At this point, Amazon(NASDAQ: AMZN) is a storied stock with a dominant industry position. Early investors have made a fortune, noting that the shares have risen nearly 1,000% over the past decade alone. Over the past year, the stock has gained 70%.
If the company continues to execute well, it could easily help to mint more wealth in the future, just like it has in the past. But hit the pause button before you buy it.
Amazon has helped to make millionaires
If you had invested $10,000 in Amazon stock on Jan. 1, 2000 (just before the dot-com crash), your investment would be worth over $470,000 today.
OK, that's not $1 million, but it is a huge gain and well more than what you would have achieved with an equal investment in the S&P 500 Index, which would be worth roughly $35,000 today. Adding Amazon to your portfolio back then and sticking with it would have been a huge step on the ladder to millionaire status.
It is, without a doubt, one of the most dominant online retailers. It has a powerful cloud computing business. And while it has managed to make some mistakes along the way, the company's big successes have more than made up for its misses. That's actually part of the plan: Try interesting and innovative things and stick with the ones that work out well.
Given the company's huge size (its market cap is $1.8 trillion) and huge cash hoard, it has the money it needs to keep testing out new ideas in a big way.
To put a number on that last point, Amazon ended 2023 with roughly $73.4 billion in cash and nearly $13.4 billion in marketable securities. Long-term debt only amounted to $58.3 billion, meaning it had a net cash position of about $28.5 billion. That's a lot of cash!
So, not only has Amazon's growth helped to make a lot of investors rich, but there's also a good reason to think that it could keep making investors rich in the future as well, if it invests as wisely in the future as it has in the past. There's just one small problem.
How much risk are you willing to take?
Amazon returned 4,630% between Jan. 1, 2000, and March 31, 2023. That's a truly incredible number. But would you have been able to own just one stock? The benefit of hindsight would clearly say you should have done just that. But sticking it out in real-time would have been much harder than you think.
Remember: Jan. 1, 2000, was the height of the dot-com craze that lifted stocks like Amazon to lofty levels. Following the dot-com bust, Amazon lost over 80% of its value. That was much worse than the S&P 500 index's loss at the time. It took years for the stock to recover.
And once it did, the shares promptly lost around 50% of their value during the Great Recession. Over the last couple of years, it lost nearly that much again. And 20% drawdowns are, frankly, pretty common for Amazon.
The peaks and valleys in Amazon's stock price are far greater than those of the S&P 500 index over time. Unless you have actually lived through volatility like this, it is hard to explain the fortitude required to hold on to a stock while it is falling so hard and fast. That's particularly true when the decline is way in excess of that of the broader market.
So, could Amazon help you become a millionaire? Sure, but you probably shouldn't bet everything you have on just one stock. The risk of having such a concentrated portfolio is huge, and sticking to the one-stock approach will likely be an emotional roller coaster.
A lot of investors would probably end up selling out of fear at the worst possible time. A far better option would be to build a diversified portfolio that includes Amazon or to pair Amazon with a broad-based index ETF.
Emotions are usually the biggest problem
The truth of the matter is that investing itself isn't a particularly difficult task. As Wall Street icon Warren Buffett likes to say, anyone with average intelligence can do it.
But mastering your emotions during the inevitable bull and bear markets? That takes a huge amount of effort, and most people fail to do it (all of the time, anyway). Buying a single stock, even one with a huge history of success behind it like Amazon, can, indeed, put you on your way to millionaire status. However, it just isn't that easy when you actually examine what it means to own just one stock.
Should you invest $1,000 in Amazon right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
