It was 18 years back when Amazon, the world’s largest bookseller and one of the most successful Internet companies, got listed. The company’s IPO was unique for two reasons.
One, that was a period before the dawn of Internet businesses, and thus most investors and brick-and-mortar competitors were convinced the company was a joke – an “Internet bookseller” with “no barriers to entry”. Michael Porter’s framework said it would go bust quickly.
Then, Amazon’s founder and CEO Jeff Bezos was extremely frank with shareholders from the word go, which is truly unique in this world where CEOs hide more than they reveal.
So, in 1997, after the IPO, Bezos wrote an honest letter to shareholders in which he explained Amazon’s philosophy, which was (and is) quite different from the philosophies of most public companies.
Why different?
Because, unlike other public companies that were (and are) obsessed with meeting and beating short-term shareholder demands, Bezos’s game plan was (and is) focused on long-term investments and value creation.
And boy, see how well that strategy has paid off for shareholders who have kept their trust in Bezos’s game plan…
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US$ 100 invested in Amazon in its 1997 IPO is now US$ 31,036, a 310-bagger, or a CAGR of 37.5%. That’s huge by any standards, but something just a tiny number of investors – mostly Amazon insiders – must have earned. Most others would’ve left the ship after earning a 5, 10, or 20 bagger.
Anyways, there are many invaluable lessons I’ve learned from Bezos over the years, but these five stand out and have helped me immensely in my roles as an entrepreneur and investor. I’m sure these will benefit you too.
So let me start right here.
5 Things I Learned from Jeff Bezos on Business and Investing
1. Think Really Long Term
This is what Bezos said in an interview in 2011 (emphasis mine)…
If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue. At Amazon we like things to work in five to seven years. We’re willing to plant seeds, let them grow—and we’re very stubborn. We say we’re stubborn on vision and flexible on details.
In some cases, things are inevitable. The hard part is that you don’t know how long it might take, but you know it will happen if you’re patient enough. Ebooks had to happen. Infrastructure web services had to happen. So you can do these things with conviction if you are long-term-oriented and patient.
What a wonderful and sustainable moat this is – long-term thinking. Whether you are an entrepreneur or an investor, by thinking and acting (investing) long-term, or just by lengthening the time you stay with a good quality business, you can create wealth you could have never thought of.
Like the CEO of a privately held company who can make decisions for the future without worrying about next quarter’s earnings, you can use time arbitrage to benefit from time-tested investment processes without the worry, and often financial damage that comes from recklessly chasing quick returns.
Here is something else I read on Bezos’s long-term thinking in the amazing book Bold…
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2. Focus on What’s NOT Going to Change
This lesson is closely related to the first one above i.e., long term thinking. Here’s more on this from Bold…
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“What’s not going to change is what we must focus on!” I tell myself each time I think about the future of Safal Niveshak. And now Anshul also has to bear with these thoughts, though I am lucky because this is what he also believes in. 🙂
“Stability”, as Bezos mentions above, is what causes companies to endure over long periods of time. Look at the biggest wealth creators in the history of the world, or in India. Those have been the most stable businesses that have not changed for years.
And I am not talking about companies that did not change despite seeing changes in their industry (Nokia, MTNL, Kodak, etc.), but rather about companies that have continued to provide tremendous value to customers (the core of any business), even while changing with changing times.
So here a few checklist points you must have (on stability) while looking at investing in businesses –
- Is the core of this business going/prone to too many changes?
- Is this business open to disruption? (anything that can be done via Internet can be disrupted)
- Is the current management too aggressive on growth?
- Do the customers love this business? Have they loved it for years?
- Would the business be selling similar products/services 10 years later?
If the answer is ‘No’ for the first three questions and ‘Yes’ for the last two, it’s most probably a good business to own (at the right valuations).
3. Focus Intensely on the Customer
This lesson holds special relevance for the entrepreneur in me, but I also apply this while analyzing companies.
“Do the customers love this business and the products/services it sells?” and “Have they loved this business for the past few years?” is what I ask. In hindsight, my biggest successes in investing have come from businesses that pass this test.
Now, it may somewhat be a case of survivorship bias, because some companies that customers have loved have done disastrously for me (like Leela Hotels), but then the probability of a business doing well for an investor is high when the customers love its products/services over long periods of time.
Anyways, this is what I read in Bold…
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4. Experiment, Experiment…Repeat
Honestly speaking, I hate when companies experiment a lot by venturing into unrelated areas through mindless acquisitions. But continuous experimentation within their circles of competence is an attribute of great entrepreneurs, like Bezos. So this is what I try to apply to my own business.
I have had my share of failures and disbelievers – with people calling me names when I started charging fee for my courses and newsletters, and how these were “doomed to fail when everything is available for free on the Internet.” But I have learned to live with this, for as I mentioned above, my focus is intensely on the value I provide to my readers and subscribers and for a really long period of time.
Anyways, here’s Bezos on ‘experimentation’ and ‘living with being misunderstood and criticised’…
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5. Accept Failure and Move On
Now, this is not something I have learned only from Bezos, simply because I have failed so many times in life that I have been searching for inspiration all around on accepting failure (again and again) but still moving one.
I have learned this lesson especially from seeing my daughter grow up. Like when she was just a year old and was trying to take her first steps and repeatedly fell down, she tried again…and again…and again. Sometimes she laughed. Sometimes she cried. Sometimes she laughed and cried at the same time.
But she kept trying and trying…laughing and crying. She did not label her experience as a “failure”. She just enjoyed it.
Unlike us adults, our babies don’t know the possibility of a failure, so they happily keep falling down until one day they take a few steps, and then a few more. Before long, they’re jumping and running. All their trying pays off. They fall but never fail.
As grown-ups, what if we also simply choose not to fail? What if we treat our mistakes and failures as not things to be avoided but things to be cultivated?
Like Warren Buffett said…
You’re going to make mistakes. You can’t play in the game without making any mistakes. I don’t think about it, I just move on. Most business mistakes are irreversible setbacks, but you get another chance. There are two things in life that you don’t get another chance at – marrying the wrong person and what you do with your children. Business, you just go on. It’s a mistake to dwell on mistakes, it’s unproductive. It’s like Mark Twain’s story about the cat that sat on a hot stove – he never sat on a hot stove again, but he never sat on a cold one again either.
Life teaches us each day that stuff happens (and sometimes shit happens!), but we don’t need to give each of our experiences a label. Good, bad, hard, easy, success, failure etc. do not exist but as labels in our minds. All we need to do to hold our head high is to break through these labels.
Like here’s what Bezos says on dealing with failure…
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Conclusion: Bezos’s Investing Checklist
Over the past two decades, no matter how much its shareholders criticized about all the money Amazon was ‘wasting’, no matter how often analysts opined that it “could never make money” and “would go bankrupt,” Amazon (and Bezos) has maintained its relentless focus on the long term and its customers.
And this is seemingly the biggest reason it is the only one of early Internet leaders that is still thriving. Its approach should be a lesson to all companies, not just Internet companies, and also to us investors (because we also wish to identify such companies that would thrive over the long run).
In this regard, I believe it would pay a lot to take Bezos’s advice on where and how to invest through a thought he shared in his 2014 letter to shareholders…
A dreamy business offering has at least four characteristics. Customers love it, it can grow to very large size, it has strong returns on capital, and it’s durable in time – with the potential to endure for decades. When you find one of these, don’t just swipe right, get married.
This I believe is the shortest yet most powerful investing checklist you can ever come across.
- A business customers love, and which
- Can grow to very large size, and which
- Has strong returns on capital, and which
- Is durable in time – with the potential to endure for decades, and which
- If you find, you must load up and get married to
Finally, whatever people ultimately will remember Jeff Bezos for, there’s still a lot we can learn from him right now.
Anything you’d like to add about him, his legacy, philosophies, or inventions? Put it in the comments section of this post. I look forward to an enlightening conversation and more lessons from one of the world’s best and brightest.
Also Read:
Disclosure: I participate in the Amazon Associates Program, which simply means that if you purchase a book on Amazon from a link on this page, I receive a small commission. The book does not cost you any extra. I give away 100% of the commission for the betterment of the under-privileged.
Great and motivational article Vishal. :). Its really hard to think long term.
True Kinshuk. Thanks!
Once Jeff Bezos called a meeting of his top managers. Everyone came in to the meeting room and sat on to their chairs, noticing the central chair which was vacant. When everyone was thinking about who would sit on the central chair, Bezos mentioned, “Imaging our customer sitting on this chair. From now on, whatever decisions you make, make sure it’s directed towards the benefit of that customer.” That’s how much customer obsession is in Amazon’s culture.
This is a nice story on the Amazon culture, Mayank. Thanks for sharing!
The human nature of tinkering is the biggest impediment to sitting still and see something grow. Thats the reason why we are unable to reap the benefits of compounding.
Yes Philip, it’s the basic human nature to act, that keeps us tinkering with things…which has, by the way, been good for the society. But mindless tinkering is what causes problems for businesses.
Hi Vishal,
Food for thought but I wanted to bring other aspects to the discussion.
Though it sounds great to have long term thinking + intense customer focus, it all depends on the particular time you look at the person/business to conclude if the strategy worked or not.
1. At the moment, Amazon is riding high in the stock markets and the press as they complete 20 years and had a quarter of an above expectation profit after many years of barely there profits and many loss making years. The key here is “expectations”, the market was used to very low profits from Amazon but pushed the share price way up on an unexpected profit declaration.
2. If one invested in Amazon right at the beginning 1998 you would still need to wait till 2009 to show any real movement. Yes truly long term is a good thing but if the business plan depends on growing size & not profits, one has to wonder if its a good investment. Could it be that Amazon is getting a great PE because of all the money made in the privately held silicon valley ‘unicorns’ that are fueling some envy & pushing money into the few internet public listed businesses? Would look like that if you see EPS of $-0.43 and a share price of $536. Also the profits come from AWS and not its retail arm and AWS is not customer focused nor as long term in nature as its retail arm. Its B-to-B business with healthy margins.
3. Though he never mentions it in any of his books or interviews, Amazon is a ruthless acquirer of business and a bit of a bully within its eco-system with its vendors. Case in point is its ongoing feud with publishers on book pricing or its acquisition of pets.com/diapers.com/zappos etc. where a lot of money is spent trying to push other retailers out of business or into their own hands. Yet they have paid high prices for most businesses they did acquire like Zappos etc.Not sure how this is customer oriented or good for its vendors/brands.
I feel truly long term good businesses should finally bring value/success to the entire supply chain including suppliers, customers and investors.
What happens when Amazon stops growing and doesn’t find new verticals to enter into? Is it sustainable then? Does it change its philosophy of everyday low prices? Do we then demand more bang for our buck in terms of investing in it?
Just questions to think about.
Thanks Deepa for sharing your thoughts!
True, it’s difficult for most people to have the foresight to find and invest (and remain invested) in a business like Amazon. My post was more related to how the company has done in hindsight, and how Bezos’s original philosophy of “long term” and “customer focus”, which he spelled when Amazon was nothing, has worked wonders for the company.
So, I am more amazed by the commitment to that thinking than the results that now show up in the stock price appreciation. For every Amazon that applied this thinking, there must have been several others that also did the same but failed. So there’s survivorship bias at work here.
On your point about being ruthless, yes any company looks like this (think Google or Microsoft) when it succeeds magnificently and comes to a situation to play the game on its own terms. That ruthlessness is what maybe the moat, and a good one to have till it does anything net-net negative for the society. Capitalism will cause people who cannot compete to go out of the system, and that’s the negative side of it. But you have to give it to Amazon to bring value/success to so many businesses by proving them a great platform to sell their products to the world. So, net-net, I believe the business has had a positive impact on the ecosystem.
Regards,
Vishal
Vishal,
The 5 questions actually apply differently to amazon itself…
Is the core of this business going/prone to too many changes? Yes
Is this business open to disruption? (anything that can be done via Internet can be disrupted)
This is also Yes
Is the current management too aggressive on growth? Yes, they have been doing that
Do the customers love this business? Have they loved it for years? Yes…agreed
Would the business be selling similar products/services 10 years later? Maybe no
In this scenario…should one not have invested in amazon..
Thanks Saurav!
First, let me clarify that it’s utterly difficult for anyone to identify and then remain invested in a emerging business like Amazon. So these five questions may not be relevant for such businesses (and Amazon has been an outlier here).
Now, coming to your questions, here are my thoughts –
Is the core of this business going/prone to too many changes?
You said yes. I say no, in light of what is defined as core for Amazon’s business. If you read through the excerpt I shared from the book, Bezos has believed that the core of his business has been – low prices and delivery. Now, if this is the core, which seems to be the case for any retail business, it hasn’t changed for years…and doesn’t seem like changing in the future.
Is this business open to disruption?
You say yes. I also say yes, and I would not invest in a business that can be disrupted. But coming to Amazon, it has been the disruptor and has been great at it for years. So, here I am siding with the elephant that’s crushing competition all around (and in a healthy way). 🙂
Is the current management too aggressive on growth?
You say yes. I also say yes. But to correct myself, I meant reckless growth.
Amazon has not indulged in such growth given that while it has sacrificed margins, it has maintained its focus on cash flows. So, I would be watchful of companies that keep burning cash, and borrow more, to pursue growth without an eye on where the cash is going to come from (which almost all Indian ecommerce companies are indulging in).
Do the customers love this business? Have they loved it for years?
You say yes. I also say yes.
Would the business be selling similar products/services 10 years later?
You say no. I say yes, from the perspective that Amazon does not have its own products to sell. So for its business, the question would be – would it be in the retail of consumer stuff in the future or not? And the answer is yes.
Hope this helps. Thanks anyways for sparking this discussion. 🙂
Regards,
Vishal
You might have read this graduation speech by Bezos before but in any case, I thought worth sharing and adding to this thread. The crux = “Cleverness is a gift, kindness is a choice”.
“We are What We Choose”
Remarks by Jeff Bezos, as delivered to the Class of 2010
Baccalaureate
May 30, 2010
Wonderful…thanks Sanjeev for sharing! Regards.
Hi Vishal,
Good write up as always.
Just wanted to ask when you say ” a business should have strong returns on capital” – did you mean a good ROIC,ROCE or ROE ???
Regards
Nabil
Thanks Nabil! Well, all three generally move in the same direction…so I would look at all of them.
Hi Vishal,
I just wanted to say thanks. I read a lot of business books and try to listen to, or read transcripts of, interviews like the one you’ve quoted but was unaware of this particular interview. Your article is excellent and has actually given me a slight boost right when I needed it.
Great to have found your blog/website – and I’ve subscribed to your newsletter. Looking forward to reading more of your articles.
The one thing I’ve really taken away from this article – think really long term. As a former musician and teacher of yoga this idea comes naturally. However, when going into business I did not see this or get it. Your post and the Amazon culture have made me “get it.” Thanks again!
Wonderful, Drew. Thanks!
All the best!