Academy of Finance

You need patience, discipline, and an ability to take losses without going crazy —Charlie Munger Kiplinger, 2005

Netflix, Amazon, and Google are three of the most successful companies over the past decade. Their products have changed the way we live, and their shareholders have in turn been rewarded with tremendous profits. That is, assuming their shareholders had the discipline to stick around. One of the oldest tenets of finance is that risk is tied with reward. If you want big rewards, you can be sure that big risk is never far behind.

Amazon is up a whopping 38,600% since its 1997 IPO, compounding at 35.5% annually. This would have grown a $1,000 investment into $387,000 today. But the degree of difficulty of actually turning that $1,000 into $387,000 20 years later cannot be overstated. Amazon got cut in half three separate times. On one of those occasions, from December 1999 through October 2001, it lost 95% of its value! Over that time, the hypothetical $1,000 investment would have shrunk from a high of $54,433 down to $3,045, a $51,388 loss. So you see why looking at a long-term winner and wishing you had bought in is a fool’s errand. “Man I should have known Amazon was going to change the world.” Fine, perhaps you should have. But even if you had that information, it would not have made it any easier to hang on for the ride.

Netflix, another revolutionary company, compounded at 38% since its IPO in May 2002. But this too required an almost inhuman amount of discipline to stay invested. Netflix got cut in half four times and fell 82% between July 2011 and September 2012. A $1,000 investment would have grown to $36,792, and then shrank to $6,629 over this time. Could an investor have watched their initial investment fall by thirty times over? A 500% gain over the previous 20 months went up in smoke in just 14 months!

Google, the youngest of the three companies, has compounded at more than 25% a year since it went public in 2004, delivering investors a smoother ride than in either Amazon or Netflix. Shares “only” got cut in half once, losing 65% of their value from November 2007 to November 2008. And when they did, many investors were unable to weather the storm that all of these great companies experience. Over the 265 days it took to bottom, nearly $845 billion worth of stock was bought and sold. The average market cap for Google over this time was just under $153 billion. In other words, the stock was turned over five and a half times, robbing many investors of the 515% return over the next eight years.