Over the last 10 years, Amazon (NASDAQ:AMZN) shares are up on average 23% per year. That’s enough to turn a £1,000 investment back in 2013 into a stake with a market value of £8,044 today.
Clearly, Amazon shares have been a great investment for those who bought them a long time ago. But I think there are some important lessons that investors can learn from the remarkable success of the online retailer.
Don’t sell too soon
If I’d bought shares in Amazon back in 2013, within five years I’d have been up by over 400%. At that point, it would have been really tempting to sell some or all of my shares, to lock in my profits in case it fell again.
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This would have been a big mistake, though. The stock is up significantly over the last five years, meaning I’d have missed out on a lot of the returns by selling too soon.
Whether or not it’s a good idea to offload a stock after a run-up comes down to the underlying business. Specifically, whether its future cash is worth its current price tag.
In the case of Amazon, the answer has been ‘yes’. Back in 2018, Amazon Web Services (AWS) was just getting started, meaning it had significant potential for revenue growth ahead of it.
The moral of the story is that even when a stock is up significantly, selling can be a costly mistake. If a stock (like Amazon) has parts of its business that still have scope for growth, selling too soon can involve missing a lot of the future returns.
It’s not too late to buy
For investors who missed out on a company’s early success, it can be natural to think the opportunity has passed. This is especially true when a company gets big – the larger its market cap, the more it takes to move it higher.
This is also a big mistake, though. At the start of the year, Amazon had a market cap of around $885bn, which is big by anybody’s standards.
It would be understandable to question how much potential for growth the stock had left. But a £1,000 investment in Amazon shares at the start of the year would be worth £1,538 today.
That’s a more than handy return for a 10-month investment. And this is largely attributable to the company realising its potential for generating advertising revenue through its e-commerce platform.
The lesson here for investors is that it’s easy to hold off buying a stock that’s already gone up. But this is another way of missing out on potential returns.
Foolish takeaways – how to avoid the mistakes
The best way to invest involves focusing on the companies themselves and not paying attention to share price movements. Over the long term, stocks tend to perform in line with the underlying businesses.
That means if a company still has good prospects for growth, whether that’s in the form of projects that haven’t yet reached scale, or new possibilities for existing operations, its stock might be worth hanging on to. And if a business has good future potential, a stock might be a buy even if it has already run up a long way.
Both of these have been true of Amazon in the past. And I think they’re important lessons for investors in the future.
