Updated: Feb 15
Around 2011, I first became aware of Amazon – I had recently become an Amazon Prime member and was impressed by Amazon’s fast delivery and customer service.
I wondered if I should invest in Amazon stock…
Amazon: A very expensive stock
The prevailing opinion at that time was that Amazon (around USD 150 in 2011) was wildly overpriced. Some experts thought it would fall to USD 40, while some predicted it would go bankrupt!
Pundits pointed to Amazon’s lack of profitability and a high Price Earning (PE) ratio close to 100 (whereas most other companies had a PE of 15 or 20).
Walmart – the biggest retailer in the world – was getting serious about online sales. Walmart was massive (USD 400 billion in sales) compared to Amazon (USD 40 billion in sales). Experts forecasted that soon Walmart’s online business would make Amazon irrelevant.
I decided not to invest in Amazon – it felt too risky.
As I watched from the sidelines, Amazon stock doubled from USD 150 in 2011 to USD 300 in 2012. Surely the experts were right, I thought. Maybe the stock will come down.
And then I would buy it at a lower price!
Changing my mind on Amazon
As I waited further, the stock kept climbing. The funny thing was, the negative articles about Amazon were still continuing in 2013:
I started wondering if these so-called experts were really that smart. I wondered how many people had listened to these talking heads and missed out on buying Amazon.
Also, I came to realize that folks had written off Amazon right from the start. I was able to find an article from way back in 1999:
While waiting on the sidelines, I was also doing my own research. I became convinced that Amazon was not only a great company, it was also a great investment. So after dithering for more than two years, I finally decided to invest in Amazon. I wish I had started investing when the stock was at USD 150, but I guess, better late than never. In addition to this realization, I also learned a few other lessons:
1. Exceptional companies always feel expensive
Looking back, there was never a chance that I would have been able to buy Amazon at a “cheap” price. Exceptional companies always seem overpriced. However, these are the companies that generate astronomical returns! It does feel reckless investing in companies like Amazon. But there is a way to take a chance on individual stocks without taking on substantial risk. I only invested a little bit of my money in Amazon and I did it over several months. The largest portion of my investment was still in a diversified fund (VOO). So I was comfortable taking on higher risk with a tiny portion of my portfolio. Even if Amazon went bankrupt, it would not impact my overall portfolio much. I also had a long-term perspective, which helped me stay the course when the stock dropped 20% or 30%.
2. Visionaries are hard to come by
There are many great business leaders, but few who actually change the world. Visionaries are hard to come by – especially those that are also great at business. People like Bezos and Musk disrupt not just one but multiple industries simultaneously. Given a choice, I would rather invest my money with them. Even if the investment goes to zero, at least I played my part in making the world better. Visionaries create an exceptional culture. Amazon is famous for its culture – like the 2-pizza rule, one-way / two-way door concept, 6-pagers, disagree and commit, relentless customer focus, day 1 mentality, etc. It is hard to overstate how big of a competitive advantage culture can be.
Culture eats strategy for breakfast.
3. Doing your own research matters
During 2011-13 when I was waiting for Amazon stock to come down (which it never did), I kept studying the company. I understood its business, strengths, threats, competition, etc. I realized that visionary leadership and strong culture would enable this company to succeed well into the future. This helped me ultimately make up my mind to invest in Amazon. There is no substitute for doing your own research. Knowing why I am investing in a company lets me ignore the so-called experts. It also helps me not to sell in a panic if the stock falls 20% or 30%.
4. Biggest gains are made by not selling
What do you do when your stock doubles? How about when it triples? Or goes up 10 times? In these cases, it is very difficult not to sell and book profits. What is the point of investing if you don’t make money? However, I think the biggest gains are made by doing the opposite. I did not sell when Amazon went from 400 to 800. Nor when it went to 1,000 or 2,000. Now it is at 3,600, and I am still not selling. There are only two scenarios when I would sell Amazon. One: when the reason for investing (#3 above) changes, and two: if it causes me to lose sleep because Amazon has become a large part of my overall portfolio.
If you can’t sleep at night because of your stock market position, then you have gone too far. Sell your position down to the sleeping level.
5. It is better to be lucky than good
Several things have to come together for an investment to work. If I had not become an Amazon Prime member in 2011, I would not have known first-hand how great Amazon is. Or, if I had kept listening to the so-called experts, I would not have invested in Amazon. Or, if I had sold when the stock doubled, I would have missed out on a much more significant gain in the future. Luck plays a big part in investing success, as it does with any other success in life. Having a bit of humility is, I think, the biggest lesson of investing!
About the Author
Mr. FINER (Financially Independent Not Early Retired) - Find me on Twitter
Salaried employee who achieved Financial Independence (FI) by frugality, sound investing… and most of all, patience.