Despite all of Amazon's (Nasdaq: AMZN) ups and downs, the company's valuation is way beyond what we hoped to see by the year 2001 when we wrote our 1997 buy report. The company was valued at $856 million when the Rule Breaker Port announced its imminent purchase, and we hoped that Amazon would have a market value of $2 billion by the year 2001 -- representing more than a double and a market-beating return. Its market value exceeds $6 billion today, even better than we'd ever hoped for.
AOL Time Warner (NYSE: AOL), too, has outperformed the portfolio's expectations since we bought it in 1994. As early as 1995, much of the online community was of the opinion that the port should sell the shares and capture its "large and obviously hype-resultant" profit. We held on, though, and saw higher and higher valuations. Now we've reached a point where even if the stock drifts for the next five years, we'll cumulatively crush the market with the investment over the nine-year period beginning in 1994, and we'll still own AOL in 2003 when it propels higher yet again.
That's real-life investing. This parabolic market is not the norm. Often you must wait for years before your confidence is rewarded. This is why investing in individual stocks can be so difficult, and it is why most mutual funds and individual investors underperform the market. They sell companies that, underneath, they truly believe have tremendous futures. They sell during moments of doubt, or during moments when they can't foresee an even better valuation five years later, not to mention the years beyond that. So they sell. I always wonder where you put your money, though, after you've sold your favorite companies (or even your favorite mutual fund).
During Peter Lynch's thirteen-year stretch managing Fidelity Magellan, his fund returned an astounding 29% annually. You probably won't believe the following, though. Mr. Lynch shares that most of the owners of the fund during his reign actually lost money. They sold when the fund was temporarily limping after buying it while it was soaring. Too many people never realize this simple truth:
It's only time that makes you an investor.
If you've owned a dozen stocks over the past five years, but none of them for longer than two or three years, you don't qualify as an investor. You're a speculator. On that argument, we've yet to even become investors in Amazon. We will be, though. Give us a few more years. We intend to be investors in companies that we believe in most -- such as AOL. Our "pre-investment" life with Amazon is simply off to a better start than we'd hoped.
Now Amazon's stock can be flat or fall 50% over the next three years and the Rule Breaker Port will still likely beat the market with it since its purchase. So just because the stock (and the business) have outperformed in the short term doesn't mean that we suddenly want to cut our ties with its long-term potential. (NB: That's not to say that we go to sleep on our stocks. We continue to evaluate the long-term business potential of our holdings, as I did with Amazon in January.) Selling our shares and paying taxes on them would put us... where? If selling your winners or your more richly valued stocks is the way to beat the market, somebody better tell Warren Buffett that he should have sold Coca-Cola (NYSE: KO) years ago, rather than letting it grow (and grow) to become, at times, 50% of his wealth.
There are a finite number of great companies in which you can invest. Warren Buffett espouses the belief that you sell a stock when you find something better to buy (this is what Fools believe as well). So please point out two companies in the online and Internet business that currently have more potential than AOL and Amazon (Yahoo (Nasdaq: YHOO) and eBay (Nasdaq: EBAY) might qualify), and we'll consider them over our current holdings. Otherwise we won't be selling. We want to be invested in the long-term potential of the Internet. Being diversified shareholders, we'd be idiots not to trust some money to this new and promising industry. So we've bought the companies that we like most. If we hold the stocks long enough, we'll become true investors in a new business, a new paradigm, even a potentially new economy in and of itself. With AOL and Amazon, we think that we stand to gain tremendously over the next decade and longer. That's Foolishness personified. There's no short term in it.