The stock is up 2,170% since the March 2009 bottom.
You could have turned $100,000 into more than $2.2 million.
But did you?
I’m not trying to be rude, in asking that – just frank.
You see, a lot of people fool themselves.
Studies have shown that most people think of themselves as “above-average” (mathematically impossible). And most smart, well-educated people think they have a leg up on the competition when it comes to investing… that they have what it takes to identify and ride Amazon’s to lucrative heights.
The truth is…
I don’t think many everyday folks have made as much money on Amazon as Amazon (and Jeff Bezos) has made on us.
And worse, I think anyone who buys shares of Amazon today are setting themselves up for failure.
There are two cognitive biases – aka “mental glitches” – that come into play here.
The first is hindsight bias, defined as the inclination, after an event has occurred, to see the event as having been predictable, despite there having been little objective basis, before the event occurred, for predicting it.
It’s also called the “knew-it-all-along effect,” because that’s the tell-tale claim people will make when their memories and perceptions are under the influence of hindsight bias.
How does this bias play out with regard to Amazon?
In hindsight, the rise of Amazon seems almost obvious. You can order anything in the world, from your couch, and have it delivered to your door in two days, for free. Who can argue or compete with that?!
But Amazon’s plan for world dominance wasn’t so obvious to investors – or even Jeff Bezos – back in 1997, when it IPOed, or even in 2002, after it turned its first profit as an “online bookseller.”
No one really knew Bezos had ambitions beyond books and compact discs (CDs)… or that a decade of cheap oil would make home-delivery shipping so inexpensive… or that automated warehouse technology (aka “robot pickers”) would save Amazon millions in labor costs.
Though now – with the benefit of hindsight – we know all of these things and more.
Looking backward, we can connect the dots and understand why Amazon is so successful, today.
The second cognitive bias at work here is the recency bias – the inclination to use our recent experience as the baseline for what we expect will happen in the future.
Simply put: We extrapolate what’s going on today, for as far as the eye can see… as if it’s a straight-line trend, with no bends and no end.
These two cognitive biases can be a lethal combination.
Hindsight bias tricks us into thinking we have a better shot at identifying stocks with massive return potential than we actually do – leading to overconfidence and imprudent risk-taking. And the recency bias tricks us into buying stocks like Amazon after their incredible run-ups – a practice called performance chasing.
In the case of Amazon, we:
- Observe (looking backward) how Amazon has dominated the market and generated enormous stock gains…
- Understand the “how” and “why” behind the company’s success (but only with the benefit of hindsight, even though we’ll trick ourselves into thinking we “knew it all along,” or at least could have)… and,
- Expect it to continue this way indefinitely (as we’re fooled by the recency bias).
Mark my words: An investment in Amazon will do far worse over the next nine years than it’s done over the last nine years.
If you’re buying shares of Amazon today, as a long-term investment, you’re buying closer to the top than the bottom.
I know it may seem like there’s no end to Amazon’s success… no bottom-of-the-well for its market and earning power.
But history shows there’s always a limit to how much of the pie one company can claim.
Over the last 40 years, there have been only 12 U.S. corporations able to grow their market cap to 2% or more of the total market.
IBM topped out at 4.4% of the total market in 1985 (the highest percentage of total market cap claimed by one company, since 1980).
Apple maxed out at 3.2% in 2012.
And Google hit its wall, at 2% of total market cap, in 2007.
Where’s Amazon today?
I’m not saying Amazon’s stock will roll over and die tomorrow. The company will continue to push on with its plan for world domination – and I’m sure it’ll continue to make gains in market share for some time.
But don’t fool yourself into thinking you can join the party now and make the same returns you’ve been eyeing in the stock’s rearview mirror.
It just ain’t gonna happen.