I previously noted that the most successful investor in the U.K. in recent years, James Anderson, has been a frequent critic of value investing and said that investors would learn more by reading Jeff Bezos' annual shareholder letters than those written by Warren Buffett (Trades, Portfolio). While I do not believe value investing is dead, because we just need to adapt value investing to the modern world (I will more about this in the near future), understanding Bezos' thinking is certainly a very valid idea in my view.
As a result, I have gone through Bezos' 24 annual shareholder letters. In this series, we will see what we can learn as investors, and what we need to look out for in companies that could be the next Amazon.com Inc. (AMZN, Financial).
Amazon focuses on maximizing the present value of future cash flows
Amazon achieves the goal of maximizing the present value of future cash flows by being obsessed about the customer experience. This includes all touchpoints, including dropping prices voluntarily in the belief that it will lead to long-term benefits. Its culture focuses on the customer rather than the competition.
The e-commerce giant looks to hire the very best people and only wants committed employees to stay.
It makes bold investments and embraces failure as part of the innovation process, which few other companies are willing to accept. This has led to three independent billion-dollar businesses: Amazon Prime, The Marketplace and Amazon Web Services.
Amazon creates flywheels (see “Turning the Flywheel” by Jim Collins, a concept introduced in “Good to Great”), which are self-reinforcing processes. For example, increasing numbers of Prime subscribers induce merchants to become part of the Prime delivery program. The larger the Prime delivery program, the more customers will subscribe to Prime.
It is always “Day 1” at Amazon. It is important to Bezos that his company retains the vitality of a startup even as a large organization by maintaining customer obsession, quick adoption of new trends and fast decision-making.
How can other companies replicate or learn from Amazon’s innovative approach?
Ambitious companies should be willing to take on risky projects and fail. Bezos says you should take bets with a low probability of success if the upside is large enough, say a 10% success chance but a 100% payoff.
Companies should be proactive toward innovation. To do this, they should continuously seek to add more value to the lives of your customers rather than waiting to follow your competitors.
Key learnings from Amazon’s letters to shareholders: 1997 to 2000
1997
Amazon focuses on solidifying its market leadership position to create shareholder value over the long term. The stronger the leadership position, the greater the profits and returns. It makes bold investment decisions to strengthen long-term market leadership that will yield a greater present value of future cash flows and is willing to sacrifice good GAAP accounting appearance for it. In line with the goal of market leadership, it obsesses about delivering value to customers and sacrifices short-term profits, for instance, by cutting prices.
The 1997 letter is attached to future letters and is worth reading in full as it is perhaps the most important one.
1998
Customer-centricity drives success as brand image and word-of-mouth follows reality. Hiring is the most significant element of the company’s success. Amazon plans long into the future and builds the foundation for being a huge company by making risky investments that will provide the best end-to-end experience for customers.
1999
Amazon is built as a platform that creates the opportunity to scale into an “everything store” and can offer effective services to partners, such as drugstore.com. It focuses on rapid growth in the customer base, of the products offered and in improving operations. Improving productivity, margin and efficiency improves the customer experience and vice versa. For example, by improving the efficiency of distribution.
2000
The company will be weighed, not voted on, in the long run and value will be accounted for. Thus, Amazon is focused on growing bigger and making bold bets. It is aligned with technological trends in a favourable way: the customer experience will improve dramatically with technological innovations increasing online shopping adoption, making Amazon the leading platform.
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