It is harder today to find bargains than when Ben Graham or Warran Buffet ran their investment funds, I don’t think there is any doubt there. Statistically cheap stocks (net nets or even massively discounted NTA) very rarely turn up and when they do, they typically have massive leverage with high default and insolvency risk. The wide spread availability of screeners has ended the statistically cheap stock game.
The game has gotten harder and can get frustrating for value investors when we sift through dozens and dozens of companies but fail to spot a bargain. Naturally the mind starts to think that the market is much more efficient nowadays and that the bargains are no longer available.
So I thought I write a piece using Amazon as an example to remind myself of the today’s market “efficiency”.
Amazon has been getting a lot of accolades lately. Its stock recently hit the $1,000 mark and Jeff Bezos has been catapulted to the no. 3 richest individual globally. Heck, even Warren Buffet recently praised Jeff Bezos as being one of the best business leaders in America today. Amazon is a great example to use for this exercise because here you have a founder CEO who laid out the principles and vision for his company in his first 1997 shareholder letter (you can read it here) and has stuck to that roadmap over last 20 years.
As shown below, the company had experience consistent annual growth in revenue and operating cash flows from 1997 to 2016. The only years where operating cash flow was negative was between 1998 to 2001.
Given the above steady growth, take a look at its share price over the same time period. The chart below is based on weekly share prices so a daily chart would show more volatility.
It’s hard to eyeball on the chart by there were massive swings in the journey from $1.50 (IPO) to $1,000. I have identified the following 2-3 year swings which cannot be explained by deterioration in the company’s fundamentals as Jeff Bezos was increasing his economic moat over this entire period.
It is astounding that in spite of a road map given, constant increase its competitive advantage and never having a year of revenue actually going backwards (slowest annual growth was 13%) the value of Amazon has halfed on four occasions and fallen by more than one fifth on nine occasions. More impressive is that some of these falls were within a period of a couple of months.
I take comfort that Mr. Market is still the manic depressive as describe by Ben Graham in the Intelligent Investor sixty eight year ago and leave you with a fitting quote from Ben Graham:
“The Intelligent Investor shouldn’t ignore Mr. Market entirely. Instead you should do business with him but only to the extent that it serves your interest”