I recently read through all of Jeff Bezos’ annual shareholder letters and wanted to summarize some of my takeaways. I’ve loosely followed Amazon for years just because of how interesting of a company it is (and how much of an effect it has on our economy), but I never went back and read the older shareholder letters until now. I wouldn’t say there was anything too surprising in the letters (everyone knows how obsessed with customer satisfaction Bezos is), but I came away even more impressed with Bezos than I already was. Many people refer to him as one of the best CEOs in the world and I can’t disagree—he has a combination of traits that are very rare.
Business manager + financial expertise
It’s not often you find a CEO who is both a visionary for the business and also understands the financial drivers behind it. This makes sense when you think about it. Most CEOs got to their position by being great marketers, salespeople, or inventors, but none of those roles prepare someone for being the chief capital allocator. A hired CEO may work his way through a company’s corporate ladder, never once needing to really allocate capital on a large scale, and then all of a sudden he’s promoted to CEO and that’s one of his main job roles. Likewise, a founder spends many years just growing their company any way they can—and suddenly one day the company is large and more in-depth capital allocation decisions must be made.
It’s pretty self-evident that Bezos is a fantastic business leader and visionary, but I was impressed with how well he understands the long-term financial drivers of the company. His 1999 letter was one of my favorites as he laid out his thesis on how several interlacing network effects would end up driving long-term revenue growth and operating leverage in the business:
“Each new product and service we offer makes us more relevant to a wider group of customers and can increase the frequency with which they visit our store. So, as we expand our offering, we create a virtuous cycle for the whole business. The more frequently customers visit out store, the less time, energy, and marketing investment is required to get them to come back again.”
“Each new product or service further leverages our investments in distribution, customer service, technology, and brand, and can yield increased leverage on our bottom line.”
“More efficient distribution yields faster delivery times, which in turn lowers contacts per order and customer service costs. These, in turn, improve customer experience and build brand, which in turn decreases customer acquisition and retention costs.”
Understands how shareholder value is created
“Shareholder capitalism is the dumbest idea in the world. Shareholder value is a result, not a strategy. Your main constituencies are your employees, your customers, and your products.” – Jack Welch
I recently read the above quote in What Went Wrong and it really struck a chord with me—given my annoyance with public company CEOs who are overly obsessed with shareholder value. Bezos seems to understand well that shareholder value is a result, not a strategy. He is obsessed with keeping his customers happy and he knows that if his customers are happy, shareholder value will be a result of that.
“We are firm believers that the long-term interests of shareholders are tightly linked to the interests of our customers: if we do our jobs right, today’s customers will buy more tomorrow, and we’ll add more customers in the process, and it will add up to more cash flow and more long-term value for our shareholders.”
Similar to the first bullet point about his financial expertise, Bezos also understands how companies are valued and what drives long-term share price appreciation. Many CEOs tout all sorts of financial metric gibberish, but all that really matters is long-term free cash flow. And Bezos certainly emphasizes the long-term part of that free cash flow. He might talk about the long-term more than any CEO I’ve seen. His first letter in 1997 was even titled “It’s All About the Long Term”.
“Why focus on cash flows? Because a share of stock is a share of a company’s future cash flows, and, as a result, cash flows more than any other single variable seem to do the best job of explaining a company’s stock price over the long term.”
“Earnings don’t directly translate into cash flows, and shares are worth only the present value of their future cash flows, not the present value of their future earnings.”
Never content with what he’s accomplished
Bezos ends many of his letters by saying “it’s still day 1.” In my own interpretation, Day 1 is a growing company that is disrupting industry norms. Day 2 is an established company that stops disrupting and coasts for as many decades as possible, before eventually dying. Bezos has mentioned The Innovator’s Dilemma before and seems to have been influenced by its message—companies either disrupt themselves or, most often, get disrupted by others. This is probably part of the reason that Bezos is never resting on his laurels. He constantly talks about how challenging of a road they have ahead of them. This trait reminded me a lot of Sam Walton and his never-ending obsession with improving Wal-Mart’s efficiency.
Avoiding the problems described in The Innovator’s Dilemma also helps to explain Bezos’ openness to trying new things, despite failing at many of them (like investing in pets.com in their early years and the Fire phone more recently). Amazon’s culture of encouraging testing new things and sometimes failing has allowed them to expand into many new areas that never would have been predicted in the early 2000s (like Amazon Web Services and physical products such as Alexa). A company culture that encourages failing is much more common in the tech space nowadays, but to develop this culture twenty years ago is far more impressive. One of the threads that runs through all these letters is how much of an independent thinker Bezos is.
Many investors claim to be contrarian investors—a phrase that has become so overused that it’s becoming meaningless—but I think it’s more about thinking independently than it is about being a contrarian. The goal is to be able to truly think for yourself—without the influence of others—not to think differently from the crowd just for the sake of doing so. If done right, you will often come to the same conclusion that the masses have because the masses generally get it right. Bezos has made many unique decisions over the years to prove that he is capable of thinking independently—from allowing customer reviews (why allow people to post negative things about your products?) to encouraging third parties to compete with them right on their own product pages and offering free shipping with Prime (which cost them a ton of money in the short-term, but helps with customer loyalty in the long-term).
“Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right.”
As of this writing, Wiedower Capital does not own shares in AMZN or WMT. This is subject to change.