Thinking Citizen Blog — What is Your Favorite Stock or Business Story of all time?

Thinking Citizen Blog — Tuesday is Economics, Finance, and Business Day

Today’s topic — What is your favorite stock or business story of all time? Mine is Amazon (AMZN).

In December 1997, the experts (“the smart money”) said that Amazon (AMZN) was the best stock to “short” for the coming year. Today, the logic behind their recommendation, the logic behind my “contrarian” position, and a takeaway for anyone considering putting any money in the stock market. Experts — please chime in. Correct, elaborate, elucidate.

WHY THE “EXPERTS” SAID “SHORT” AMAZON IN DECEMBER 1997

1. It’s too expensive: it’s trading at 4X sales and retail stocks should trade at 1X sales.

2. It’s up on a spike: it’s more than doubled this year already!!!!

3. It’s earnings growth is unsustainable! If it grew at this rate, it would soon have revenues exceeding world GDP!!!!

NB: Shorting is selling stocks with borrowed funds. The downside is unlimited!!!!

WHY I MADE IT ONE OF MY TOP THREE (LONG) POSITIONS IN DECEMBER 1997

1. It’s not too expensive. The average retail stock grows sales at close to 0. Amazon is growing sales at 100% or more month over month! To think that Amazon deserves an average multiple is insanity.

2. The spike does not matter. What matters is the long term target value. What stock in the market has the best odds of being up ten fold in the next ten years? What stock could have a revenue base 10X what it is today?

3. Do you have any idea of what “one click” ordering means for its revenue growth? Do you have any idea of how addictive book-buying is? Consensus revenue estimates are short by an order of magnitude!!!! I did know because I could not stop clicking.

NB: Spoiler: in 1998, Amazon was the best performing stock of 20,000. I sold it in May 1999 (up 15 fold). Every share. Over the next year the stock almost doubled again. And I looked like an idiot for selling early. In fact, I looked so stupid, that in September 2000, Fidelity management took away half of the $6 billion I was managing because in their judgment my 0% weight in technology stocks was too risky a bet to make. I just did not understand risk.They gave the funds to a quantitative investor who understood “risk” and had an index weighting in tech: 40%. Within two years, Amazon had declined 89% from its 2000 peak.

LESSONS FOR WOULD-BE INVESTORS

1. Ever the best stocks of all time can go down 89%. Don’t ever invest if you are not willing to lose 100% of what you invest. Not only can the best long term stocks go down almost 100%, but you can be wrong. And it is a lot easier to be wrong than most people think. Professional stock pickers are considered geniuses if they are right a third of the time. It’s like baseball players — batting “300” is terrific. Batting “400” beyond most hitters’ wildest dreams. And remember the math: if your stock is down 90% that does not mean that your risk is just a further 10%. The value of your holding can go down 90% again, and again, and again.

2. Focus on companies whose business you understand, whose products you love, and whose market is huge. I knew Amazon because I understood retail (previous winners included Gap Stores and Home Depot), loved its service, and knew that “one click” ordering would lead to explosive growth sooner rather than later.

3. Every decade new companies offer huge new opportunities. What new products are you buying? what new services are you using? How about your friends? relatives? what could be more fun than doing a little research and making a little bet if appropriate? what better way to teach a little math to your children or grandchildren? If you can figure out a way of sparking an interest that is… Click here for the last three years of posts arranged by theme:

PDF with headlines — Google Drive

YOUR TURN — Please share:

a.) the coolest thing you learned this week related to business, economics, finance.

b.) the coolest thing you learned in your life related to business, economics, finance.

c.) anything at all related to business, economics, finance.

d.) anything at all