Investors often spend a lot of time researching which little known stocks are about to become the next big thing, but the reality is that if you are looking for investment returns the best stocks to choose are often the best known.
Think about Amazon for example. Many investors won’t buy Amazon shares because they think they are too expensive, and they are spending their time looking for companies which they think might be the next Amazon.
People look at the share price five years ago and compare where it is today and think that they have missed the boat, or are being ripped off in some way if they buy in now.
Sure, you could buy Amazon shares for US$760 or so five years ago, and they are around US$3300 today.
The same goes for some of the other big tech stocks. Shares in Alphabet, Google’s parent company, are up nearly 350% over five years, Microsoft by more than 500%, Facebook 300% and Apple 515%.
But if you had bought at almost any point along that five year journey you would be well ahead today. After all, these companies are regularly reporting annual earnings increases in the range of 40% or more.
So why not buy Amazon, for example, today? The company continues to expand exponentially and only recently launched its Australian operations and is moving directly into other countries..
Amazon Web Services dominates the cloud computing and storage market, a market that has significant growth still to come.
It is huge already, but can get bigger. Who is to say the shares won’t perform just as well over the next five years?
If you think US$3,300 per share is too much, you can also go along for the ride with Amazon – and other US tech stocks – through investing in an ETF product which will mirror their performance, but at a much lower entrance fee. These funds are available in Australia through providers such as BlackRock and Vanguard.
Closer to home, think of the example of the Commonwealth Bank. You might be spending hours looking at the small caps on the ASX and trying to find a fintech company which is the next big thing, but there is still a strong argument for buying CBA.
The shares might not have been quite as stellar in performance as Amazon, but they are still up 26% over the last five years and are nudging $100 right now.
Under Matt Comyn’s leadership, the bank seems to be putting the shameful Royal Commission period behind it and is emerging as a genuine financial sector innovator.
This means shareholders bet the benefit of the capital gain, plus the ongoing dividends. No wonder self-funded retirees love their CBA shares so much.
Amazon, in comparison, doesn’t pay dividends and has a policy of reinvesting profits back into the business, which is one reason for its growth.
So on the one hand, you have spectacular capital growth with Amazon and moderate capital growth and nice dividends with a stock like CBA. There’s a good argument for both.
In any well balanced portfolio of shares there is room for different kinds of stocks. There are the shares you pick because you think they are going to be the next big thing, but there is also room for the current big thing.
Shares in those companies are expensive because they have been successful.
If you think those companies are going to continue to be successful, then perhaps their shareholders will continue to be rewarded. And you could be one of them.