Amazon's IPO at 20: That Amazing Return You Didn't Earn
May 14 2017 - 10:29AM
Dow Jones News
By Steven Russolillo
A $10,000 investment in Amazon.com Inc. 20 years ago would be
worth $4.9 million today. Good luck finding an Amazon investor who
can brag about a return like that.
Monday is the 20th anniversary of Amazon's initial public
offering. Its vertiginous stock chart is a reflection of the
internet giant's dominance. Shares have gone from under $2 on a
split-adjusted basis to $961.35 at Friday's close. The 36%
compounded annual gain by buying Amazon at its first-day closing
price earned an investor 155 times what would have been made in the
S&P 500, including dividends. At $460 billion, Amazon now
sports the fourth-largest market capitalization in the S&P
500.
"This massive outperformance has led to an explosion in
hindsight bias, with investors fooling themselves into believing
Amazon's ascent was somehow obvious or inevitable," writes Michael
Batnick, director of research at Ritholtz Wealth Management and
author of the popular "Irrelevant Investor" blog. "You had to be
some sort of sociopath, void of any human emotions, to earn these
monstrous gains."
Zooming in on Amazon's stock chart shows a wild ride. It is one
that likely sapped gains from market-timing investors who either
bought or sold at the wrong time.
History shows stock investors regularly underperform the
market's returns. Volatility often triggers irrational behavior
when investors almost always would fare better by ignoring the
noise. Similar patterns are only exacerbated when focusing on
individual securities.
As Mr. Batnick points out, Amazon shares have had daily declines
of 6% 199 times. The stock has fallen 15% over a three-day span on
107 different occasions. And the damage was far worse over longer
time horizons.
Amazon has suffered at least 20% pullbacks in 16 of its 20 years
on the public markets. The drawdowns were more than 40% apiece in
nearly half of those instances, including a 64% plunge in 2008
during the depths of the financial crisis. Worst of all, shares
lost 95% of their value when the tech bubble burst from December
1999 through October 2001.
Most investors just couldn't ride that out. "There is a very
real cost associated with the outperformance that we choose to
ignore when looking at a chart," Mr. Batnick says.
It isn't just retail investors who have expressed regret for
missing out on Amazon, which only recently started turning profits
and has always sported an astronomical valuation. Warren Buffett
said earlier this month at the Berkshire Hathaway annual meeting
that he "underestimated the brilliance" of Amazon boss Jeff Bezos
and that the odds that he would succeed were "not at all
obvious."
Plenty of people might brag that they saw the potential that
eluded the most successful investor of all time. Unfortunately, few
if any had the Buffett-like discipline to actually hang on for this
extremely profitable 20-year ride.
Write to Steven Russolillo at steven.russolillo@wsj.com
(END) Dow Jones Newswires
May 14, 2017 10:14 ET (14:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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