By: Dividend Sensei
Recently I explained why I initiated a position in Amazon (AMZN), which I consider a must own, buy and hold forever growth stock. In fact, there are six reasons Amazon is the only non dividend stock I intend to own in my high-yield income growth retirement portfolio. Since I made that purchase tech stocks in general, but Amazon in particular, have sold off. The Nasdaq is now 8% off its all time high, while Amazon has fallen 14%, putting it officially in a correction. The cause of the sell off is largely due to long-term interest rates spiking sharply higher for four main reasons.
But while some might look upon such a sharp price drop and cringe, I’m taking a very different, long-term, value focused approach. So let’s take a look at the three reasons why I am taking advantage of this correction to triple my position in Amazon. Most importantly, we’ll see why, despite what many investors fear, Amazon is likely NOT a bubble stock likely to crash 50% to 80%, but is actually 10% to 20% undervalued. This means today is a great time for long-term investors to add the greatest growth story of our age to their diversified portfolio.
Lowering Your Cost Basis And Building Positions Over Time Is The Core Of Successful Long-Term Investing
Many investors think that stocks are inherently risks and no different than gambling. And while it’s true that short-term trading is fraught with peril, long-term investing is as close to a “sure fire” way to get rich over time as you can find in this world.
The core difference is that traders are looking for quick profits, derived from swing trades or even day trading in and out of a stock with modest profits. In contrast long-term investors take a completely different view. We recognize that a share of stock is an ownership stake in a real company, whose management and employees are working to maximize long-term cash flow growth and shareholder value. Thus long-term investors focus on steadily accumulating more shares over time, hopefully at prices that are at, or below fair value. When a stock drops it’s actually a great opportunity to lower your risk by reducing your cost basis. That’s because quality companies like Amazon appreciate over time as their sales, earnings, and cash flow grow. This means that during corrections like this one, you can increase the size of your share of the company’s assets and future cash flow, all while lowering your breakeven price. When the stock eventually recovers, as it does for all quality companies, you’ll own more shares at a lower cost basis, resulting in much larger capital gains.
Best of all, remember that price is an integral part of risk management. The lower your cost basis the lower your risk of a permanent loss of capital. This is why it’s generally a good idea to dollar cost average into a stock (building positions over time), as long as the company is at fair value or less. If you can lower your cost basis? Well that’s an even better time to add to your position. But of course there is a very important caveat to dollar cost averaging and reducing your cost basis by buying during corrections and bear markets. Adding to a position should only ever be done as long as the fundamentals remains healthy and the investment thesis (why you bought the stock), remains intact.
Fortunately, Amazon’s fundamentals have never looked better, which is why I can buy with confidence at today’s prices.