Jeff Bezos recently made news (again) when he became ‘the world’s richest man’ with a net worth of over $90 Billion. Over $10B of that was added within a few days in October 2017 after Amazon announced it’s third-quarter earnings and the stock went up 15% since early Sep to Mid-November 2017.
Since then, there have been a host of articles with titles like If you had invested right after Amazon’s IPO, you’d be a millionaire. In short, Amazon’s stock price is up approximately 57000% in the 20+ years since it’s IPO. This means, $1,000 invested in Amazon stock in May 1997 would be worth $575,000 (over half a million) in Nov 2017.
Note: The $1.96 price in May 1997 is not the actual price it traded at but the price adjusted for splits.
ROHMO (Regret of having missed out) makes for a powerful story because it makes you feel foolish for having missed what seems like an obvious massive winner in hindsight. But feeling stupid is not the lesson to take away from studying historical price trends of an out and out blockbuster company/stock. Then what is? Here are five takeaways:
Attaining blockbuster returns needs a bulletproof temperament
There were periods of absolute terror for buy-and-hold investors of Amazon. Table below shows the largest falls for specific durations.
|Monthly||Jan '01 - Feb '01||(49%)|
|3 Months||Nov '00 - Feb '01||(65%)|
|6 Months||Sep '00 - Apr '01||(78%)|
|Annual||Apr '99 - Apr '00||(89%)|
Think about what it would have felt like to be holding Amazon stock during the above time periods. How likely would you be to hold on to the stock once it bounced back to the pre-fall level? What were the biggest falls you have endured in stocks you have held?
Holding on to stocks you believe in irrespective of the hammering it’s getting needs a special kind of temperament.
Your buy price decides your returns
The chart shows what your annualized returns until Nov 2017 would be if you had invested lumpsum in that year. i.e. If you had invested in May 2004 at $43 (adjusted for splits) your annualized returns until present-day would be 27% while if you had invested a year later in 2005 at $33, you’d have a significantly higher 32% return. Now compare this with your returns if you had invested during the dot-com bubble.
We often get influenced by powerful stories about emerging megatrends (for example the Graphite rods or Electric Vehicles stories). Even if those trends actually play out, your returns are decided when you buy.
However, timing your purchase right is incredibly hard
Assume you’re overall positive about Amazon as a long-term investment but you don’t own the stock. It’s mid-May 1998, Amazon stock has returned 280% in the last year. Can you get yourself to enter the stock now?
It’s Jan 2001, AMZN has halved in the last 6 months. Good time to enter?
The chart shows what happened in the next 1 year, 3 months respectively in the above cases.
I know that I wouldn’t be able to buy a stock that’s up nearly 3x in one year, no matter how positive the outlook. Similarly, if I was waiting to get in, a 50% correction would seem too inviting to not take action. Counting on timing entry and exit right is too similar to playing on the roulette wheel at a casino.
A better approach might be to stick to a process every time you’re considering a stock and to look at current price in the context of the business instead of it’s past performance
FOMO is pointless
Our brains are wired to think of anything that is rare as valuable, so when convinced that a company is a great business, we feel the stock will run away from us, leading to buying frenzies.
Refer to the price chart at the top of the post. It’s not very easy to read this but Amazon stock has corrected significantly a few times and was range-bound for considerable periods of time.
After the dot-com crash in 2000 where AMZN corrected from $107 to $6, it took three years to go back up to $58 before languishing between $58 and $39 for three years until 2007.
Even good companies correct with the broader market and also due to fluctuations in their own results. To be a successful investor, we have to train ourselves to not think of stocks like the last train for home leaving the station. Curb that Fear Of Missing Out when making buy decisions.
The market periodically offers great companies at fair prices, the trick is in being able to wait for that before accumulating the stock
Finally, there is no better returns lever than “time in the market”
The annualized returns chart above shows that irrespective of when you bought Amazon stock in the 20 year period from 1997 to 2017, your annualized returns were pretty decent. Barring 1999 and 2000, annual returns are close to 30%+, even 50%+ if you bought in 2015. This is deceptive because we’re just not wired to take compounding into account.
Look at the table below to see what $1,000 would be worth in May 2017, depending on when it’s invested.
|$1000 invested in May||Value in May 2017|
A buy-and-hold Amazon investor from 1997 would have over half a million for every $1,000 she had invested.
Next time someone talks of this stock that’s made triple-digit returns in a short time, think of the reasons why they’re so hard to come by and how a lower but consistent return will make you richer than a one-shot flash in the pan company.
What investors can learn from Jeff Bezos’s 2017 letter to shareholders link
Scarcity Error – What is rare is not always valuable link