In my first article for GuruFocus, I noted that the most successful investor in the UK in recent years, James Anderson, had been a frequent critic of value investing and has stated 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, understanding Bezos' thinking is certainly a very good idea in my view.
So, I have carefully gone through Bezos' 24 annual shareholder letters, and in this article, we will see what we can learn as investors and what we need to look out for in companies that could potentially become the next Amazon.com (AMZN, Financial).
Key takeaways from Amazon’s letters to shareholders: 2001-2005
In this letter, there is a slight shift from a single-minded focus on growth and in lowering costs that was present in the early years, to finding a balancing of both in this next stage of the company’s life. Amazon focuses on spinning the flywheel:
"Focus on cost improvement makes it possible for us to afford to lower prices, which drives growth. Growth spreads fixed costs across more sales, reducing cost per unit, which makes possible more price reductions."
The customer experience is centred around selection, convenience and relentlessly lowering prices so that customers will buy more tomorrow, adding more cash flow and long-term value for shareholders.
Bezos talks about business decisions in this letter, focusing on how customer experience should be driven by the characteristics of the online retail business: high fixed costs and low variable costs. The growth of business shrinks costs as a percentage of sales, so it is important that the company can offer lower prices and improve customer experience simultaneously. Amazon focuses on offering greater value than its competitors so that customers save money and time.
A long-term ownership mindset drives all decisions regarding customer experience in this letter. This allows every customer-facing aspect of the business to add maximum value for customers. This is the most important driver of the business.
The key takeaway from this letter is that free cash flow per share is the most important financial measure that Amazon wants to increase in the long run because the stock is only worth the present value of its future cash flows. Growing earnings can reduce value if the capital investment for growth exceeds the present value of the cash flow derived from those investments.
"Amazon.com’s free cash flow is driven primarily by increasing operating profit dollars and efficiently managing both working capital and capital expenditures. We work to increase operating profit by focusing on improving all aspects of the customer experience to grow sales and by maintaining a lean cost structure."
Rational decision-making should be done through data analysis when possible. For instance, data analysis can be used when opening a new fulfilment centre or making inventory purchase decisions. For other decisions, judgment is required when lowering prices because lowering prices loses money, as volume increases in the short-term cannot offset lost revenue on each purchase. The belief that these types of decisions will pay off after five to 10 years are difficult to quantify, but with good judgement, they can be still valid.
"'The Structure of ‘Unstructured’ Decision Processes' is a fascinating 1976 paper by Henry Mintzberg, Duru Raisinghani, and Andre Theoret. They look at how institutions make strategic, 'unstructured' decisions as opposed to more quantifiable 'operating' decisions. Among other gems you will find in the paper is this: 'Excessive attention by management scientists to operating decisions may well cause organizations to pursue inappropriate courses of action more efficiently.' They are not debating the importance of rigorous and quantitative analysis, but only noting that it gets a lopsided amount of study and attention, probably because of the very fact that it is more quantifiable."
The whole paper is available at www.amazon.com/ir/mintzberg.