Michael Moritz Says Most Investors Can't Do the One Thing That Actually Makes Money

Sir Michael Moritz, a veteran investor with a 38-year tenure at Sequoia Capital, has made significant contributions to the tech industry by backing companies such as Google, YouTube, PayPal, and Stripe. In a recent episode of the podcast "Richer, Wiser, Happier," he shared insights on why many investors struggle to succeed in the market. Moritz stated, “Most investors are congenitally incapable of doing nothing. They just have to do something.” He believes that the instinct to take action can be detrimental, leading investors to make decisions based on fleeting market sentiments rather than the long-term potential of a company.

Moritz explained that investors often make trades prompted by external factors like alarming news headlines, round-number prices, or the temptation to secure short-term gains. Although these actions may seem productive at the moment, they undermine the power of compounding, which is essential for building wealth over time.

Charlie Munger, the vice chairman of Berkshire Hathaway, recognized Moritz's unique temperament when asked which investors he respected. Munger noted that while Moritz might not be the most intellectually gifted investor, his ability to maintain his positions better than his more intellectually inclined peers was commendable. Moritz expressed his appreciation for Munger's acknowledgment, saying he was “incredibly flattered” to be remembered in such a way.

Central to Moritz's argument is his thought-provoking question about Amazon: "In the 30 years or so that Amazon has traded as a public company, how many days has that stock traded at an all-time high?" This question often leaves investors momentarily speechless. The concept of an all-time high can create a psychological barrier, making it seem sensible to sell, as it appears that the stock has reached its peak. However, for a company that continues to grow, these new highs are merely part of the business’s trajectory. Each record high presents an opportunity for selling that, in hindsight, can result in regret for those who acted on impulse.

Recent performance data illustrates this point. On October 9, Amazon's stock closed at $262.43, reflecting a staggering 531.6% increase from an adjusted price of $41.55 a decade ago. However, the stock's five-year return has been more modest, with a gain of 59.6% since October 2021. Moritz pointed out that this period has tested the resolve of many investors. He remarked, “There is nothing that beats the compounding power of a well-positioned company. But most people are unable to recognize that and capitulate, give up, are frightened.” Such behavior often leads to regret when investors look back years later.

Currently, Amazon is once again challenging its shareholders' patience. The company has announced plans for approximately $200 billion in capital expenditures by 2026, focusing on advancements in AI infrastructure, custom chips, robotics, and satellite technology. This ambitious investment comes as Amazon's trailing free cash flow has dipped to -$7.6 billion, which might tempt impatient investors to sell.

However, the company’s operational performance tells a different story. In its second-quarter report filed with the SEC, Amazon reported revenues of $200.61 billion, a 19.6% year-over-year increase, and an operating income of $27.46 billion, up 43%. Additionally, Amazon Web Services (AWS) revenue surged by 37% to $42.23 billion, and the AWS backlog reached $496 billion. CEO Andy Jassy has indicated that AWS could potentially evolve into a trillion-dollar annual revenue stream. He also noted that once operational, data centers can generate income for “30-plus years,” rewarding patient investors who hold through the build-out phase.

Moritz's investment philosophy serves as a useful guideline for long-term investors. He advises them to critically evaluate the reasons behind their decisions to sell, questioning whether those reasons relate to the company's future potential or are merely influenced by price movements. Specifically for Amazon, investors should consider whether the company's performance aligns with its third-quarter guidance of $197.0 billion to $202.0 billion in net sales and $22.5 billion to $26.5 billion in operating income, as well as the anticipated transition from capital expenditures to free cash flow. According to Moritz, a new all-time high should not be a deciding factor in such evaluations.