Well, I finally put my money where my mouth is and shorted Amazon this week. I’ve been talking shit about Amazon’s stock for weeks, and I finally pulled the trigger this week. If you don’t know where I stand on Amazon, I discuss Amazon’s historically high multiple here, and Amazon lost my “Battle of the Titans” to Walmart. Yep. The same Walmart that your grandfather shops at because he believes that entering credit card info on Amazon will prompt hackers to steal his retirement money and scramble his television channels. Also, he doesn’t have a credit card because his money is in a box under his bed because no robbers would ever think to look there…
Anyways, back to the topic at hand: Amazon. Here’s this thing:
Yep. And here’s the typical Amazon bull argument, presented by Andrew Tonner from Motley Fool:
…what makes Amazon so exceptional is its ruthlessly long-term-oriented corporate mindset, a line of thinking that gave birth to the likes of the then-unpopular Prime shipping service and Amazon Web Services. Both initiatives have become smash hits for Amazon and its investors, and it’s this same kind of savvy, big-picture thinking that remains alive and well at Amazon…
I will not argue with Amazon bulls on the merits of the company. Amazon is growing, expanding, and basically planning on taking over the world. Amazon is a great company. There, I said it. And it has a lot of good stuff going for it, and it certainly has a bright future. So maybe an analogy would help.
Let’s pretend you are a single gentleman at a party looking for a lucky lady to ask out on a date with hopes that you will eventually fall in love. The plan is to find your soul mate and the one with whom you’ll spend the rest of your life in ceaseless happiness. What do you look for? I’m guessing you want a woman that has at least some of the following characteristics: personality, intelligence, thoughtfulness, sense of humor, ambition, compatibility, beauty, compassion, and grace.
So as soon as you start chatting up every girl, you are assessing all of these particular characteristics. Nobody is perfect, but some girls are closer than others. You might be willing to overlook a little bit of selfishness if the girl has a great sense of humor. Or if she is the funniest, sweetest, smartest girl you’ve ever met, maybe she doesn’t have to be a 10 in the beauty department. Certain trades can be weighted and compared based on their relative importance and your particular taste. However, if at any point in the process you look down and see a fat diamond engagement ring on her finger, that is a deal breaker.
My point is this: Amazon may be the most beautiful, funny, smart, sweet and elegant company at the party, but its got a big ole 533 carat P/E ratio on its ring finger. No matter what you think of the company, a large-cap stock that is that expensive should be setting off alarms in your head. No growth rate and expansion can justify that multiple. As I have written before, assuming Amazon grows earnings at a 46% annual growth rate for the next five years, its P/E ratio would still be over 70 five years from now!
I want to take a minute to thank all the people that bought my book this past weekend while it was on sale. I hope you enjoy reading.
Does the market seem completely random to you sometimes? Trust me: it’s not. Or maybe you just want to be able to look sophisticated in front of your coworkers when they ask you what you are reading on your Kindle, and you’d prefer to tell them “Oh, I’m just reading a book about stock market analysis,” rather than the usual “Oh, I’m just looking at pics of my ex-girlfriend on Facebook.” For these reasons and more, check out my book, Beating Wall Street with Common Sense. I don’t have a degree in finance; I have a degree in neuroscience. You don’t have to predict what stocks will do if you can predict what traders will do and be one step ahead of them. I made a 400% return in the stock market over five years using only basic principles of psychology and common sense. Beating Wall Street with Common Sense is now available on Amazon, and tradingcommonsense.com is always available on your local internet!