I often write on Quora.com, where I am the most viewed writer on financial matters, with over 438.2 million views in recent years.
In the answers below I focused on the following topics and issues:
- Why is Amazon stock plummeting?
- Is it a good idea to use margin (leverage) to buy index funds?
Some of the links and videos referred to might only be available on the original answers.
Source for all answers – Adam Fayed’s Quora page.
Why is Amazon stock plummeting?
This was the letter Jeff Bezos sent shareholders in 2000:
“Here it is in full, and you can see it here –https://s2.q4cdn.com/299287126/files/doc_financials/annual/00ar_letter.pdf
To our shareholders:
Ouch. It’s been a brutal year for many in the capital markets and certainly for Amazon.com. shareholders. As of this writing, our shares are down more than 80% from when I wrote you last year. Nevertheless, by almost any measure, Amazon.com. the company is in a stronger position now than at any time in its past.
• We served 20 million customers in 2000, up from 14 million in 1999.
• Sales grew to $2.76 billion in 2000 from $1.64 billion in 1999.
• Pro forma operating loss shrank to 6% of sales in Q4 2000, from 26% of sales in Q4 1999.
• Pro forma operating loss in the U.S. shrank to 2% of sales in Q4 2000, from 24% of sales in Q4 1999.
• Average spend per customer in 2000 was $134, up 19%.
• Gross profit grew to $656 million in 2000, from $291 million in 1999, up 125%.
• Almost 36% of Q4 2000 U.S. customers purchased from one of our “non-BMV” stores such as electronics, tools, and kitchen.
• International sales grew to $381 million in 2000, from $168 million in 1999.
• We helped our partner Toysrus.com, The Official Toys” R” Us Site sell more than $125 million of toys and video games in Q4 2000.
• We ended 2000 with cash and marketable securities of $1.1 billion, up from $706 million at the end of 1999, thanks to our early 2000 euroconvert financing.
• And, most importantly, our heads-down focus on the customer was reflected in a score of 84 on the American Customer Satisfaction Index. We are told this is the highest score ever recorded for a service company in any industry.
So, if the company is better positioned today than it was a year ago, why is the stock price so much lower
than it was a year ago? As the famed investor Benjamin Graham said, “In the short term, the stock market is a voting machine; in the long term, it’s a weighing machine.” Clearly there was a lot of voting going on in the boom year of’ 99—and much less weighing. We’re a company that wants to be weighed, and over time, we will be—over the long term, all companies are. In the meantime, we have our heads down working to build a heavier and heavier company.
Many of you have heard me talk about the “bold bets” that we as a company have made and will continue to make—these bold bets have included everything from our investment in digital and wireless technologies, to our decision to invest in smaller e-commerce companies, including http://living.com and Pet Supplies, Accessories and Products Online, both of which shut down operations in 2000. We were significant shareholders in both and lost a significant amount of money on both.
We made these investments because we knew we wouldn’t ourselves be entering these particular categories any time soon, and we believed passionately in the “land rush” metaphor for the Internet. Indeed, that metaphor was an extraordinarily useful decision aid for several years starting in 1994, but we now believe its usefulness largely faded away over the last couple of years. In retrospect, we significantly underestimated how much time would be available to enter these categories and underestimated how difficult it would be for single-category e-commerce companies to achieve the scale necessary to succeed.
Online selling (relative to traditional retailing) is a scale business characterized by high fixed costs and relatively low variable costs. This makes it difficult to be a medium-sized e-commerce company. With a long
enough financing runway, Pet Supplies, Accessories and Products Online and http://living.com may have been able to acquire enough customers to achieve the needed scale. But when the capital markets closed the door on financing Internet companies, these companies simply had no choice but to close their doors. As painful as that was, the alternative—investing more of our own capital in these companies to keep them afloat—would have been an even bigger mistake.
Future: Real Estate Doesn’t Obey Moore’s Law.
Let’s move to the future. Why should you be optimistic about the future of e-commerce and the future of Amazon.com. Spend less. Smile more.?
Industry growth and new customer adoption will be driven over the coming years by relentless improvements in the customer experience of online shopping. These improvements in customer experience will be driven by innovations made possible by dramatic increases in available bandwidth, disk space, and processing power, all of which are getting cheap fast.
Price performance of processing power is doubling about every 18 months (Moore’s Law), price performance of disk space is doubling about every 12 months, and price performance of bandwidth is doubling about every 9 months. Given that last doubling rate, Amazon.com. will be able to use 60 times as much bandwidth per customer 5 years from now while holding our bandwidth cost per customer constant. Similarly, price performance improvements in disk space and processing power will allow us to, for example, do ever more and better real-time personalization of our Web site.
In the physical world, retailers will continue to use technology to reduce costs, but not to transform the customer experience. We too will use technology to reduce costs, but the bigger effect will be using technology to drive adoption and revenue. We still believe that some 15% of retail commerce may ultimately move online.
While there are no foregone conclusions, and we still have much to prove, Amazon.com. today is a unique asset. We have the brand, the customer relationships, the technology, the fulfillment infrastructure, the financial strength, the people, and the determination to extend our leadership in this infant industry and to build an important and lasting company. And we will do so by keeping the customer first.
The year 2001 will be an important one in our development. Like 2000, this year will be a year of focus and execution. As a first step, we’ve set the goal of achieving a pro forma operating profit in the fourth quarter. While we have a tremendous amount of work to do and there can be no guarantees, we have a plan to get there, it’s our top priority, and every person in this company is committed to helping with that goal. I look forward to reporting to you our progress in the coming year.
As I usually do, I’ve appended our 1997 letter, our first letter to shareholders. It gets more interesting every year that goes by, in part because so little has changed. I especially draw your attention to the section entitled “It’s All About the Long Term.”
We at Amazon.com.remain grateful to our customers for their business and trust, to each other for our hard work, and to our shareholders for their support and encouragement. Many, many thanks.
Jeffrey P. Bezos
Founder and Chief Executive Officer “
The key paraphrase is this one:
“So, if the company is better positioned today than it was a year ago, why is the stock price so much lower
than it was a year ago? As the famed investor Benjamin Graham said, “In the short term, the stock market is a voting machine; in the long term, it’s a weighing machine.” Clearly there was a lot of voting going on during the boom
Ultimately, in the short term, stocks are about speculation and emotions. How confident are investors feeling.
In the long-term, investment fundamentals win out. This favours the patient investor. This quote says it all:
Amazon hit over 5.37 in 1999. They hit 0.30 during 2001. Another record high wasn’t hit until 2009. In November 184 was preached.
Going down to 135 is no big deal if you look at the long-term graph.
The biggest reason Amazon has gone down this year is the market’s emotions. People have been a bit fearful about rising rates, Ukraine and many other issues.
You have only seen optimism during limited periods, like more recently, when a few more investors are hopeful that a bottom has been found.
I wouldn’t listen to anybody trying to be overly analytical and say it is because lockdown has improved, and fewer people are staying at home.
Amazon’s sales are up, and most of the fundamentals are sound. They are down because the general market is down.
Is it a good idea to use margin (leverage) to buy index funds?
Charlie Munger once said that intelligent people only go broke from three things beginning with L:
- Liquor
- Ladies
- Leverage
His business partner Warren Buffett said he thinks he only put the first two Ls to make it sound better, and in reality, only leverage can ensure that competent people go broke.
The counterargument is that most people don’t think twice about using a loan through a mortgage to buy a property, so why not with stocks and index funds, especially as major indexes like MSCI World and the S&P500 have always hit record highs again?
The issues are emotions and controlling risks.
Let’s give a simple example. Your account is worth $700,000, and the brokerage is willing to provide you with a loan at 2% per year, up to the value of $450,000.
That is a great deal. Since 1945, the S&P500 has done 11% per year on average, with many international markets doing an average of 8% per year.
Here are the issues:
- Markets tend to do very well during some periods and not so well during others. So, you might need to be patient and only break even on your loan after several years.
- If markets fall a lot, you will either need to sell assets or add more money. Coming back to the original example of 700k, if that falls to 350k or 400k after a market crash, the buy and hold investor can wait for a recovery. In comparison, the person who has used margin now has a 450k loan tied to an account worth less than that. It is similar to trying to sell your house and being in negative equity, only more severe.
- As a result of the last point, it doesn’t make sense to take out the highest possible loan. Taking out half or a third would make more sense. That way, even if there is a market crash, it won’t cause a margin call unless you are in individual stocks, which can fall more than the general market. The problem is, if you succeed, human greed might ensure you increase the value of the loan.
- It is more rational to get out a margin loan when markets are down, like now or in 2008. Most people are more likely to get them out during good moments for the markets like last year. Look at one of the answers below. They used a margin loan to go into Cathy Wood’s fund, which was doing well but is now severely down.
- Interest rates could rise a lot, making the loan more expensive.
- One wrong move can wipe you out. The person who sees their account go down by 50%, like in 2008 or 2020, loses $0 if they stay calm. They have to wait a few years, or a maximum a decade during more severe crashes, to return to where they were. They can take advantage of the falls by adding fresh money. The person who sells out at a 50% loss has made a foolish decision, but they aren’t at $0. If you get a margin call, one awful decision can undo hundreds of good choices.
It can make sense in limited situations. It can work if you are a financial professional with a great temperament.
Imagine how much money somebody would have made if they had used margin every time the markets fell 20% or more.
It allows people to not need to time the market (you can be fully invested) and use other people’s money at reasonable interest rates to take advantage of falls.
Take 2008–2009 as an example. People could have been fully invested without the need to keep cash to market time and then use margin once markets crashed.
They would have made a fortune had they done that with markets 30%-50% down, as they would have benefited from their existing money recovering + a 400%-500% return on leveraged money.
Yet it is easier than done, though. I would estimate a maximum of 10% of the population can use margin loans responsibly long-term.
Less than 1% can use them probably with non-index products. Using them with individual shares and crypto is asking for trouble.
I have seen more people succeed with leveraged property but also observed several who went down to zero due to over-leveraging, especially before the housing crash of 2007–2008.
At least with the property you can’t panic sell by definition, as it can take weeks or months to sell out. With ETFs, you can sell instantly, which increases the chances of silly decisions being made.
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Adam is an internationally recognised author on financial matters with over 830million answer views on Quora, a widely sold book on Amazon, and a contributor on Forbes.
