Buffett’s annual letters are the gold standard, but close behind is Jeff Bezos.
In typical Jeff Bezos style, the annual letter is brief, to the point and packs a punch.
A must read for any business minded person or Amazon investor.
In April, Li Lu and Bruce Greenwald took part in a discussion at the 13th Annual Columbia China Business Conference. The value investor and professor discussed multiple topics, including the value investing philosophy and the qualities Li looks for when evaluating potential investments. Q3 2021 hedge fund letters, conferences and more How Value Investing Has Read More
Bezos is undoubtedly one of the elite minds in business and he provides a glimpse into how he thinks and what he sees with Amazon.
Fiscal 2015 is an important year for Amazon as they have hit the $100B annual revenue milestone, but they are the fastest company to have reached this goal.
Growing the top line may not sound as exciting, but when you look at the steps the company took to get there, it's an astounding feat.
I've taken the best parts from the letter and categorized it for you.
Why and How Amazon Has Grown like a Weed
Reflecting on how Amazon has gotten to where they are, Bezos attributes it to being eager to fail and having focused on the customer and taking bold action to what the customer wants.
Not what competitors are doing.
I'm talking about customer obsession rather than competitor obsession, eagerness to invent and pioneer, willingness to fail, the patience to think long-term, and the taking of professional pride in operational excellence
To invent you have to experiment, and if you know in advance that it's going to work, it's not an experiment. Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right.
Think Big and Be Bold
Given a ten percent chance of a 100 times payoff, you should take that bet every time.
The difference between an investor and a businessman like Bezos is that we'll never take the 10% odds for a 100x payoff. There is a higher probability that no money will remain to make another bet. As an investor, we fail plenty of times and aim to learn from the mistakes, but purposely testing and trying our new ideas to make outsized returns goes against the definition of investing.
In business, every once in a while, when you step up to the plate, you can score 1,000 runs.
This long-tailed distribution of returns is why it's important to be bold. Big winners pay for so many experiments.
Our scale enables us to build services for customers that we could otherwise never even contemplate.
Prime Day Will be a Tradition and Prime Continues to Thrive
The entire Prime membership concept was a huge gamble for Amazon as nobody in the industry was even thinking of doing it. However, Prime continues to grow, Amazon continues to add features and benefits for Prime members and the future is bright.
Finally, our first ever Prime Day surpassed all our expectations – more new members tried Prime that day than any other day in our history. Worldwide order growth increased 266% over the same day the year before, and sellers whose products are Prime-eligible through FBA saw record-breaking sales – with growth nearing 300%.
Membership grew 51% last year – including 47% growth in the U.S. and even faster internationally – and there are now tens of millions of members worldwide.
Seeing New Revenue Streams via Financing Businesses
This is an add-on business that is gain traction. With millions of sellers on Amazon, they have detailed stats on each seller and can target who gets the funding based on their selling performance. A lot of companies run into trouble when they introduce financing programs, but because Amazon controls every process the seller takes and can see how much money they are making, the risk is low.
We also created the Amazon Lending program to help sellers grow. Since the program launched, we've provided aggregate funding of over $1.5 billion to micro, small and medium businesses across the U.S., U.K. and Japan through short-term loans, with a total outstanding loan balance of about $400 million.
Walk the Walk – Listen to Customers
Many companies describe themselves as customer-focused, but few walk the walk. Most big technology companies are competitor focused. They see what others are doing, and then work to fast follow. In contrast, 90 to 95% of what we build in AWS is driven by what customers tell us they want.
Our approach to pricing is also driven by our customer-centric culture – we've dropped prices 51 times, in many cases before there was any competitive pressure to do so.
On Decision Making
One common pitfall for large organizations – one that hurts speed and inventiveness – is “one-size-fits-all” decision making.
Some decisions are consequential and irreversible or nearly irreversible – one-way doors – and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation. If you walk through and don't like what you see on the other side, you can't get back to where you were before. We can call these Type 1 decisions. But most decisions aren't like that – they are changeable, reversible – they're two-way doors. If you've made a suboptimal Type 2 decision, you don't have to live with the consequences for that long. You can reopen the door and go back through. Type 2 decisions can and should be made quickly by high judgment individuals or small groups.
As organizations get larger, there seems to be a tendency to use the heavy-weight Type 1 decision-making process on most decisions, including many Type 2 decisions. The end result of this is slowness, unthoughtful risk aversion, failure to experiment sufficiently, and consequently diminished invention.1 We'll have to figure out how to fight that tendency.
And one-size-fits-all thinking will turn out to be only one of the pitfalls. We'll work hard to avoid it… and any other large organization maladies we can identify.
The opposite situation is less interesting and there is undoubtedly some survivorship bias. Any companies that habitually use the light-weight Type 2 decision-making process to make Type 1 decisions go extinct before they get large.
Amazon from 1997 Exists Today
This years letter also includes a repost of the 1997 letter.
One of the ways to analyze management is to check whether what they say and write appears on the numbers and in real life. Trying to value Amazon is a completely different matter, but one thing for sure is that Bezos has stuck to his initial blueprint for Amazon from over 20 years ago.
You read or hear about ex founders who got too cocky and ran their business to the ground, but Bezos has stayed true to what he wrote.
Amazon's Original Philosophy – It's All About the Long Term
We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital.
Our decisions have consistently reflected this focus. We first measure ourselves in terms of the metrics most indicative of our market leadership: customer and revenue growth, the degree to which our customers continue to purchase from us on a repeat basis, and the strength of our brand. We have invested and will continue to invest aggressively to expand and leverage our customer base, brand, and infrastructure as we move to establish an enduring franchise.
Because of our emphasis on the long term, we may make decisions and weigh tradeoffs differently than some companies. Accordingly, we want to share with you our fundamental management and decision-making approach so that you, our shareholders, may confirm that it is consistent with your investment philosophy:
- We will continue to focus relentlessly on our customers.
- We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.
- We will continue to measure our programs and the effectiveness of our investments analytically, to jettison those that do not provide acceptable returns, and to step up our investment in those that work best. We will continue to learn from both our successes and our failures.
- We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case.
- When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we'll take the cash flows.
- We will share our strategic thought processes with you when we make bold choices (to the extent competitive pressures allow), so that you may evaluate for yourselves whether we are making rational long-term leadership investments.
- We will work hard to spend wisely and maintain our lean culture. We understand the importance of continually reinforcing a cost-conscious culture, particularly in a business incurring net losses.
- We will balance our focus on growth with emphasis on long-term profitability and capital management. At this stage, we choose to prioritize growth because we believe that scale is central to achieving the potential of our business model.
- We will continue to focus on hiring and retaining versatile and talented employees, and continue to weight their compensation to stock options rather than cash. We know our success will be largely affected by our ability to attract and retain a motivated employee base, each of whom must think like, and therefore must actually be, an owner.
Forget about Amazon valuation at the moment. Honestly, trying to value Amazon makes my head hurt. So many moving parts. Investing in Amazon is completely different and requires faith in the jockey and that the company will continue to innovate for another two decades.
But whether you're a shareholder or not, one thing to admire is the leadership, big bold thinking and strategic direction.
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This post was first published at old school value.
You can read the original blog post here Jeff Bezos Letter Better than Warren Buffett's?.