Whenever I talk about markets and someone asks me to recommend a security to own for a long term, I talk about few stocks, among them being Amazon. Why?
Despite being an excellent business in terms of quality and quant, it is also one of the most innovative and the most customer oriented company.
I am prone to hindsight bias here but if you would have just held this company in your portfolio while subscribing for its IPO in 1997, you would have app made 134000% return, compounding at 38.4% annually (past 25 years) easily beating any fund for that matter including Berkshire Hathaway!
Mr Buffett, while cast down, thinking of Amazon’s return! (sorry Mr Buffett)
Let’s get down to business.
What can an investor or a business person learn from Amazon and Bezos for that matter?
Day 1 Philosophy
Every time, Jeff closes his letter, he reminds the reader that for him (and Amazon) it is still Day 1.
What that means?
Considering every day- Day 1 reminds people that whatever they have build is as fragile and vulnerable as the first day of the business. Employees should be as lean and nimble, (what they were) when it was a startup. To drive the business and induce customers- two important things should be kept in mind.
Customer Focus
Innovation
What is day 2 then?
Day 2 according to Jeff is stasis, total irrelevance and gradual decline and death of business. In one of the interviews that I listened, he mentioned that he still tells his employees that Amazon could still fail- provided they stop obsessing about customers and stop innovating.
Focus on Free Cash Flows
I don’t want to explain this in detail. Even someone with a little business sense will understand this point quite comfortably.
Jeff focuses on free cash flows accruing to the firm instead of GAAP earnings or in other words bottom line of the business.
Having worked in finance before starting amazon.com, he knows that Wall Street analysts focuses on quarterly earnings but the intrinsic value of any business should logically be based on free cash that the company can generate!
It can’t be over emphasised the importance stated by Amazon on free cash. Since its IPO in 1997, year by year, the company has focused and talked about their free cash flows instead of net profits.
Effectively, this is an important point for investors. Whenever, one analyses a business, one’s sole focus while valuing should be cash as cash getting generated is very difficult to manipulate.
Long Term Emphasis
The company’s focus on long term value creation can easily be observed. The company’s quest for having investors/business peeople who believe in their vision of long term customer satisfaction/centricity, not paying heed to short term noise of quarterly numbers, acting like owners instead of employees also drive this point.
This is a very important lesson which every-one should inculcate in their lives. Nobody in any endeavour can be successful without showing up consistently. Success is derived from compounding over the long term. Businesses are built over the long term. Last, but not the least, wealth is created over the long term.
Effectively as emphasised in their letter that they are trying to build a business over the long term, they have improved by 1% every day compounding shareholder returns by 38% annually (1.01^365=38%)
Most Shareholder Oriented Company
I personally believe that Amazon may be the most shareholder oriented company in the world. Why do I say that?
Jeff in the letters has stated the company’s intention to a) always focus on long term wealth creation 2) taking actions and discussing with ‘owners’ to keep them on board of their plans of bettering the business (walking the talk as well)
The company with a cost-conscious culture has effectively utilizes its working capital levels quite efficiently vis-à-vis revenue its generates.
The company has try to act in the best interest of shareholders by driving the benefits of a lean structure along with ‘industry best’ inventory turnover of a staggering 19 times a year! Just to give one context, the ‘golden number’ inventory turnover in the retail industry is 2-4 times in an year..
Who to hire?
Jeff talks about 3 questions when hiring any employee for a company
Business Nature
The company’s online e-commerce website (which is its main revenue generation business) plays on operating leverage with heavy fixed cost and low variable cost. The company has always focused on growth (revenue and customer) for solely this reason.
A small or a medium sized company cannot exist until it keeps on raising financing from its investor on regular intervals till the time it achieved the necessary scale.
The company acquired two startups in the Tech Bull market of 2000 where Jeff talked about these investments and they were a ‘mistake’. These companies ‘could’ have been big but they required regular capital infusion which he was not comfortable putting in (a wise decision)
How the company is able to give discounts and still remain profitable?
This has been one of the main questions asked by people, that despite giving so many discounts and offers, how the company is profitable? The company’s retail profitability has some interesting moving parts.
Amazon can be studied as a case study in managing its inventory and order fulfilment. The company uses ‘Fulfilled by Amazon’ or FBA which is basically an automated software driven system in place which helps Amazon in inventory planning, optimising supply chain by ‘predicting’ inventory levels, delivery dates, metadata about customers and so on and so forth.
The company through these incremental improvements over its 25+ years journey has been able to achieve such a huge scale that the fixed expenses per se gets ‘distributed’ over billions of revenue/products it sells all over the globe- hence decreasing its major cost- a solid moat business which is growing in double digits!
The company also used its biggest pain point in creating its most futuristic business. Employees were spending most of their time in building server, tech infrastructure, computing, storage etc for their growing business. (pre 2006)
Andy Jassy came and headed what later came to be known as Amazon Web Services (2006)- a data center of sorts for all computing needs. Their first customer? Amazon.com!
A very important lesson- instead of cribbing about pain and asking ‘someone’ to solve it, the company did create a service which it so required, and in the process created a business unit which is now the 2nd most important business for Amazon- a mammoth cash generating machine. Effectively- a window to the internet.
Data- The New Gold
Amazon while delivering the widest assortment of goods to its customers produces billions of Terabytes of data. Amazon is Amazon because of its use of data in almost all its systems and processes. (customised recommendations)
A beautiful example portrays this
What businesses to target in the future?
Growing industry
Large market segment
High returns on capital
Importance of Culture
A snippet that demonstrates better ~
Type 1 and Type 2 Decisions
There are two types of decisions as far as any important business situation goes (life as well for that matter)
Type 1- Irreversible decisions that need to be thought through as are ‘fixed’ in nature
Type 2- Reversible and should be taken with ‘velocity’
Steve Jobs Much?
Steve Jobs was a marketing genius who had a simple philosophy. To simplify and what is more relevant here- Customers don’t know what they want until they get ‘that’.
Bezos seems to echo the same thinking. Devices like Kindle or services like Prime weren’t demanded by customers but Amazon tinkered itself! He also firmly believes that customers can never be satisfied, to understand look below
Thing > Process
Instead of focusing on best process, instead focus on the thing (product). Keep a close eye on your main product. That will what satisfy the customer (for the time being) and not the process itself!
Market Survey- What they lack?
Jeff believes in invention and inventors rather than customer surveys. This resonates back to point 12 as he doesn’t believe that customer ought to know they want something until they get it. Controversial, sure. Debatable, sure.
But, if one truly understand customer and can gauge with some ‘foresight’ or feel, she can reap rewards.
Embrace External Trades
Any company which wants to build a sustainable business over a long term should try to embrace external trends as soon as possible.
Some examples of external trends- blockchain, data science, NLP etc
To give you an example from the letters:
Velocity Matters in Business Decisions
Quality of decisions matters a lot but the velocity or in other words, how fast one makes decisions matters equally (more in some circumstances).
It is not essential to get 100% of information before making a decision. Sometimes, it makes sense to take whatever amount of information and make decisions soon. If one is waiting for the complete picture, it will be too late!
As we investors can relate to this..its not essential to get all information about a company before making the decision to invest!
How does one make decisions in those situations? Nature has bestowed on us certain inherent ‘simulations’ in form of gut/intuitions/feel etc
More data/information DOESN’T equate to more success! (or more alpha for that matter)
Disagree and Commit
There will be some decisions where a team might dis-agree. Generally, such a situation will warrant multiple meetings with no ‘sight’ in future.
Amazon and Jeff has followed Disagree and Commit philosophy wherein some team members will disagree with a decision but for the team as a whole (and for ‘sensible’ risk) they will commit 100% to the effort or action to make the goal a success
A very important philosophy to inculcate for the current day and age when people are poor in knowledge but strong in opinions. One has to understand that the other might have better knowledge leading to a better perspective of the task on hand and hence it makes good sense for their judgement to prevail.
Beautifully applicable in investing decisions while dealing with not so familiar business but an inclination to invest. It makes sense to listen to an expert (in that business)
How do you stay ahead of customer expectation?
By having ‘high standards’ which are teachable and domain specific. In other words, high standards are areas of interest where one is good at. One has to make extreme effort to learn these high standards in different areas to make a customer satisfied
Benefits of high standards?
Scaling Failure?
Jeff talks about the importance of risk. Basically he tries to bring the point of risk taking to home and why it is importance of fail at scale when you are growing. It is essential to realise that failure and ‘innovation’/invention go simultaneously in business as well as investing.
He calls ‘failures’ as failed experiments which is quite apt considering the fact that if A experiment failed there are n-A experiments to take forward. Generally, one should analyse before taking an experiment due to the skewed/non-linear payoffs.
Remember, Bezos or Buffett can ‘accept’ but for some of us, it may be the loss of a career.
Creator Economy
I don’t know about you, the reader, but this is quite inspiring for me personally. How do you create value? By building or creating more than consume- the essence of the creator economy.
It is your responsibility to create more than you consume in the world. That is how you create surplus~ money, status and wealth is a byproduct of your value creation rewarded by the society.
Value created by Amazon for its stakeholders, calculated in money terms but contains quantitative factors like time saved etc (2020)
Be Different
Jeff gives the advice to the reader in embracing one’s individuality. One should be different from the crowd to be truly successful. He also remarks that unfortunately/fortunately this ‘distinctiveness’ is not free (obviously) and one has to work hard for it.
How can one be different? Simple, not do things or do things differently than others!
In investing, traders and investors have made money by betting against the crowd!
Future Vision
The company desires to be Earth’s Best Employer and Earth’s Safest Place to Work, inspiring confidence along with of course Earth’s Most Customer Centric Company
Last words on Investing (because why not fellow investors :))
Jeff wrote this in 2000 when the stock fell by ~ 80% (Tech bubble remember
?)
A necessary point indeed~ coming at the last.
Long term + Solid business + Vision + Execution + Innovation = Wealth
If you have read till here, you should be really proud of yourself. You read more than 2% of the reading population.
PAT ON YOUR BACK NOW!!!