Amazon is the steamroller of today’s economy. When it enters a new sector – watch out – competitors may not be there tomorrow. Amazon went public 20 years ago and already the stock is up to over $1,000 a share. A $10,000 investment in Amazon 20 years ago is worth nearly $5 million today.
Many investors believe they will be able to recognize this type of opportunity in the future, but few will. If you had been prescient enough to have bought Amazon early on, you probably would have sold after the price doubled or tripled. You would have thought yourself lucky. And, as the chart below shows, Amazon has had some wild swings and very few investors would have been able to stay on a bronco bucking like this. Amazon shares have had daily declines of 6% or more 199 times. Worse still, in the tech bust of 1999 – 2001, Amazon shares lost nearly 95% of their value. Would investors really have been able to hang on after losing 95%?
But it is the long-term investor who benefits in the stock market. Benjamin Graham is considered the Dean of Wall Street security analysts and Warren Buffet considers his book, The Intelligent Investor, the best single work on stocks. At the very end of Graham’s seminal work, in the Postscript, he admits that one stock made him more money than all of the other stocks he owned combined. That stock was the insurer Geico. And why did Geico work out so well for him? Because Graham held it for decades allowing Geico’s true value to be realized. Here are some lessons from both Amazon and Geico.
1. Breathe Deeply… Practice Patience. When I joined the investment business back in the early 1970s the average portfolio turnover was about 20%. You typically held a stock for five years or more. Today according to a recent article by John Bogle in The Financial Analyst Journal, annual turnover is 240%. You don’t make real money trading stocks. As Warren Buffett says, the ideal holding period for a stock is forever.
Individual investors have an advantage over Professionals here. Professionals are subject to ‘career risk.’ Underperform the market for two or three quarters and you might very well lose your job. So you trade excessively to make sure you don’t miss the most popular ideas. But chasing popularity is not the way to make big money on Wall Street.
Individuals also often get “locked into” successful investments. The more the price goes up the more the potential capital gains tax is. So individuals stick with their best investments afraid to sell because of the tax they will owe.
2. Time is Your Ally… In almost everything in life the future is very uncertain but in the stock market the future is your friend. The longer your time horizon, the greater the chance of success (see chart below). In investing, think long term and Exercise Extreme Sloth.
3. Turn Over Every Stone… Be Skeptical. There are many instances where group decisions are the best decisions. Consumer Reports averages the opinions of thousands of car owners and coffee machine users. Its recommendations are usually better than that of any one individual. Multiple online restaurant reviews are on average a good predictor of where it’s best to eat.
But when it comes to the stock market, group decisions can cause big losses. Why? Because crowds get wrapped up in the emotions of the day. At market peaks we get very excited to buy and at market troughs we are desperate to sell. How do we apply this today? We do not think we are in Bubble territory but certainly we are not at a trough. Make sure you have plenty of insurance, safe things such as bonds and cash, to tide you over for the day the market has its next decline. This will surely happen. But keep your trading to a minimum. Otherwise you might just be getting rid of the next Amazon!
