Amazon. Google. Starbucks. Tesla.
In retrospect, it seems so easy to pick these winners.
I’ve been shopping at Amazon for at least 15 years, and the stock has risen 6300% over that period of time. Shouldn’t it have been so obvious to buy Amazon when I first discovered how great it is to buy books (and everything else) online?
Google was synonymous with search when it went public in 2004 with much fanfare. If you bought the stock at the time of its IPO, you would have made 1700% over the past 13 years.
The story of many of these high-flying stocks is a series of successes that propels the stock ever higher, leaving competitors in the dust. A lot of the run-up in stocks is the anticipation that it will be successful in the future. At each step of the way, some companies will fail and others succeed. Because we remember the big winners and quickly forget the losers, it seems far easier to pick the next big thing than it actually is.
For every start-up that succeeds, many fail
Venture capitalist firms invest in companies at its infancy. Every startup has a great founder, a great idea, and a great pitch that they can be the next Facebook or Google and disrupt a billion-dollar industry. As a venture capital firm, you need to sift through all of these great ideas and people to pick the winners, because if you don’t, you will quickly go bankrupt. Even the most successful venture capital firms have many, many investments that lose everything for each investment that makes it all the way to an initial public offering (IPO).
Google was actually relatively late to the search engine game, and many of us remember search engines like Ask Jeeves, Excite, Lycos, and Altavista, all of which were founded before Stanford Ph.D students Larry Page and Sergey Brin conceived Google in 1997.
Facebook has been the dominant leader in social media for many years, and it’s easy to forget all the other social media companies that have come and gone. Among non-college students, MySpace was a more popular social network than Facebook in the early years of social media (the mid-2000s). Myspace was bought by News Corp in 2005 for $580 million dollars and was valued as much as $12 billion. While Myspace actually still exists and is currently the 1,521st most popular site in the United States, it was sold to Specific Media for $35 million in 2011.
An IPO doesn’t make a stock a slam-dunk
Even when a great start-up matures to have a successful IPO, the stock doesn’t become a slam-dunk. Google had its naysayers at the time of its IPO. Columnist Stephen Gandel told investors at the time of the Google IPO in Money Magazine to “stay clear” and anyone who purchased Google at that time was a “sucker.”
While Facebook has had a successful run-up since its IPO, Twitter has not done so well. After a fast start, Twitter’s stock currently sells for 30% less than its IPO price from 4 years ago.
A high-flying stock can be one mistake away from a crash
Even high-flying stocks are just one scandal away from losing their charm. Chipotle was a high-flying stock for many years. I loved their burritos. Before I went to a three-fund portfolio in investing, I dabbled in picking individual stocks and made a little bit of money on Chipotle stock. But after a series of food safety incidents ravaged its sales and its reputation, Chipotle stock took a huge hit and has never fully recovered.
Index fund investors own Amazon and Google, too
The beauty of an index fund portfolio is that you do get to own a piece of the winners. You own Apple and Facebook and Google when you buy an index fund. In fact, because the S&P 500 and Total Stock Market index funds are market-cap weighted, your largest holdings end up being these mega-cap companies. In fact, over 10% of the S&P 500 is currently invested in Amazon, Apple, Google, and Facebook.
Conclusion
It’s not easy to pick the next Amazon or Starbucks. High-flying stocks, given their hype, will usually be overvalued by traditional investing metrics and are often one mistake away from losing its luster. You get exposure to these high-flying stocks through index funds, so you can still brag to your friends that you technically “own” these companies.
What do you think? Have you, like me, invested in “high-flyer” stocks? How have you done?
[Charts courtesy of StockCharts.com]
Don’t forget Friendster. That is actually what I used in the 2001-2004 period. I think I joined Facebook in 2005. Stock picking is tough. The funny thing is that people look at Amazon, Google, and Facebook and wonder why they did not buy. It was obvious right?
Not so fast…even Facebook was considered to be a possible risky stock. Who knew they would monetize advertising so well. It may be fun to dabble but until I am financially set I will stick to the index funds. Once I have play money, then I may consider some dabbling.
It sounds like Friendster predated both MySpace and Facebook. It just goes to show that the early bird doesn’t always get the worm.
I used to seriously dabble in individual stocks. I survived the dot.com bust. The only individual stock that I own is Apple. The capital gain is too large so I am stuck with it.
A good problem to have certainly!
Hey i grew up in the hey-days of chatting on irc – internet relay chat – whatever happened to that? Having read the bogleheads philosophy, the majority of our funds are in low cost index. I do have ‘gambling money’ in vanguard and robinhood where i buy a few atocks to dabble in.
Cause whenever your team of managers promise a break-through in 3-5 yrs timeframe they underdeliver. No one in the world knows whether the team can deliver or not on their powerpoint.
Walmart had 1/3 of its top execs working on IT systems. Amazon was doing IT, website, integrating online to its warehouses. Sam Walton was alive then and overseeing stores, groceries, logistics.
Myspace > Fb. Myspace founder visited Fb and saw Fb’s data teams went back to Myspace’s office told them it was a waste of $ that he would use his founder’s instincts to direct his coders what features to build.
Starbucks who’s competing with it? No one. Why doesn’t Walmart add it’s own coffee stop attached to their own stores? Who knows why not.
Tesla. Well now a decade later the competition has woken up it’ll be interesting in the next 5. I’d rather buy a complete electric vehicle from the traditional car manufacturers who have an ACTUAL killer exterior, interior, manufacturing, quality control, deep supply chain than a Tesla that is ACTUALLY a simple, basic, ugly exterior, interior that long tesla media props up non stop.
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