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.
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]