Jeff Bezos - 24 Shareholder Letters with 24 Lessons - 2015-2021 - Part 4
The last few of Jeff Bezos's shareholder letters from 2015 to 2021. These years are dominated by the beginning of coronavirus pandemic and the subsequent actions that Amazon enacted.
This is the last part of my series - 24 Shareholder Letters with 24 Lessons. IN my previous articles, I went through the years 1997-to 2014. If you haven’t done already, read the previous articles to learn more about Jeff Bezos’s and Amazon’s thought processes in business and investing.
Part 1 - Jeff Bezos - 24 Shareholder Letters with 24 Lessons - Part 1
Part 2 - Jeff Bezos - 24 Shareholder Letters with 24 Lessons - 2004-2008 - Part 2
Part 3 - Jeff Bezos - 24 Shareholder Letters with 24 Lessons - 2009-2014 - Part 3
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2015 Shareholder Letter - Customer instead of Competitor Obsession
Intentionally or unintentionally, Bezos described the investing strategy I read in the book "100 Bagger" - by Christopher Mayer. Bezos explains that Amazon invests in bets that have ~10% change to pay 100 times in the future. The challenge is to invest in nine other bets that will consequently fail.
Key Learning 1: To win big, you must expect to lose along the way. Make strategical bets along your investment journey and find bets that have the opportunity for an asymmetrical risk-reward probability. Most often, it’s enough to win once in a big fashion than many times on a small scale.
Finding these bets and sticking with them for years to see how they evolve requires an entrepreneurial corporate culture. Instead of passively reacting, Amazon’s employees must proactively improve and invent new ways to satisfy customers. The people within Amazon are energetic with entrepreneurial mindsets. These people select others that are similarly energized and entrepreneurial. It's a self-feeding machine.
Key Learning 2: Betting big requires a specific mindset. Finding people that make strategic bets and stick with them requires an entrepreneurial and consistent mindset.
Amazon is an invention machine that embraces not to fall for the same pitfall as other large organizations and make "one-size-fits-all" decisions.
For Bezos, there are two types of decisions:
Type 1 decisions are irreversible decisions that must be made methodically, carefully, and with great deliberation and consultation.
Type 2 decisions are reversible decisions (most decisions fall into this category) that must be made quickly by high judgment individuals or small groups.
Large corporations fall into the trap of making too many decisions to type 1 decisions even though they are type 2 decisions. This mistake makes companies slow and sloppy with unthoughtful risk aversion. It creates an environment that lacks experimentation and entrepreneurship and diminishes inventiveness within a company.
The decision-makers at Amazon must categorize decisions rapidly, making many of them type 2 decisions. Rapid decision-making enables Amazon to decide quickly, experiment, adjust, and try again.
Key Learning 3: Pay attention to managers and executives that take too much time for decisions. Most decisions are reversible and have no further consequences related to them. Making too many decisions to type 2 decisions makes a company slow and is a sure way to underperform the industry and market.
2016 Shareholder Letter - Why It's Always Day 1
During a hands-up meeting, Bezos was asked what day 2 looks like.
Day 2 is when a company falls into stasis - followed by irrelevance, a painful decline, and lastly, the company's death.
Key Learning: Bezos and Amazon's leaders' work is to fend off day 2 and to remain in Day 1 indefinitely. Bezos lists a few things to stay in Day 1:
Obsess over customers
Customers are forever dissatisfied as they quickly adapt to new norms and services. This human tendency is called hedonic adaptation. Despite positive or negative events, humans adapt promptly to those events and return to a relatively stable level of happiness.Keep a skeptical view over proxies.
This is when employees rather focus on doing the process right instead of focusing on the right outcome. This one is a frequent trap that large companies fall into. Many junior leaders and employees focus on doing the process right and ignore the result. It's the job of experienced leaders to track the outcome of the processes and adjust or redesign the processes to make the outcome better.Adopt external trends
Instead of fighting external trends, a company must adopt the trends and enable its customers to work with these trends. This is another large company fallacy, where it tries to fight trends.High-velocity decision making
Day 1 companies must make decisions with high-quality and high-velocity. There are four important processes for companies to maintain High-velocity decision-making.Never use a one-size-fits-all decision-making process. Many decisions are not as irreversible as many think. Use light-weight decision-making for most decisions.
Most decisions should be made with only 70% of the information you wish you had. It's more costly to wait too long to decide than to reverse the decisions later.
Disagree and commit. Even if some team members disagree with a decision, at some point, the team must decide, and everyone within the team must commit to the decision.
Recognize misalignment issues early on and escalate them immediately. Sometimes, team members are fundamentally misaligned and have different views and objectives. No amount of discussion or meetings will solve this misalignment in these cases. This will lead to extreme exhaustion if no solution is found.
Shareholder Letter 2017 - High Standard
As customers are divinely discontent and regularly adapt to higher norms, a company must exercise high standards to keep up.
Are high standards intrinsic or teachable?
Key Learning: Bezos assumes that high standards are teachable and even contagious. If some people within the company exercises high standards, new employees will be prone to learn and exercise the same high standards.
High standards are domain-specific and not universal. People need to learn what high standards in different domains mean. They must, first, recognize what "good" means within the domain. Second, have realistic scopes of how long and hard it will be to achieve that results.
In summary, the four elements of high standards are teachable, domain-specific, recognizable, and scope dependent.
Even in investing, expectations and expertise for different categories of investors vary widely. There is no one-size-fits-all solution. Some want a low-volatility investment portfolio with market-like returns. Others look for those 100-baggers to make more than average returns.
Shareholder Letter 2018 - 100 Baggers
Create a culture of builders and inventors with people who are curious explorers. A culture like this helps to approach hard-to-solve problems with a humble conviction. Success in business and many other areas of life come from iteration - invent, launch, reinvent, relaunch, start over, rinse, repeat, again and again.
Sometimes, people have a general hunch on where they want to go, and they can be efficient in going that way. In business, wandering is inefficient, but it's also not random. It's guided by hunch, gut, intuition, and curiosity and powered by a conviction that it will be for the better of the customer.
In this letter, Bezos's approach to investing in new businesses and processes reminded me of the book "100 Beggars" by Christopher Mayer.
Key Learning: In business and investing, you need to make a few sizable bets powered by intuition, curiosity, and research. 90% of those bets will lose, but the loss is limited to 100% of your investment. That 10% will recover your losses and generate sizable returns.
Shareholder Letter 2019 - Covid-19
This year's letter is a lot about the pandemic and the processes Amazon introduced to cope with the situation.
The letter ends with a positive outlook and a nice quote by Theodor Seuss Geisel:
When something bad happens you have three choices. You can either let it define you, let it destroy you, or you can let it strengthen you.
Shareholder Letter 2020 - Create more than you Consume - Goodbye Jeff
This is Bezos's last shareholder letter as Amazon's CEO. He writes a lot about the value that Amazon created for shareholders, businesses, consumers, employees, and third-party sellers.
To explain value creation, Bezos goes through Amazon's business and explains how it creates value for different people.
In 2021, Amazon's net income was $21.3 bn. If, instead of being a publicly-traded company, it would be private with a single owner, that would be its profit in the end.
Employees earned $80 bn, plus an additional $11bn, including benefits and various payroll taxes, for a total of $91 bn. Third-party sellers' profits from selling on Amazon were between $25 bn and $39 bn. Let's use $25bn.
For customers, Bezos breaks it down to AWS and consumers.
Customers save time that they'd otherwise spend driving to a store, searching, reviewing, and comparing similar products. Amazon saves on average 75 hours a year. Using average wages, and multiplying with the number of members on the platform, results in $126 bn of value creation.
AWS customer value creation is around $38bn. Adding AWS customer value creation with consumer value creation gets us $164bn in value created.
Key Learning: A business must create value for its customers; if it doesn't, it will cease rapidly. This is not only true for companies but people in general. To be successful in life, one must create more than one consumes.
The End
Thank you for reading this series. I publish this type of content regularly as I’m embarking on becoming a better investor and human.