It’s All About the Long Term: Amazon’s 1997 Shareholder Letter
“Jeff Bezos is the most remarkable business person of our age, I’ve never seen a guy succeed in two businesses almost simultaneously that are really quite divergent in terms of customers and all the operations.” – Warren Buffett
I really do agree with Warren in the statement above. Anyone who knows me, knows I am a complete Amazon advocate. Not only does my firm own Amazon stock, but I am a frequent user of the website and really have developed into some sort of fanboy. It is a company that, in my opinion, is virtually certain to be bigger 5-10 years from now than it is today. Every year it leaves me flabbergasted that Amazon continuously knocks it out of the park. Companies that are doing 100B+ in revenue annually should not be continuously growing sales by 25+% per year. To me it is extraordinary. And it is certainly a case study in action that we can all learn from and add to our investing-wisdom toolbox, whether you are a shareholder or not. But before we talk about the present, I think it can help all of us as investors to go back to the beginning and study the company. After all, investing is all about pattern recognition. The beauty of hindsight is that it’s always 20/20. Let’s use this hindsight to our advantage and learn from it.
In this series, we are going to go back and review every Annual Letter to Shareholders written by Jeff Bezos. I really encourage everyone to do this yourself here. I have printed off every Shareholder Letter and have read them multiple times and, like any good literature, I take away something new from it each time. When reading, I encourage everyone to continuously ask yourself this: “Is there any information in this writing that I can take with me to make myself a better investor?” One of the greatest things about investing is that we are constantly learning and all information in life is relative –meaning you can read books completely unrelated to business, read newspapers, watch movies, you name it, and still take away some sort of insight or wisdom that can relate to investing. That’s essentially what we are trying to do here at Focused Compounding; compounding both capital and wisdom. If you have not already, I deeply encourage everyone to read the book “The Everything Store” by Brad Stone. It is a great book that will help you get familiar with the beginnings of Amazon, and more specifically with Jeff Bezos as a CEO.
Let’s go back to 1997 when Jeff Bezos wrote his first letter to shareholders. Anyone who is familiar with the company will know this letter serves as the groundwork of principles that Amazon still embodies today. In fact, Jeff has posted the 1997 letter at the end of every Letter to Shareholders every year since writing it to keep the standards top of mind.
A manager who doesn’t just talk the talk but actually walks the walk can be an incredible manager to study, especially when it relates to taking a long-term mindset to business. The single most important thing to remember when it comes to common stocks, is that stocks are not just pieces of paper that flash and move around on a screen all day. Stocks, rather, are fractional ownerships of real businesses with real assets, managers, etc. Keeping this in mind will allow you to remain focused and cut through all the noise that is involved in the market every day which is prone to clouding your judgement. Thinking about stocks as actual businesses, and keeping in mind that markets move faster than businesses do, will certainly allow you to remain rational during irrational day to day swings by Mr. Market. I think Jeff shares this view, which is why he always preaches the “long-term view” in his letters. The fact that he talks about focusing on business metrics such as Return on Investment Capital, as opposed to beating analysts’ quarterly EPS estimates illustrates this. Jeff Bezos pretty much says, “too hell with the status quo on Wall Street, we are going to focus on the long term and the customer.” I truly think it is this exact mindset that has made Amazon into the juggernaut that it is today. He elaborates on the customer by saying:
“We will continue to focus relentlessly on our customers
• We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.
• We will continue to measure our programs and the effectiveness of our investments analytically, to jettison those that do not provide acceptable returns, and to step up our investment in those that work best. We will continue to learn from both our successes and our failures.
• We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages. Some of these investments will pay off, others will not, and we will have learned another valuable lesson in either case.
• When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.
• We will share our strategic thought processes with you when we make bold choices (to the extent competitive pressures allow), so that you may evaluate for yourselves whether we are making rational long-term leadership investments.
• We will work hard to spend wisely and maintain our lean culture. We understand the importance of continually reinforcing a cost-conscious culture, particularly in a business incurring net losses.
• We will balance our focus on growth with emphasis on long-term profitability and capital management. At this stage, we choose to prioritize growth because we believe that scale is central to achieving the potential of our business model.
• We will continue to focus on hiring and retaining versatile and talented employees, and continue to weight their compensation to stock options rather than cash. We know our success will be largely affected by our ability to attract and retain a motivated employee base, each of whom must think like, and therefore must actually be, an owner.”
Back in 1997, the internet was still a new and foreign concept to many. I truly think Amazon’s obsession over the customer served them well and has helped them establish a deep and wide moat that they still are capitalizing on today. There are not many companies that have this intense “customer obsession” that comes to mind as seriously as Amazon does. This was made extremely clear to me when reading The Everything Store in an incident where Jeff was incredibly furious about the fact that it took longer than only a few minutes for a customer service representative to answer the phone to help customers. Maybe Jeff’s mindset comes from the Field of Dreams quote “If you build it, they will come” revised to “If you focus on the customers, they will come.” All joking aside, it seems to have served them right… A 442-Billion-dollar Market Cap right.
Key Takeaways:
- Bold CEOs that have a long-term oriented drive and passion to make a dent in the world can produce exceptional returns for shareholders.
- Companies that focus on real-return metrics such as ROIC and Free Cash Flow, as opposed to short-term EPS earnings and Wall Street guidance, are a good filter for potential long-term shareholder wealth creation.
- Stocks are fractional ownerships of a REAL businesses.
- If you focus on the customers first, they will come. 🙂