The compound interest is a relatively uncomplicated concept. Nevertheless, it is easy for investors (especially those who are just starting out) to underestimate the power of compound interest. That was certainly the case with me when I started investing.
This is the story of one of my earliest investments: Amazon.com (WKN: 906866). On an annual basis, I achieved a phenomenal return of 730%. But overall, my early dilemma at Amazon is the biggest mistake in my career as an investor. And that’s why.
How not to invest
I started investing in 2004. I was a sophomore at the time, and between a small inheritance and summer earnings I raised about $ 15,000 to invest.
To put it mildly: I had no idea what I was doing. I hadn’t studied finance, nor had I read anything about investment strategies from the outside. I didn’t know how to read an income statement, analyze a balance sheet, or evaluate a company’s cash flow. I didn’t even understand where to look for information about potential investments.
As far as I can remember, my strategy, if you can call it that, was to buy stocks that were trading near the 52-week lows and sell them when they were back in the middle of the 52-week trading range moved. In short, the idea was to buy stocks that could easily be undervalued and get out of there as quickly as possible with a small profit.
A bad strategy in action
In October 2004, just over two months after opening my first brokerage account, I decided to buy Amazon stocks. As a student, I used Amazon.com a few times this year to order textbooks and other items. Like most people at the time, I thought Amazon was an online version of Barnes & Noble and didn’t think much about its potential to expand well beyond selling books and other media.
On October 28, 2004, a Thursday, I bought 150 shares from Amazon. I paid $ 34.35 per share, so the total cost of my purchase was $ 5,163.49, including commissions. (That was long before the days of commission-free trading.) My entry price was close to the 52-week low of the stock. At the beginning of the year, the Amazon stock had already traded at over $ 50.
DATA SOURCE: YCHARTS.
The stock quickly recovered from its late October lows. At the end of December it was back at around $ 45. However, I didn’t stay invested that long. I sold my shares on November 1st and 2nd: less than a week after I bought them, and my average price was $ 35.45. I got $ 5,294.88 in net sales from commissions.
This brought me a profit of $ 131.39 after paying about $ 33 in commissions and trading fees. On the one hand, this corresponded to a moderate return of 2.54% on my original investment. On the other hand, since my average holding period was less than five calendar days, I could theoretically have generated this return about 84 times in one year. The annual return on my Amazon stocks was a staggering 730%.
Had I held these 150 stocks instead, my average annual return would have been “only” 33%. However, with a holding period of almost 16 years – instead of four to five days – my investment of $ 5163.49 would now be worth about $ 450,000.
DATA SOURCE: YCHARTS.
Invest in the long term
Two years after my initial misstep, I had the chance to correct my mistake. In September 2006, I bought 100 shares of Amazon for $ 30.42 each: an even lower price than in 2004. Unfortunately, my patience had only improved slightly in the past two years. This time I held the shares for almost two weeks and walked away with a $ 201.91 gain. Once again, my average annual return was phenomenal (602%), but my actual 6.6% gain after commissions was nothing to tell your friends.
The lesson from my experience should be pretty clear. Theoretically, an investor could achieve three-digit annual returns by making single-digit profits every week with a different stock, but in practice, your chances of sustaining such a winning streak are almost zero.
Conversely, if you buy a portfolio of companies with massive growth potential that will last for many years – or even decades – the profits of a few big winners (like Amazon) could generate above-average returns. I’ve been lucky enough to identify a handful of multi-excavators over the past 10 years, but the profits I’ve made from all of these companies are fading compared to what I missed when I bought Amazon shares (twice!) For sold a small profit. Patience is perhaps the most important virtue when investing – and that’s a lesson I had to learn the hard way.
The post I got an average annual profit of 730% with Amazon shares. It was my worst mistake when investing ever. appeared first on The Motley Fool Germany.
John Mackey, CEO of Whole Foods Market, a subsidiary of Amazon, is a member of The Motley Fool’s board of directors.
This article was written by Adam Levine-Weinberg in English and on July 26th, 2020 on Fool.com released. It has been translated so that our German readers can take part in the discussion.
The Motley Fool owns Amazon stock and recommends the following options: Short January 2022 $ 1940 calls on Amazon and Long January 2022 $ 1920 calls on Amazon.
Motley Fool Deutschland 2020