serious about your trading and what really works.

Here are the six universal principles of successful traders:

1). Preparation

Author Brent Penfold is in the minority believing risk management is the #1 priority in trading. Brent believes that once you get your trading system and position size in place you must use the amount you will risk on each trade to determine your risk of ruin. The book shows exactly how to figure this out using Excel. His point is that if your risk of ruin is not zero then you will eventually blow out your account. Risking 1% to 2% of your capital in any one trade usually gives you a zero percent risk of ruin but it also depends on your systems win/loss ratio. But the point is to test any system with 30 trades first then determine your risk of ruin.

2). Enlightenment

Your most important goal is to lower your risk ruin to zero. In trading, the trader with the best ability to cut losses short wins. Simple trading strategies work the best based on traditional support and resistance while trading with the trend on either retracements of break outs. The 10% of winners in the market win by treading where others fear, buying on break outs when they first occur and going short when a new low is made, or buying into the abyss when a security finds support or resistance and reverses at the end of a monster trend.

3). Developing a trading style

You must choose your own personal style of trading, swing trading or trend trading. You must also trade based on your chosen time frame: intraday, short term, medium term, or long term.

4). Selecting Markets

Ideal markets to trade have volume and price transparency, liquidity, 24 hour coverage, zero counter party risk, low transaction costs, and are honest and efficient. They also must  have the necessary trading attributes of volatility, research, simplicity, ease of short selling, specialization, opportunities, growth, and leverage. These are the markets that afford you the greatest chances of money trading.

5). The Three pillars of trading.

Money Management: You must make your trades as fixed as possible. Trade with the same risk, capital, units, percentage, and in the same type markets to manage risk most effectively.

Methodology: Choose a method that works for you and your personality from the ones available. (Dow Theory, technical indicators, patterns, price and volume, etc) Once you have a methodology to your trading, test it 30 times by e-mailing a trading partner for accountability to verify it works in the real world.

Trader Psychology: Manage your hope, greed, fear, and pain to stay in the game.

6). Putting it all together

Monitor performance consistently. Positive reinforcement. Equity momentum.

I have been actively and successfully trading the market for a decade and agree 100% with the authors principles.  The author finishes up his book by asking many professional traders and some that are successful private traders what one advice they would give to aspiring traders. This advice alone is worth the price of the book. Here is a summary:

Money Management:

Focus on risk

Trade small

Methodology: 

Pick a method that suits your personality

Develop a simple methodology

Avoid the majority, learn to anticipate reversals

Look for alignment in set ups

Good defense wins games

Identify low risk set ups

Know your methodology using software

Psychology: 

Deep practice before trading

Expect to lose. Trade to win

Be disciplined. Be patient

Be humble

Be in control

These Are The Top Gold Producing Countries In The World

Gold is one of the rarest elements in the world, making up roughly 0.003 parts per million of the earth’s crust. But how much gold is the world digging up each year and what countries produce the most?

In 2017, global gold mine production was a reported 3,247 tonnes. This figure is down 5 tonnes from the previous year and marks the first annual drop since 2008, according to the GFMS Gold Survey 2018. The driving forces behind the drop in output were environmental concerns, crackdowns on illegal mining operations and rising costs.

This raises the question I’ve explored recently – have we reached peak gold? The idea is that all the easy gold has already been discovered and explorers have to dig deeper to find economically viable deposits. For example, South Africa was once the top gold-producing country by far, digging up over 1,000 tonnes in 1970, but annual output has fallen steadily since. On the other hand, several nations have emerged in the last few years as growing gold producers. China and Russia have both seen production in an overall upward trend.

As seen in the chart below, China takes the number one spot of global gold producers by a wide margin, extracting 131 tonnes more than second place Australia.

The top 10 rankings remained unchanged from 2016 to 2017, with the exception of Canada and Indonesia switching between fifth and seventh place, respectively. Of the top producers, Russia posted the largest annual gain, boosting output by 17 tonnes.

Below are more details on the top 10 countries with the largest gold production in 2017, beginning with the top producer and top consumer of bullion, China.

1. China – 426 tonnes

For many years China has been the top producing nation, accounting for 13 percent of global mine production. Production fell by 6 percent last year due to escalated efforts by the government to fight pollution and raise environmental awareness. However, production is expected to pick back up this year due to several mine upgrades at existing projects.

2. Australia – 295.1 tonnes

Although gold production increased 5 tonnes from the previous year in Australia, MinEx Consulting released a report detailing an expected drop between 2017 and 2057 unless the amount spent on exploration is doubled. The minerals industry produces over half of Australia’s total exports and generates about 8 percent of GDP.

3. Russia – 270.7 tonnes

A massive 83 percent of European gold comes from Russia, which has been increasing its production every year since 2010. The nation increased output by 17 tonnes last year, even as the ruble appreciated 13 percent, which hurts producers with weaker revenue growth relative to the cost of production. Who is the largest buyer of Russian gold? The Russian government, of course, which purchases around two-thirds of all gold produced locally.

4. United States – 230.0 tonnes

Gold output rose by 8 tonnes in the U.S. last year, marking the fourth consecutive year of annual increases. Production was supported by project ramp-ups at the Long Canyon project in Nevada and the Haile project in South Carolina. Around 78 percent of American gold comes from Nevada alone.

5. Canada – 175.8 tonnes

Canada inched up two spots on the list in 2017, producing 10 more tonnes of gold than the previous year. Toronto-based Seabridge Gold stumbled upon a significant goldfield in northern British Colombia after a glacier retreated and is estimated to contain a whopping 780 metrics tonnes. This could be a source of increased output in the coming years.

6. Peru – 162.3 tonnes

Gold output fell for the second consecutive year in Peru, by 6 tonnes, largely due to crackdowns on illegal mining operations in the La Pampa region.

Mining is a significant portion of Peru’s economy and the nation is also number three in the world for copper production.

7. Indonesia – 154.3 tonnes

Production in the archipelago nation fell by 11.7 percent, dropping to number seven on the list of top global producers. The Indonesian government introduced a tax amnesty program that hoped to repatriate money from overseas, which led to production falling at new main sites as traders were reluctant to remain in the mining industry.

8. South Africa - 139.9 tonnes

Once the top gold-producer in the world by a wide margin, South Africa’s gold mines have been slowing every year since 2008, with the exception of 2013 when production rose by a few tonnes. The nation is still home to the world’s deepest gold mine, the Mponeng mine, extending 2.5 miles underground.

9. Mexico – 130.5 tonnes

Although production fell three tonnes from 2016 to 2017, Mexico remains a competitive gold source. Output has risen from just 50.8 tonnes in 2008 to over 130 tonnes last year, one of the largest increases in a nine-year span. Mexico is an attractive place for mining due to a relatively low cost of regulation.

10. Ghana – 101.7 tonnes

Ghana is Africa’s second largest producer of gold and is also known for its reserves of various industrial minerals. Bullion production rose 7 tonnes over the previous year and accounts for over 20 percent of the nation’s total exports.

The Newest Innovation In Electric Vehicles

Wireless charging is finally making its way to market as an energy source for electric vehicles, with BMW readying to start production in July for release by the end of summer. BMW’s existing 530e plug-in hybrid sedan will be the first EV coming from a major automaker with an inductive pad capable of charging the electric car.

The German automaker first announced the launch in September of last year, explaining how the 530e can be charged on the floor of the garage or parking space once the electric car is parked close enough to the inductive charging pad to work correctly.

The company will roll out wireless charging to other BMW models, but the 530e will introduce the technology to interested consumers. It uses a 3.2 kW current that allows the wireless unit to fully charge the EV within three-and-a-half hours. The charging pad uses an alternating magnetic field that carries power between a coil inside the pad itself and a coil built into the electric car to wirelessly charge the battery.

Wireless charging has been years in the making with major companies getting behind the technology but support from automakers taking a long time. Years from now, wireless charging is expected to play a vital role in mass adoption of EVs and alleviating resistance to charging the cars. Tests are being conducted by university researchers that could one day set up wireless charging points on highways. EV owners will be able to drive from cities such as San Francisco to Los Angeles without stopping for a charge.

Transferring power wirelessly goes back more than a century ago when electricity pioneer Nikola Tesla worked tirelessly but failed to bring wireless transmission beyond the Wardenclyffe Tower in Shoreham, New York. It was said to have eventually ruined his reputation and career as Tesla became obsessed over making the technology work the way radio waves had been sending communications over the airwaves.

Concerns do come up over the safety and reliability of working with wireless charging, similar to the misinformation that made acceptance of cell phones difficult a quarter century ago for consumers.

There’s also the issue of which technology will win out — wireless or plug-in charging, with many companies investing heavily in existing charging infrastructures and backing coming from electric utilities and automakers. Companies such as ChargePoint are investing millions of dollars, usually with outside investors, to join roads around with world with a strong plug-in charging infrastructure.

Although he wasn’t part of naming the electric car company after Nikola Tesla at its formation, Tesla CEO Elon Musk has been impressed enough with the brilliant inventor to donate $1 million in 2014 to a new science museum at Wardenclyffe Tower. The event also honored Nikola’s 158th birthday.

Beyond that contribution, Musk has shown reservations over embracing wireless charging, instead devoting capital and resources to building the company’s plug-in Supercharger fast-charging network. He just showed off an updated map with expansion of Supercharger stations during the 2018-2019 time period.

There are currently 9,800 Superchargers in place around the world. Musk said that the company has thousands of new Supercharger stations in the construction and permit phase, with most all of them being installed in North America, Europe, and China.

Tesla has opened up a bit, allowing a group of engineers to build an aftermarket product for wirelessly charging the Tesla Model 3.

Mobile technology giant Qualcomm believes enough in wireless to start up a division years ago devoted to supplying carmakers with inductive charging gear. Qualcomm’s Halo technology offers users a dish-sized device under the car that matches up with a charging pad. Once the two are close enough to be aligned, charging can be done at speeds of 3.3kW, 6.6kW, or 20kW.

Qualcomm believes it will help electric car owners to alleviate their range anxiety and frustration in finding an open plug-in charging port. EV drivers will be able to charge in parking areas without having to do the work of plugging in. The company foresees a day when EV drivers will be able to recharge and propel their cars along highways equipped to transfer electricity to moving vehicles.

A research team at Stanford University in Palo Alto, Calif., has been able to wirelessly transfer enough electricity to run a 1-milliwatt LED bulb. An electric car will need a lot more capability, but the Stanford team sees a day when a coil mounted on the bottom of an EV could receive electricity from coils that are connected to electric current embedded in the highway.

Wireless charging is still in its infancy stage, but observers will be monitoring the technology closely to see if serves as a viable alternative to plug-in chargers that can bring greater support for EVs.

Will Cryptos Hold Up In A Major Financial Crisis?

After an epic run in 2017, much of the hoopla surrounding cryptocurrencies seems to have faded, with the majority of price movements now being driven by news and events rather than pure speculation.

Long-time investors in the space will no doubt begin to ponder whether it makes sense to hold crypto now as a safe-haven asset, and also whether the digital currency is capable of living up to that billing in the event of a major financial meltdown.

Which is not exactly an idle question either, given the current backdrop of constant trade war threats, political tensions in the Eurozone, market crises in the emerging markets of Latin America and monetary tightening by central banks across the globe.

Would Bitcoin and other cryptos see large capital inflows due to their reputation as independent assets, or would investors view them as no different from more traditional asset classes?

Crypto the New Safe Haven?

Unlike safe assets like gold, silver and Treasury bonds, cryptocurrencies have never been subjected to this litmus test. The last major financial crisis spanned 2008-2009 when crypto pioneer, Bitcoin, had not even made its debut let alone become available to the masses.

The latter part of 2017 was characterized by a “risk on” period and a strong uptrend in stocks that was followed by an extreme crypto rally. Coincidentally, gold--considered the pre-eminent safe haven asset--also finished the year with double-digit gains. So that's pretty inconclusive since the real value of a safe haven is seen during market downturns.

How cryptos would actually behave during a market meltdown largely depends on how investors view them.

Currently, cryptos are viewed as high-risk, high-return assets by the vast majority of investors. That's a big reason behind their volatility as well. Sadly, that's hardly the hallmark of a safe haven.

So cryptos fail the first test--at least in theory.

Low Correlation with Stocks

A good safe haven should also, theoretically, be a good hedge for stocks--i.e. it should be able to at least preserve its value when stocks are losing theirs.

Analytics firm Sifr has compiled a correlation matrix for different cryptocurrencies--stocks, gold, VIX etc. According to the chart, Bitcoin's correlation with S&P 500 is a mere -0.17. That's a weak negative relationship correlation since a reading of -0.1 to -0.3 indicates a weak negative relationship while -0.5 to -1.0 indicates a strong negative relationship. The 365-day reading is 0.57--a strong positive correlation (in large part due to the 2017 rally).

Unfortunately, the matrix only provides a lookback period of 12 months, which is not nearly enough to make anything concrete.

Source: Sifr Data LLC

Interestingly, gold has an even weaker 90-day correlation of -0.09 with stocks, which buttresses the view that gold is not a good short-term hedge for stocks.

Safe Haven Rally

So far, the evidence we have examined seems to suggest that cryptocurrencies might not be a very good safe haven--in theory.

But what if panicking investors see everything around them crumbling and consider them a viable alternative to stocks during a market downturn?

Well, in that scenario, cryptos would probably follow gold's 2008-2009 trajectory. Gold prices fell sharply, along with those of other assets, in October 2008 at the height of the crisis as investors sold their holdings to shore up losses in other markets. Congress then came to the rescue in October and approved the Troubled Asset Relief Program in—a $700-billion bailout plan--and gold started rebounding by the end of 2008. The subsequent huge gold rally that took prices from $900-$1,000 to nearly $1800 was largely as a result of QE and a period of big reflation.

Source: Kitco

Since cryptos are non-interest yielding assets just like gold, it's not unthinkable that Fed policy would also impact their movement in a meaningful way.

How Netflix sent the biggest media companies into a frenzy.

The media industry is in a frenzy.

AT&T is buying Time Warner for $85 billion after overcoming a challenge from the Justice Department. The Murdoch family has agreed to sell the majority of its 21st Century Fox empire to Disney.

Comcast plans to crash that deal with a higher offer. It has also outbid Fox for the remaining 61 percent of European pay-TV provider Sky. Those two deals together could total $100 billion when the bidding is done.

Viacom and CBS continue to dance around merging. Discovery closed a $14.6 billion acquisition for Scripps Networks in March. Lionsgate completed its $4.4 billion deal purchase of Starz in December.

There's been a drastic change among legacy media company executives the last two years. Their CEOs won't say it publicly, but they're saying it privately: The pay-TV bundle, the lifeblood of the U.S. media ecosystem for decades, is dying.

There's a lot of places to blame. Competition on mobile devices. Video games. Even the internet in general.

But executives at most traditional media companies agree that Netflix, if not directly responsible, is at least holding the murder weapon. The 21-year-old company that was once best known for killing DVD rental giant Blockbuster has pivoted its entire business around the idea that streaming video delivered over the internet will replace the linear TV.

Consumers seem to agree. Netflix gained 92 million customers in the last five years while the number of people who pay for cable declines year after year. That dynamic has persuaded investors to believe in Netflix's high-risk business model of running cash-flow negative to outspend traditional media companies for content. It has let Netflix strike deals with everyone from David Letterman to Ryan Murphy to Barack Obama.

And the more Netflix spends, the more investors cheer.

The success of Netflix in the market is why we're seeing "the greatest rearranging of the media industry chessboard in history," according to BTIG media analyst Rich Greenfield.

But chasing scale isn't the answer for every media company, according to Netflix CFO David Wells.

"Not everybody's going to get big," Wells said in an interview. "The strategic question is, 'what type of business do I want to be in the next five or 10 years?'"

So legacy giants are now beginning to contemplate how to beat Netflix at its own game. Comcast, which owns CNBC parent NBCUniversal, has had preliminary talks with AT&T to start an over-the-top digital streaming service with NBCUniversal and Warner Bros. content, according to people familiar with the matter. Discovery is also pondering its own OTT service, potentially with a global technology company, said other sources. Disney is debuting its streaming service next year.

Wells is skeptical about this approach.

"The consumer doesn't want 100 direct-to-consumer services," he said. "The consumer wants great breadth and amazing personalization so they can find something in 30 seconds instead of five minutes."

While traditional media is racing to catch up, Netflix CEO Reed Hastingsis not looking back at the runners he's passed.

Hastings has never really feared legacy media, said Neil Rothstein, who worked at Netflix from 2001 to 2012 and eventually ran digital global advertising for the company. That's because Hastings bought into the fundamental principle of "The Innovator's Dilemma," the 1997 business strategy book by Harvard Business School professor Clayton Christensen.

That book, often cited in tech circles, explains how disruptive businesses often start off as cheaper alternatives with lesser functionality, making it difficult for big incumbents to respond without cannibalizing their cash-rich businesses. Over time, the newcomer adds features and builds customer loyalty until it's just as good or better than the incumbent's product. By the time the old guard wakes up, it's too late.

"Reed brought 25 or 30 of us together, and we discussed the book," Rothstein said of an executive retreat he remembered nearly a decade ago. "We studied AOL and Blockbuster as cautionary tales. We knew we had to disrupt, including disrupting ourselves, or someone else would do it."

There's no guarantee Netflix can keep up its big spending without seeing its stock fall back to Earth. But the media giants can no longer afford to wait and find out.

The unfair fight

Let's say you're a carpenter, and you make furniture out of mahogany. You pay for mahogany wood and sell a finished product for a profit. You've been doing this for years, and you've made a good living from it.

One day, a new guy — let's call him Reed Hastings — moves in next door. At first, Reed seems awesome. After looking through your store, he buys a bunch of the dusty pieces in the back no one else wanted.

But after a while, Reed decides to get into the furniture manufacturing business, too. And now he's telling your mahogany supplier that he'll pay 50 percent more for the same wood. Then another competitor, a rich fellow named Jeff Bezos, shows up across the street. He wants the mahogany, too, and he's bidding 75 percent more.

This is crazy, you think. How are these guys able to afford to pay so much more for the same stuff? They've got to be passing along the costs to their customers, right?

But they're not. You walk in their store, and they're selling the same quality furniture you make for less than you sell it. And cash from investors is pouring in.

You say, what the hell? I'll up my spending, too. This is the new world, I guess. So you bid 100 percent more for mahogany. Instantly, your stock falls. "Boo!" say your investors. "Your business model is dying!"

This sounds like a Franz Kafka novel. But this allegory explains the current plight of legacy media.

Imagine Lionsgate is the mahogany carpenter. Lionsgate develops original and licensed movies and TV shows; it pays for the talent and the production costs and receives money in return from cable channels, digital outlets, TV networks and so on. It owns the "Hunger Games" franchise, "Mad Men" and "Orange is the New Black." That last one, of course, runs on Netflix.

For years, Netflix was a welcome addition to the media landscape because it bought a lot of library content that was old or not that popular. Plus, Netflix didn't get in the way of the two main ways content providers make money — signing deals with pay-TV operators like Comcast, Charter, AT&T and Dish Network, and taking cash from advertisers. Working with Netflix was like finding free money.

But the programmers kept asking for higher fees, especially on costly sports rights, and that pushed cable bills higher. Meanwhile, Netflix customers loved the low price — originally less than $8 a month compared with $80 or $100 for cable. When Netflix started offering a handful of original shows, such as "House of Cards" and "Orange Is The New Black," viewers kept coming, and the company's valuation swelled.

Five years ago, Netflix was trading at about $32 per share. Today, Netflix trades at about $370 a share. That's a gain of 1,050 percent.

Over the same period, Lionsgate is down about 15 percent.

A lot of media CEOs believe Netflix is winning because the game is rigged in its favor. Their complaints focus on how companies are valued by investors.

Lionsgate's enterprise value (EV), a good measure of a company's worth, is about $7.5 billion. Its earnings before interest, taxes, depreciation and amortization (EBITDA) over the last 12 months was $520 million. So, Lionsgate trades at a trailing EV/EBITDA multiple of about 14. Discovery, Disney and Viacom all trade at trailing multiples lower than 14.

Netflix has an enterprise value of $165 billion and EBITDA of $1.1 billion, giving it a multiple of about 150.

That's the equivalent of a huge cheering section, throwing money at the company to keep spending.

Indeed, Netflix is now the number one spender on media content outside of sports rights, according to consulting firm SNL Kagan.

Can the spending game last?

Some traditional media execs and analysts are skeptical that Netflix can keep it up.

"To be worth $150 billion, someday you've got to make at least $10 billion in EBITDA," Steve Burke, CEO of CNBC parent company NBCUniversal, said in an interview. "There's at least a chance Netflix never makes that."

Netflix spends more money than it takes in each year, funding the gaps with debt. Last year, it posted free cash flow of almost negative $2 billion and has forecast that it could be negative $4 billion in 2018. Netflix's path forward is tied to massive international growth, which will require spending billions more on original programming.

If you think Netflix should trade like a traditional media company, Burke's got a pretty good case Netflix is insanely overvalued. Even Hastings acknowledges Netflix looks more like a media company than a technology company, which tend to trade at much higher multiples.

"We'll spend over $10 billion on content and marketing and $1.3 billion on tech," Hastings said in his April 16 quarterly earnings conference call. "So just objectively, we're much more of a media company in that way than pure tech."

The music will stop for Netflix if it can't quit burning money, said Wedbush Securities analyst Michael Pachter, who has a sell rating on the stock and a price target of $140 per share.

"Netflix has burned more cash every year since 2013," Pachter said.

As of the end of the first quarter, Netflix had $6.54 billion in long-term debt and $17.9 billion in streaming content payment obligations, with only $2.6 billion in cash and equivalents on hand. In April, Netflix raised $1.9 billion of 5.875 percent senior notes.

"What happens when they need to keep increasing their spending and suddenly they have $10 billion of debt? People are going to start asking, 'can this company pay us back?' If that happens, their lending rate will spike. If Netflix needs to raise capital, they'll issue stock. And that's when investors will get spooked," Pachter said.

Even if his logic is sound, Pachter has been wrong for years on Netflix. Its stock has just kept rising.

Netflix executives even posted a 2005 comment of his on a wall at their Los Gatos, California, headquarters and would chuckle at it as they walked by. It read: "Netflix is a worthless piece of crap with really nice people running it."

Hastings: Everyone uses cash wrong

Netflix's use of cash is strategic, even though it's not a typical corporate practice, according to Hastings.

"It's horrible how mismanaged most Silicon Valley companies are in capital," Hastings said in a 2015 interview with venture capitalist John Doerr, a partner at Kleiner Perkins Caufield & Byers and early backer of tech giants like Google and Amazon.

"Microsoft always wanted to have a lot of cash on hand. Apple had no cash 15 years ago in 2000. Who did the most innovation? The cash does not help. The cash insolates you in a bad way. It's a bad thing that companies store cash."

From October 2016: Reed Hastings on AT&T-Time Warner, acquisition speculation:

The long-term bull case for Netflix is that its subscriber growth, coupled with incremental price increases, will eventually propel earnings and cash flow.

BTIG's Greenfield predicts Netflix will increase its global subscribers from 125 million to 200 million by 2020. Bank of America analyst Nat Schindler estimates Netflix will have 360 million subscribers by 2030. Netflix estimates the total addressable market of subscribers, not including China, could be about 800 million.

Meanwhile, the number of traditional cable and satellite pay-TV households falls each year, and the declines are accelerating. Research firm Statista predicts there will be 95 million U.S. pay-TV households by 2020, down from 100 million in 2015.

The bigger Netflix gets, the more A+ talent will want to sign exclusive deals with Netflix instead of traditional media companies. It's a virtuous cycle, as top talent then accelerates subscriber growth. It's also a death spiral for the weakest traditional media players.

Netflix has another edge in the content wars. While networks make decisions on TV ratings, Netflix plays a different game. Its barometer for success is based on how much it spent on a show rather than hoping every show is a blowout hit, said Barry Enderwick, who worked in Netflix's marketing department from 2001 to 2012 and who was director of global marketing and subscriber acquisition. Since Netflix is not beholden to advertisers, niche shows can be successful, as long as Netflix controls spending. That also gives Netflix the luxury of being able to order full seasons of shows, which appeals to talent.

"If you're a typical studio, you raise money for a pilot, and if it tests well, you pick up the show, maybe you make a few more episodes, and you wait for the ratings," said Enderwick.

"At Netflix, our data made our decisions for us, so we'd just order two seasons. Show creators would ask us, 'do you want to see notes? Don't you want to see a pilot?' We'd respond, 'If you want us to.' Creators were gobsmacked."

That dynamic has led some content makers to decide they're better off working directly for Netflix, which now spends more on content than many TV networks.

Last year, Netflix signed Shonda Rhimes, creator of "Grey's Anatomy" and "Scandal," to a multiyear contract after more than a decade at ABC Studios. Earlier this year, Netflix signed a deal with Ryan Murphy, creator of "Nip/Tuck," "American Horror Story" and "Glee," to a deal that could reach $300 million, according to Deadline Hollywood. He left Fox TV for the Netflix offer and spurned a counteroffer from Disney. And Jenji Kohan, who created "Orange is The New Black" for Lionsgate? She left for Netflix, too.

Fighting back

So if you're a big media company, how do you fight back? What if you're Comcast or Charter or AT&T? How do you stop customers from ditching pay TV services for Netflix?

Compete

Disney is farthest ahead in its plan to fight Netflix head-on.

It's removing all of its movies from Netflix at the end of the year and starting its own service for lovers of Disney and Pixar titles. Disney's digital over-the-top service will launch in 2019 and include movies and TV shows from the Disney-ABC TV Group library. Fox's film and TV library would bolster this service, if Disney completes that deal.

NBCUniversal may be forced into offering a streaming service of its own, potentially with partners who can generate enough must-have content that it becomes enticing to customers with and without cable.

NBCUniversal executives have discussed launching a rival OTT service that would include Universal and Warner Bros. programming, according to people familiar with the matter, although it may not happen if NBCUniversal parent company Comcast succeeds in grabbing Fox from out of Disney's hands. Outside of Fox, NBC views Warner's library of programming as the strongest among potential partners, with Sony No. 2, one of the people said. (AT&T and NBCUniversal spokespeople declined to comment.)

Discovery, too, is considering an OTT product, according to people familiar with the matter — perhaps in conjunction with a global tech platform that can showcase its nonfiction programming — an area where Netflix isn't as strong.

"You look at the FAANGs (Facebook, Apple, Amazon, Netflix and Google), and their strategy is focused primarily on scripted movies and scripted series," Discovery CEO David Zaslav said. "Discovery is probably the most effective nonfiction producer in the world. I like our hand given we own all of our content."

A Discovery spokesman declined to comment on plans for the OTT service.

There are several problems with competing with Netflix by offering rival online services. Netflix already has a huge first-mover advantage. Stand-alone digital services aren't where legacy media companies want to spend their money. Programming costs are high, and the result may just cannibalize their existing pay-TV model, which brings in billions of dollars from subscriber fees and ads. And just because the market has rewarded Netflix for its strategy doesn't mean investors will cheer on late competitors for following the same model.

Consolidate

AT&T CEO Randall Stephenson told CNBC earlier this year that the Time Warner deal is a direct response to Netflix.

"Reality is, the biggest distributor of content out there is totally vertically integrated," said Stephenson. "This happens to be somebody called Netflix. But they create original content; they aggregate original content; and they distribute original content. This thing is moving at lightning speed."

The desire to gain scale to take on Netflix is also driving interest by Disney and Comcast in Fox's assets, which include Fox's movie studio, some cable networks and stakes in Sky, Endemol Shine Group, and Hulu.

But getting bigger isn't the answer for everyone, said Wells.

"Some brands are big enough to compete to be another Netflix, or another YouTube, and vie for the global consumer media dollar," said Wells. "But not everybody's going to be in that bucket. They may want to specialize in content production, and that may be a better business for them."

Capitulate

Comcast and Charter have actually accelerated Netflix's growth by allowing Netflix subscribers access to their programming through their cable boxes. Their strategy is if people are going to watch Netflix anyway, they might as well bundle it with cable service and improve the overall experience. That way, customers can subscribe to both.

Because these cable giants are also Internet providers, they also have a theoretical weapon in their back pocket — the ability to throttle Netflix speeds in the new era without net neutrality safeguards, or at least charge customers for using data via Netflix while keeping home-grown cable applications exempt from usage caps.

"We could experience discriminatory or anti-competitive practices that could impede our growth, cause us to incur additional expense or otherwise negatively affect our business," Netflix acknowledges in its annual report.

But this isn't much of a fear for Netflix. The company knows cable and wireless companies need broadband growth more than video growth to keep flourishing, and few companies drive internet usage like Netflix. T-Mobile now offers its customers Netflix for free.

How does this end? 

Big Media isn't going to just disappear like Blockbuster. A company like CBS, with a market capitalization of $20 billion, had EBITDA of about $3 billion last year — that's three times as much as Netflix. Many sports rights are still locked up for years by old media companies. That will keep affiliate fees and advertising dollars coming.

But Amazon, Facebook, Apple and Google have massive valuations and cash hoards compared with media companies. They, too, have the balance sheets to spend billions on video without seeing a major dent in their stock prices. And as young consumers get older, the days of paying for a bundle of TV channels may be waning.

So how does this end? Netflix's answer is again in a business strategy book.

Hastings derived many of his strategy lessons from a Stanford instructor named Hamilton Helmer. Hastings even invited him to Netflix in 2010 to teach other executives.

One of Helmer's key concepts is called counter-positioning, which Helmer defines as: "A newcomer adopts a new, superior business model which the incumbent does not mimic due to anticipated damage to their existing business."

"Throughout my business career, I have often observed powerful incumbents, once lauded for their business acumen, failing to adjust to a new competitive reality," Hastings writes in the forward to Helmer's book "7 Powers," published in 2016.

"The result is a stunning fall from grace."