I took my two young boys (three and six) to a skate park down the road from our place - we'd never been. The park was full of thrill seeking teenagers wearing super long t-shirts sucking down Slurpee's from the 7-Eleven across the road.
For the first ten minutes my boys just stood there staring at these kids whizzing, flipping, and spinning around the park on their bikes, skateboards, and scooters. Up they would fly, crashing down onto the concrete. Some would land the jump, others wouldn't. Some bloodied, others not.
As I watched on, I looked down at my boys who were by my side holding onto their scooters, probably feeling totally out of their place. It got me thinking. What is risk? And as I thought about it in this context, was it was doing something you are uncomfortable to do, understanding the consequences (or maybe not), being okay with it, and accepting the outcome. Why did these jumps and flips seem so risky to me? Yet to the fourteen year old on the black BMX it was pure joy? What qualified him? Was it experience?
Amazon's share price cracked US$3,500 last week. It floated on the Nasdaq on May 15, 1997 at US$18 per share. If you invested $10,000 in the IPO, today, your investment would be worth over US$18,500,000 - a total return of over 150,000%.
You see, the problem with this type of analysis is that it assumes you rode the rollercoaster ride and you turned a blind eye to the risks. I'm not saying this applies to everyone, but I'm super confident it would apply to a very high proportion of investors - you could not have handled the ride and you would have sold out, capitulating to market forces. Here's why.
Since floating, the stock has fallen 95%, 70%, 74%, 60% and everything in between. The stock has had an average drawdown of 31% - probably one of the wildest rides on the market. Cast your mind back to what we experienced most recently during the COVID crisis. Now imagine every time Amazon's stock fell, it felt just like that.
Investing, just like the skate park has so much perceived risk built in. For a lot of people, perception is reality. And this perception is exactly what will hurt you.