Yesterday Amazon disappointed its investors with their quarterly earnings report, and their Q4 projections, which caused its share price tanked to 225.89, a 12% loss of value. Essentially that report drove investors to believe that the company's value (Market Cap) needed to have a downward adjustment of a whopping $12.4B.
It is a given that volatility is deeply embedded in the composition of the equity markets. Similar to how you must cope with the fact that the sun is going to rise tomorrow morning whether you like it or not (For those who don't live in the Arctic Circle of course), you must be able to accept that in the short-term the value of your investment is going to fluctuate. However, what can be learned from Amazon's recent 12% drop? What exactly can we do as small investors to minimize such risk absent of using options as a hedge?
The valuable lesson is this; the general consensus regarding Amazon is that it's a high growth stock. However, this belief has been 'priced' into the stock price, which explains why it was/is trading greater than 100 times earnings.
Now, although price per share is the ultimately the driving variable of how much we profit/lose, P/E (Price Earnings) can help us form determine how 'patient' investors will be with their investment. And level of tolerance/patient can dramatize a stock's volatility. Thus with Amazon, its P/E indicates that the market will overreact to any of its missteps, or anything positive (:cough cough: Kindle Fire).
Please be mindful that such behaviour is not only present in financial markets, for instance, the general public is quick to label a top overall pick a bust, but will allow later round selections to develop over time. Two different worlds, but the same mentality and this where someone is drafted (plus the amount of money that is paid to them of course) indicates what is IMMEDIATELY expected of them. Thus in the short term any of the player's accomplishments, or mistakes, will be taken out of context because so much is at risk and with risk comes the distortion of common sense.
But this is just my unqualified opinion....
