Barron’s on Amazon: Mastery of the Obvious

It was a by-now typical and wonderfully schizophrenic Wednesday on Wall Street, as tech and Internet stocks opened slightly up, almost immediately plummeted, and then rallied sharply before selling off a bit at the very end of the day. All of which is to say only that if you really think you can make money day trading, you’re nuts.

Perhaps the most interesting move of the day was that of, which finished up more than six points at $112 a share after earlier dipping as low as $98. There were lots of traders on the Street–and lots of reporters who uncritically repeated what they said–who argued that if Amazon fell below $100, you’d see a massive sell-off as those flighty Internet investors ran for the doors. Instead, a host of buyers stepped up, demonstrating yet again that assuming that the market really cares about artificial signposts like that $100 mark is a recipe for disaster.

Still, Amazon is down almost 50 percent from its all-time high, and today’s gains put it about where it started at the beginning of the week. The stock has been hit hard by what appears to be a more general–although perhaps temporary–shift in sentiment away from Net stocks. It also took it on the chin this weekend from Barron’s, with its Amazon.bomb cover.

That the Barron’s article did hurt the stock is inarguable, since in pre-market trading on Tuesday (the first day of trading after the article appeared) the stock was down nearly ten points. The interesting question, though, is whether it was the actual substance of the article–that is, the arguments presented in it–that provoked selling, or whether we were simply witnessing a classic negative feedback loop, which is to say that people sold because they assumed that other people were going to sell. Unsatisfying an explanation as it may be–after all, does anyone ever sell if they’re expecting everyone else to buy?–the latter seems more reasonable than the former. That’s because in terms of substance, there was absolutely nothing in the Barron’s article that was new.

As more than a few people have already pointed out, Barron’s has been negative on Amazon for so long that its attacks on the stock have very little credibility. They’re about as surprising and as enlightening as Bill Bennett’s attacks on Clinton. But even for Barron’s, this weekend’s performance was disappointingly repetitive. Low barriers to entry, lots of spending on marketing, too much spending on warehouses, fierce competition from Barnes & Noble: Is there anyone who read this article who didn’t know all the details of the indictment?

More to the point, is there anyone who owns Amazon who doesn’t know those details? Look, at this point it’s not just small investors and nutty day traders who own Amazon. Institutions have large stakes in the company. When Amazon wanted to raise $1.2 billion in a convertible bond offering, the offering was oversubscribed immediately. The mere mention of Amazon’s becoming interested in a new product sector–like pets–is enough to freeze investors who are thinking of putting money into companies in that sector.

The fact that institutions are investing in Amazon is not proof that its stock price is reasonable, since there’s no evidence that institutions are collectively more intelligent than small investors. But it does suggest that you can invest in Amazon with eyes wide open, since we can assume that large mutual funds wouldn’t invest in a company without at least considering the issues that Barron’s raises.

In the end, what’s most frustrating about the Barron’s piece is not the critique of Amazon per se. It’s the implicit assertion that the company’s shareholders are so deluded that they haven’t even considered the most obvious problems that Amazon might face. Markets are clearly subject to manias and panics. But when thinking about the price of a stock, the prima facie assumption should be that it’s probably closer to being right than it is to being wrong. That, after all, is what it means to say that markets are, in general, efficient. Barron’s governing assumption instead is that most stock prices are not just wrong, but incredibly wrong. And when you begin there, it’s very difficult to end up in the right place.