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 had 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 from the 2006-2010 Amazon.com (AMZN, Financial) letters to shareholders.
Key learnings from Amazon’s letters to shareholders: 2006-2010
2006
In this letter, Bezos notes the tests that need to be passed in order to enter new businesses: they must have high potential and be both innovative and differentiated.
"Our established businesses … are growing, enjoy high returns on capital, and operate in very large market segments. These characteristics set a high bar for any new business we would start. Before we invest our shareholders’ money in a new business, we must convince ourselves that the new opportunity can generate the returns on capital our investors expected when they invested in Amazon. And we must convince ourselves that the new business can grow to a scale where it can be significant in the context of our overall company. Furthermore, we must believe that the opportunity is currently underserved and that we have the capabilities needed to bring strong customer-facing differentiation to the marketplace. Without that, it’s unlikely we’d get to scale in that new business."
2007
Bezos introduces the Kindle and its product-specific considerations and features. He argues that is exemplifies Amazon’s philosophy and long-term investment approach that was outlined in the 1997 letter.
"Publishers—including all the major publishers—have embraced Kindle, and we’re thankful for that. From a publisher’s point of view, there are a lot of advantages to Kindle. Books never go out of print, and they never go out of stock. Nor is there ever waste from over-printing. Most important, Kindle makes it more convenient for readers to buy more books. Anytime you make something simpler and lower friction, you get more of it."
Just as I have relied on Amazon to buy stuff from and ship to me quickly, I have also relied on the Kindle to store my books in the cloud, which I can access from any of my devices. This is a good example of when you provide the customer something that is easier to obtain, they will want more of it. From Amazon and the publishers’ point of view, the margin on the marginal Kindle sale is 100% and it ties customers and publishers into Amazon’s network.
2008
In the 2008 letter, Bezos highlights the benefits of long-term thinking, which includes that it allows Amazon to do new things it would not consider otherwise. Therefore, supporting failure and allowing for many iterations are required for innovation. This approach has allowed Amazon to look in unexplored places rather than following the marketplace in seeking instant gratification.
2009
Inside the company, little time is spent on discussing financial results or projected financial outputs. Instead, Amazon managers focus on the controllable inputs to the business. Thereby, they maximize financial outputs over time. In terms of objectives set for the following year, 360 out of 452 impact the customer experience directly. The company starts with customers and works backwards.
"Listen to customers, but don’t just listen to customers – also invent on their behalf."
This reminds me of what Elon Musk told the Wall Street Journal not too long ago. Tesla (TSLA, Financial) is another big holding of James Anderson's Scottish Mortgage Investment Trust (LSE:SMT, Financial), which is no surprise to me.
2010
Bezos stresses that Amazon technologies are based on cutting-edge and sometimes very innovative computer science. Technology infuses all teams, processes, decision-making and approaches to innovation in each of its businesses.
"Invention is in our DNA and technology is the fundamental tool we wield to evolve and improve every aspect of the experience we provide our customers."
