I Found The Next “Amazon” Stock!
Sorry for the clickbait-y title but if you are reading this, you may have believed that I found the next “Amazon” in the stock market.
Today, I want to talk about a travesty of investing. I don’t have a word for it but I call it the “Next Amazon Stock” syndrome.
Unless you are living under a rock, you will know this company called Amazon. The company that started from selling books till today it sells EVERYTHING. You can even buy a crystal skull on Amazon.
But the most I heard about Amazon is….
This company is the Amazon of car-sharing
This company is the Amazon of grocery
This company is the Amazon of <<insert any industry>>
Yes, people like to compare their latest investment idea with a well-established company, in an attempt to draw some similarities. They believe that this company is the next “Amazon-in-the-making” so they should invest in it now when the share price is still low before it explodes upwards.
Does It Make Sense?
Well, to give them credit, there is some truth to their logic. Looking at the chart below, if you invest $1000 in Amazon when they first listed in 1997, you would have made more than $1,300,000 now.
However, there is a serious flaw in this thinking.
What Are Chances?
They are assuming that they have really found a next AMAZON.
Do a reality check, how many next “Amazon” are there in the stock market? Frankly, I can only think of two – Alibaba and Mercadolibre.
Now, how many listed companies are there in the world? Based on Google, it is around $630,000. If we include the non-listed companies, it will be more than 1 million.
So What Does This Tells Us?
This tells us that your REAL odds of finding the second “Amazon-in-the-making” is around two in a million chance (0.0001%). To put it into perspective, you have a much higher chance winning roulette in the casino (43-47%) and yet people continue to lose money in the casino.
I encourage deep stock analysis as that is what I do day in day out. However, we must pair it with some statistics to keep ourselves grounded.
If the odds are overwhelmingly against us, we must be very careful not to believe that Lady Luck is shining on us this time.
Because the most dangerous phrase in investing is,
This time is different.
In the next post, I will talk about what to do IF you really believe you have found the second “Amazon-in-the-making”. Yes, I am giving you the benefit of doubt.
