Would Investing in Amazon Be a Wise Decision for Your Savings?

Deciding to invest a significant portion of your savings in a stock like Amazon can be a crucial decision, especially given its current valuation and market conditions. Here’s a detailed analysis to help you decide.

Short Term Perspective: Buying Amazon Now

Current Market Analysis: Amazon (AMZN) is currently one of the most expensive stocks in the market, with a Price-to-Earnings (P/E) ratio of around 250. This implies that investors are valuing future growth and profits at a much higher multiple than the current earnings. Despite the profitability of its AWS business, the margins of its delivery business are struggling to make a substantial profit.

Market Expectations: The stock's high valuation is underpinned by significant expectations for future growth. However, if these expectations are not met, the stock could face a significant correction. This risk is exacerbated by the current phase of the long-term debt cycle and the historically high Shiller PE ratio, which suggests a high likelihood of a stock market correction by 2022.

Long Term Perspective: Holding for 10 Years

Future Potential: Amazon's visionary leadership and innovative business strategies have made it a dominant player in numerous sectors. Over the next 10 to 20 years, it is expected to remain one of the largest and most powerful companies. The question is how its financial metrics—revenues, margins, and profits—will evolve, and how its valuation will adjust to more sustainable levels.

Criticism and Risks: Investing in growth stocks is not without critics. The fear of a correction and the difficulty in predicting future earnings can pose significant risks. Hence, a 10-year holding period might still be a risky proposition, especially if you are relying solely on Amazon for substantial returns.

Ventures with Caution

I would not recommend putting 20% of your savings, or any significant portion, into Amazon. Although the stock’s future looks promising, it is greatly overvalued based on its current profit. This means that any disappointment in future earnings could lead to significant losses. Moreover, the stock market is inherently risky, and diversification is crucial.

Alternative Strategies: Instead of concentrating your investment in a single stock, consider diversifying your portfolio. Investing smaller amounts into a wide variety of medium-sized companies could provide a more balanced approach to managing risk.

Personalized Advice: Each investor has unique goals, risk tolerance, and market knowledge. Before making any decision, it is essential to educate yourself thoroughly. Reading extensively about investing, finance, and the market can provide a solid foundation. Over time, this knowledge can be compounded to help you make more informed decisions.

Sources and Education: Instead of relying solely on my advice, I encourage you to research directly from accessible sources. Understanding your goals, risk tolerance, and current market conditions will help you form a more personalized investment strategy.

Risk Mitigation: Diversification is key to managing risk in any investment portfolio. Investing all of your savings in one company, especially a high-growth company like Amazon, is too risky. Spread your investments across different sectors and companies to protect against potential losses.

Long-term Goals: If your primary motivation for investing is to make rapid profits, it's likely that you will fail. Successful traders and investors emphasize controlling emotions and maintaining a long-term perspective. If you lack the time or desire to learn about trading and investing, a safer route is to invest in managed funds like ETFs through a reputable brokerage like Vanguard.

Conclusion

While Amazon has tremendous potential, it comes with significant risks, especially in its current valuation. Diversification, education, and a long-term perspective can help you make more informed investment decisions. Go directly to your sources, educate yourself, and take the time to understand the markets and your goals before making any investment.