This was the year 2000 — at the height of the Internet craze. I had two years of cash contributions ($2K max was allowed at the time) piled up in my Roth IRA. So, in March 2000, I bought $4K worth of Amazon shares (at about $70 per share) in my account. I can’t be sure why I bought the shares. It was so many years ago and I didn’t keep detailed investing notes back then. But I suspect I was mostly influenced by the Internet hype of the era. Amazon was a highly regarded Internet stock. Its founder CEO was the Times’ Person of the Year in 1999. I was also an Amazon customer from the beginning (since 1998) — buying books from them. That might also had played some role in my buy decision.
Soon afterwards, stocks started declining. The Internet bubble had burst. Amazon dropped like a rock to a low of about $10 over the next two years. I was looking at more than 80% capital loss in less than two years. I didn’t sell my shares though. What kept me from selling? I can’t honestly claim that somehow, I knew what Amazon would turn out to be in 20 years. To the best of my recollection, I could think of two possible reasons why I kept my shares during those dark days of the Internet stocks:
- I was their customer before I became a shareholder. I could tell they were running an excellent customer-centric business. They had the best deals in books — and excellent customer service. See the invoice of my first order from 1998 below (yes! they keep your entire order history).
- My shares were in an IRA, so I couldn’t sell them for tax loss harvesting when the stock was in the dumps. If I had, I probably wouldn’t have bought them back again.
Spring forward to today, those shares are worth 20 times my original cost basis. And thanks to my Roth IRA, I won’t have to pay single dime in capital gain tax on them if I were to sell them today. Not that I am considering selling any time soon!
I consider it my lucky break that I didn’t sell my Amazon stake in the mid-2000s because my position was in a tax-sheltered account.
I consider it my lucky break that I didn’t sell my Amazon stake in the mid-2000s because my position was in a tax-sheltered account. I had substantial capital loss in the position and it would have been too tempting not to harvest it. Most of my other stock positions from that period ended up in losses (3Com and Adtran, to name two). Those were in regular brokerage accounts, however.
What happened in the following years wasn’t luck though. I bought more shares of Amazon as I developed a better understanding of their business model and followed their progress. As I previously wrote about it here, I like investing in businesses that are run by thoughtful owner/founder CEOs. My investing MO is to gradually build stake in a good business. I prefer to add to my core stock positions whenever they go out of favor. Today, Amazon is the largest position in my stock portfolio.
Lesson Learned. A key lesson that I got out from this was that time is my friend when I find a successful compounding investment. Don’t sell a stock simply because its price has tanked or that the media has turned sour on it. This happened to Amazon throughout the 2000s and up to mid-2010s. As long as the business model looks credible and the management appears trustworthy, don’t bail out. For years, Amazon didn’t generate any profit — yet its business was growing gangbusters and customers were loving them. They grew without taking on debt on their balance sheet. Also, Jeff Bezos’ annual shareholder letters were always insightful and credible.
A final point. I’d be remiss if I didn’t bring up the subject of traditional versus Roth IRA here. For what it’s worth, I could have done just fine had I bought those Amazon shares in a traditional IRA back in March 2000. My after-tax capital gain wouldn’t be nearly as high though. So why did I pick a Roth IRA over the traditional kind? I am not sure, but I suspect it was because I wasn’t eligible for traditional IRA tax deduction back then due to my employer’s 401(K) plan. Roth IRA never had any such restriction.
Under some conditions, Roth and traditional IRAs are really equivalent. If you put the same pre-tax amount in either IRA and your tax rate stays the same throughout then it wouldn’t matter if you put money in a Roth or traditional type. Both would result in same after-tax performance.
Where Roth outshines the traditional IRA is when you put max annual contribution to it and you expect your withdrawal tax rate to be lower than your current rate. Back in 2000, the max one could put in either Roth or traditional was $2000. But a Roth contribution was more valuable because it was in post-tax dollars — unlike a traditional contribution. And I expect my tax rate would be lower by the time I am ready to withdraw from my Roth account.
Maximizing contributions to either retirement account is far more important than worrying if you had picked the right kind.
This question of where you put your money — Roth v traditional — is a good one and more of us should be asking it. Here is a good analysis on this topic in case you want to dive a bit deeper. At the risk of stating the obvious, maximizing contributions to either retirement account is far more important than worrying if you had picked the right kind. For anecdotal evidence, read about my 20-year investing journey with a retirement account here.