While there remains some serious questions out there as to where stocks may be headed during the coming economic recovery, Amazon is going up even more now.
Stock selection is a lot more important than the great majority of investors realize, and when the market becomes as embattled as it has been, the stakes go up, and being in the right stocks, or being in none at all, becomes even more important.
Investors love to spread things around, doing things like investing in stock and bond funds, in an effort to hedge against the risk of certain stocks or sectors falling upon hard times. Broad strategies of diversification are beaten into us at every turn, to a point where just about everyone, other than true maverick investors, load their investment bushels with a huge assortment of things.
Somewhere along the way, we have lost sight of even what we are trying to accomplish with stock investing. This presumably is supposed to be about seeking to make as much money as we can, which we can call the heads side of the coin. On the tails side of this coin is risk management, but the coin that people like to flip is tails on both sides. The tails side isn’t even a genuinely sound risk management strategy, but one of just owning a lot of things and not paying enough attention to either risk or returns.
A typical strategy is to have 60% in stock index funds and 40% in bond funds, but this isn’t even enough for a lot of people, as they will mix different types of stock and bond funds in this basket for good measure. Good measure is not a very appropriate word to use here, as we should be focusing more on what may be good and what may not be, instead of just seeking as diversified mix of the good, the bad, and the ugly as we can manage.
Since this potpourri strategy with investments is so popular, very few people even ask any questions about it, they just use it without any real thinking. What little thinking that goes on concerns how faithful or not they may be to this directive, how many ingredients that they may have in this witches’ brew, with no real regard of how snake skin or frog’s tails or any of the other assorted items in our pot may be harming or hurting us.
Imagine if there were no stocks as we know it, but rather, people who would knock on your door and pitch their investments directly to you. Some of the people at your door have some fabulous sounding ideas, which you eagerly invest in. Others may appear more mundane, but for the sake of variety, you buy into those as well, and even do this with hideous proposals and investments, just because you like variety for its own sake, no matter how good or bad they may be.
The Amazon man stops by, and this looks like a swell deal because more and more people are buying things online now, and are especially doing so these days with almost all of the stores closed for a while and people generally scared of human contact. He tells you that the stock is up over 400% over the last 4 years, and you start thinking that 100% per year on average was a great deal, and you are told that they expect this to just keep growing.
You wisely invest in Amazon, although you may still want to keep a close eye on it because you know that sometimes other investors may run scared, like they did for about a month, between mid-February and mid-March, where even this mighty stock fell to the ground and took a real beating, to the tune of 23%.
You don’t like to see this much money get taken from your account, even temporarily, even for just a month, and while you could just step aside when Amazon gets taken down by the undertow of big market selloffs such as the one that we had over this month, you’ve been told not to mess around with these things and just add a whole bunch of other investments instead, since that is supposed to help. You’re not sure how, other than this is supposed to, and don’t ask, just listen becomes your prime directive.
A Macy’s representative comes to your door next, with some eye-popping stories. He tells you that this stock went from $6 to over $70 over 7 sweet years after the 2008 crash, and while they may be back to $6 now, the stock is somehow due. You think that it may be in for another Miracle on 34th Street, as you remember the movie, even though it may need an even bigger miracle than this to not only do well, but perhaps even to survive.
No matter though, because this is all about variety, and if you put these rotten apples near the bottom of your bushel, you may not notice them, among the different kinds of apples in different qualities, from the shiny new Amazon ones to the well-browned Macy ones, and perhaps ones even more rotten than Macy’s.
Somehow, these rotten apples, smelly fish bones, and other clearly undesirable items are supposed to protect us against the warm weather. However, when a heat wave comes like the one that we just saw, this rots everything, but things that are already rotten stink even more.
Macy’s, for instance, during this nasty month of unbearable heat, didn’t just drop the 23% that Amazon did, they lost 71%. This is on top of all the other losses they put in over the last 5 years or so, where their apple had already been almost entirely consumed by worms already, and this virus scare had them gobbling this gruesome mess at a faster pace than ever.
Rotten apples, especially worm-infested ones, affect the good apples as well, and when you have your basket full of ones that are of considerably lesser quality, and especially those that are really adversely affected by too hot temperatures, this is really going to bring down the value of your bushel of apples.
Stock positions are a lot like food, where you need to keep an eye on them to make sure that they are still edible, and when they start to turn, this is when you need to throw them away and look for something else to put in your fridge instead.
Sometimes the power can go out and nothing is going to stay fresh in it, when for instance we blow up the housing market like in 2008, or choose to blow up ourselves like right now. It takes a special dish to be able to handle these conditions, but with Amazon, refrigeration is not even required right now.
Stock Selection Should Be Based Upon Merit, Or We Should Think Anyway
The only way to approach this sensibly at all is to look to see what you have on hand and what you want to buy and decide all this based upon merit. Choosing stocks based upon merit is a strange idea though overall, and people don’t want to do any shopping at all here, and instead just order a box of various things of widely differing qualities and just put it in the basement and forget about it.
The current situation with the market is a pretty tough one, given how much of an economic hit that we’re taking right now with so many things not open for business. While this also can present some real opportunities, we need to be particularly selective with the ones that we choose, and avoid stocks like Macy’s in particular because this stock is not only out on the street drumming up business, it is in ICU on a ventilator, which is not all that bullish as it turns out.
Amazon, on the other hand, is coming out a big winner over all this, and it’s not even because their business has picked up so much. While many of their competitors are sick and dying, they have more business than they can handle and are out to hire another 75,000 workers to try to keep up.
However, the real win is how many people become more open to online ordering from this. Once you get them to come in the door, and many are ordering from Amazon for the first time these days, the chances of getting repeat business from this go way up. This might be the best thing that has ever happened to Amazon, or even perhaps the best thing that ever could.
This is a whole different breed of apple than Macy’s is, which this situation either putting them out of their misery finally or at least getting them closer to that point. There are a lot of stocks that may be primed for a rebound from this, but these are the ones that are still walking around, dragging an IV around with them perhaps, but with a good prognosis, rather than wondering if they will ever get out of bed again.
We need to be assessing stocks by merit, which includes both their potential to make us money and their potential to lose us money. Most of the potential to lose us money can be managed simply by refusing to allow them to lose us all that much money, and the way to do this is not to mix a bunch of crappy apples or even significantly lesser quality ones in with our good apples, if we even bother to pick very many good apples that is.
When you get a pullback such as the one that we just had, where the bears raid our fridges, the aftermath can provide is a chance to make a lot of money if we are smart. You don’t even have to be that smart in fact, as you can just wait until the bigger part of the storm passes and then go out and collect apples again. The dead ones that are laying on the ground and have been stepped on multiple times aren’t the ones we want to gather though, so this does require at least some care.
Some people just refuse to trade though and only want the things that you can just leave alone over the long run with at least a decent expectation, but these are the folks that need to be even more selective about what they choose to do this with. They also need to be aware of how much that they are giving up on the risk side of things when they do this, not just ignoring it completely but even picking some bad stocks to throw in which will suffer even more when the bears take over.
The Differences with Stock Selection Can Be Enormous
It is not so much the risk side that visits these investors with pain, as they get jolted even more on what they give up on the upside. We can even just compare the S&P 500 with Amazon to get a better feel for what we are taking about, although you could pick any top stock and see the same thing.
We’ll throw in Macy’s in here as well so we can have the good, the bad, and the very ugly all represented. Let’s take a trip back to the start of 2009, where Amazon traded at $51.90 a share, the S&P 500 was at 890, and Macy’s sold for $10.30 a share.
Every once in a while, you get assets performing so divergently that you don’t even have to do any math to work out percentage changes, as the numbers speak very well all by themselves. Macy’s change sure does, going from $10.30 then to $6.20 now, as that’s 11 years wasted and a good part of your investment lost.
The S&P 500 is up to 2846, which is several times the 890 that it was worth before, at least. Amazon, on the other hand, is at $2283, and that’s a whole lot more than $51.90. $10,000 invested back then is now worth $439,884, where doing this with the S&P 500 you’d only have $31,997, but that’s still a lot better than the $6,019 that picking Macy’s would have ended up with.
This isn’t even with any risk management, this is the tie your kangaroo down style of investing, but turning $10,000 into almost half a million dollars is way beyond the dreams of investors who invest this way. They don’t dream big enough though, and not even close.
A lot of people would be scared out of their wits by putting all of their money in a stock like Amazon, and might even think that this would be close to insanely reckless. They may even need the huge returns that the real good stocks deliver, but settle for mediocre results while they languish in squalor in retirement. They want to avoid the risk of the poorhouse, so they have instead chosen to move in.
Along the way, over these 11 years, Amazon has continually made new highs, including yet another one on Tuesday. It is up 24% year to date now, in comparison with the S&P 500’s 12% loss, and the gruesome loss of 64% that Macy’s has been further sickened with this year so far.
For those who are courageous enough to step out during big pullbacks, in addition, they could have captured a lot of the 35% that Amazon is up on its current little run of a little over a month in duration.
For those who like to look at how companies are doing, and use that as a major factor in their stock picking, it’s hard to imagine a stock that looks much better than Amazon. Even when the risk of this pandemic disappears, this virus will have served to really cement a lot of existing relationships and created a lot of new ones, in a way that will accelerate the company’s growth in a way that would not otherwise been possible if not for the world’s misfortune and Amazon’s good fortune courtesy of that microscopic bug that has so many panicking nowadays.
When a stock has performed so brilliantly and its future has become even brighter, this should really grab our attention, if we’re even out to make money from our stocks that is. If we are instead on the opposite end of this spectrum, only concerned with spreading our money around as much as possible with little or no regard for either making money or making sense, we may be none the wiser, but we’ll certainly be all the poorer.