Market News

One staple of financial news is the wistful “If only you had...”  article about the tremendous gains an individual could have obtained if they had invested in some famous company at its initial public offering (IPO). Probably the most popular business to use in these hypotheticals is Amazon.com (Ticker: AMZN), with Investopedia and CNBC.com among the many to publish wishful what-ifs.

Readers are tantalized with charts like the one above that show an investment in AMZN at its IPO on 5/15/1997 would appreciate over 100,000% by last Friday’s close. Of course, having the foresight to recognize in 1997 that AMZN would become a world-altering company with seemingly limitless growth potential would have been impressive, but even if you had invested in its IPO it would have taken almost maniacal self-belief to maintain that position through the years. The uneasiness that an investor would have felt through the decades can be visualized with an underwater chart. Underwater charts plot how far a stock has fallen from its previous all-time high (a point at 0% indicates the stock is currently at a new high). Below, we have a underwater chart for AMZN and SPY, a S&P 500 index fund. We can see that an investor would have needed nerves of steel or possibly a last name of Bezos to hold on to their position as it fell –94% from its previous high in late 2001. The volatility of a high-growth single stock position is further illustrated by the multiple dips of more than –20% which don’t seem daunting when looking back on a stock’s history but are incredibly stomach-churning when experienced in real time. We know now that the turbulence was worth the anxiety, but that can almost be impossible to tell at the start (as investors in Pets.com and other failed tech start-ups of the time know well). The underwater chart of SPY also shows why diversification is so important for those of us who can’t predict the future. By investing in 500 large-cap stocks instead of one, the series of drawdowns is much less severe.