In order to make 10 times your money, sometimes you do have to risk 27% - 48% of your capital. Why? Because that is just what it takes to make a massive return on your capital. If you risk 50% to make 10 times your money, that is a 20:1 winning trade.
Look at the times when AMZN fell to roughly 2 times sales and had you purchased back in 2005-2006 in the 30's, you would have faced some deep drawdowns in the value of your shares, to the tune of 27% right off the bat and then several other large drawdowns along the way. But, in the end, that is the way that long term, huge gains are made in the stock market.
Note too that when AMZN gets up to near 3 times sales (PSR of 3) that sellers come out of the woodwork and slows down the price appreciation until the valuation can catch up.
I hope this is instructive for any of you who are interested in learning how to invest in the stock market. If you believe that you need to cut your losses at 7%, then you will find it very difficult to hold onto a 10X winner like this one, ever.
Cheers,
Tim
Comments
jangseohee
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Tim
is that Value Investing? :-)
Or double digit bagger by Peter Lynch?
During the respective 27% & 48% correction, the lost in share value can be reduced by buying put options right?
timwest
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It is not value investing because there was no "value" in Amazon by traditional measures. No earnings, no dividends, no book value, no cash flow either.
It is more along the lines of Peter Lynch. What I'm showing you here is the fundamental metrics of PSR and revenues, which some day turn into cash flow, earnings and dividends. RE: PUT OPTIONS. If you spent 1% a month buying put options, you would lower your returns in the up-times and save some losses in the down times, flattening and reducing your return over the long term. If you sell calls when it is expensive, that might be a wiser use of capital. But the important point to get out of this analysis is that you can't be afraid of losses in order to earn the big returns. If you fear drawdowns, you will never be in the volatile stocks that have the chance to compound capital at very high rates over many years.
jangseohee
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Thanks for your detail explanation Tim :-)
BornToBeTrader
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Can you recommend a good book of Peter Lynch where all that knowledge comes from? Thx :)
is that Value Investing? :-)
Or double digit bagger by Peter Lynch?
During the respective 27% & 48% correction, the lost in share value can be reduced by buying put options right?