Friday, October 31, 2014

An Amazon Lesson

I wrote a week ago about how I made 57% on my money overnight when Amazon stock crashed. It's time to add a footnote.

My strategy of buying put options (ahead of the earnings announcement) was to protect my actual shares; and it worked. But what about the shares themselves? They went down in value by around 10% on October 24. Most (amateur) investors, after seeing their shares go down 10% overnight, will panic-sell and "take their lumps." That's seldom a good strategy, however. If you liked something at $314, why would it not be even more attractive at $285?

The morning of the Amazon stock crash, I bought more shares immediately.

In the intervening time, Amazon has gone from $285 (just a week ago!) to $302 this morning. Buying more shares turned out to be exactly the right thing to do.

The moral is: If you believe in a stock, buy more of it when the price goes down. Don't panic-sell at a loss.

Will Amazon keep going up from here? No one can know that, of course. But I think six months from now, Amazon will not be under $300, any more than AAPL will be under $100.

Why buy AMZN at all if the company shows no profit? Because free cash flow is still growing. The only thing that could take Amazon seriously lower ($50 a share, say) would be a major health event that causes Mr. Bezos to leave the company unexpectedly. If Bezos ever leaves, I expect there will be a very short-lived dip in the stock price. You should buy that dip. Any subsequent management team will be perceived (rightly or wrongly) as "more responsible" and more likely to force profits to the bottom line than Mr Bezos. And that will take the share price sky-high.

Bear in mind, Bezos could make Amazon profitable overnight, any time he chooses, just by "turning a few knobs." But doing so will interrupt the company's growth. Right now, he chooses growth.

That's worked very, very well so far.

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