Amazon's IPO at 20: That Amazing Return You Didn't Earn

A $10,000 investment in Amazon.com Inc. 20 years ago would be worth $4.9 million today. Good luck finding an Amazon investor who can brag about a return like that.

Monday is the 20th anniversary of Amazon's initial public offering. Its vertiginous stock chart is a reflection of the internet giant's dominance. Shares have gone from under $2 on a split-adjusted basis to $961.35 at Friday's close. The 36% compounded annual gain by buying Amazon at its first-day closing price earned an investor 155 times what would have been made in the S&P 500, including dividends. At $460 billion, Amazon now sports the fourth-largest market capitalization in the S&P 500.

"This massive outperformance has led to an explosion in hindsight bias, with investors fooling themselves into believing Amazon's ascent was somehow obvious or inevitable," writes Michael Batnick, director of research at Ritholtz Wealth Management and author of the popular "Irrelevant Investor" blog. "You had to be some sort of sociopath, void of any human emotions, to earn these monstrous gains."

Zooming in on Amazon's stock chart shows a wild ride. It is one that likely sapped gains from market-timing investors who either bought or sold at the wrong time.

History shows stock investors regularly underperform the market's returns. Volatility often triggers irrational behavior when investors almost always would fare better by ignoring the noise. Similar patterns are only exacerbated when focusing on individual securities.

As Mr. Batnick points out, Amazon shares have had daily declines of 6% 199 times. The stock has fallen 15% over a three-day span on 107 different occasions. And the damage was far worse over longer time horizons.

Amazon has suffered at least 20% pullbacks in 16 of its 20 years on the public markets. The drawdowns were more than 40% apiece in nearly half of those instances, including a 64% plunge in 2008 during the depths of the financial crisis. Worst of all, shares lost 95% of their value when the tech bubble burst from December 1999 through October 2001.

Most investors just couldn't ride that out. "There is a very real cost associated with the outperformance that we choose to ignore when looking at a chart," Mr. Batnick says.

It isn't just retail investors who have expressed regret for missing out on Amazon, which only recently started turning profits and has always sported an astronomical valuation. Warren Buffett said earlier this month at the Berkshire Hathaway annual meeting that he "underestimated the brilliance" of Amazon boss Jeff Bezos and that the odds that he would succeed were "not at all obvious."

Plenty of people might brag that they saw the potential that eluded the most successful investor of all time. Unfortunately, few if any had the Buffett-like discipline to actually hang on for this extremely profitable 20-year ride.

Write to Steven Russolillo at steven.russolillo@wsj.com

(END) Dow Jones Newswires

May 14, 2017 10:14 ET (14:14 GMT)