Recently heard a PM on CNBC say "Yeah, we bought some Amazon back when it was 1400." And my thought was "Really? 1400? How 'bout buying it back when it was 300 five years ago like I did -- when I was 15 years old."
And I'm not saying this makes me a genius. Not at all. Clearly, that PM knows a million times more about investing than I do. But I'm saying it at least made me aware of what was going on around me. Aware that virtually EVERY house on our block had an Amazon package on their front porch almost every day. Aware that, whenever anyone in our family wanted to buy something, we would buy it on Amazon.
Same goes with Netflix. Is there an expression called "Hulu and Relax?" No, it's Netflix and Chill. Because every kid I know has and watches Netflix, and virtually every adult I know also has Netflix.
So virtually everyone I know uses both Amazon Prime and Netflix multiple times per week, and if either of those companies raised their prices 5, 10, even 15 percent, you know what would happen? Everyone I know would STILL subscribe to those services. Hell, I don't even know exactly what I pay for Netflix -- I just keep paying it. And what about you? When Amazon Prime raises its price in a year or two to 130 instead of 120, are you gonna cancel? I don't think you are.
Plus, from a market psychology standpoint, what's happened fairly soon after each of these two companies has experienced a dip these last 5 years? It's shot back up. Why?
Because both Amazon and Netflix (and you can throw in Facebook on this) have 25-40 percent top-line growth, are industry behemoths in rapidly growing industries and have undeniable pricing power. So how have you not bought on a dip over the last 5 years? And I'm not talking betting the mortgage on it, I'm talking putting 2-5 percent of your portfolio in it. What were you afraid of? That you were going to lose 10 percent of your investment? 20 percent? Maybe you would have. And maybe you will. But by not recognizing the potential of fantastically run companies with tremendous business models that the stock market seems to love, you've lost out on a 500 and 600 percent gain, respectively.
Finally, on market valuation, while NFLX'S valuation makes me a little uncomfortable, AMZN trades at 4.5 times sales -- and while that is slightly (40 percent) above market average, since its top line growth is 200-400 percent above the S&P growth average, I'll take that trade-off any day.