Why learn lessons on investing from Jeff Bezos? Because he “is the single best investor of our generation, even better than Buffett,” as commented by Chamath Palihapitiya, the billionaire founder and CEO of Social Capital.
Jeff Bezos, founder of Amazon, pioneered internet bookstores from his garage.He was named Time’s person of the year in 1999. But in 2000, the dotcom bubble burst, sending Amazon’s share price to the rock bottom.
Source: The Guardian / Amazon.bomb
“Amazon.bomb” – that’s how the newspaper described Amazon back in 2000 when Bezos saw the value of his company cut by a fifth in a single day.
Investment banks were warning investors of the company haemorrhaging cash and that it might not even survive. Analysts highlighted Amazon’s financial health with terms like “weak balance sheet, poor working capital management, and massive negative operating cash flow.”
Fast forward to today, Bezos became the richest man in the world in 2017. And today, Chamath Palihapitiya, calls Bezos as “the single best investor of our generation, even better than Bufftett, because he would take billions of dollars of free cash flow and invest it into the future.”
Let’s take a look at how Jeff Bezos earned such a title with his investment approach through these years.
Lessons on Investing: 1. Think Long-Term
Well, it wasn’t all smooth sailing for the internet tycoon. People used to criticize Jeff Bezos for not being profitable during the earlier days of Amazon.
However, Bezos’ business philosophy has always been for Amazon to focus on its customers. Not its competition, Wall Street or short-term profitability.
He argues that “long-term thinking squares the circle. Proactively delighting customers earns trust, which earns more business from those customers, even in new business arenas. Take a long-term view and the interests of customers and shareholders align.”
Bezos is playing a longer game, where the plan was to spend money on infrastructure and customer loyalty. This has helped to position Amazon as the everything store that consumers recognise today. Only once that is established, had the company been able to generate sustainable and upsized profits and cash flow. And this is one of the most important lessons on investing and business.
Whether it is spending on new projects in Amazon, acquiring other companies or investing in the scope outside Amazon – such as his investment in The Washington Post, Airbnb and Uber, Bezos is holding a long-term frame in mind.
So for you investors out there, you may not have as much power in the direction of your company’s initiatives. However, as an investor, you can still do your research. And participate in companies that have tremendous long-term value and prospect. Have the patience to ride through the short term fluctuations, and keep your eyes focused on the future.
Lessons on Investing: 2. Be Willing To Experiment
Importance of Failing
Not all of his investments turn out to be winners.
Amazon had its fair share of failures. It wrote off $170 million for its failed Fire smartphone. The company pulled the plug from the daily deal site LivingSocial, after investing $175 million in it. Another big investment was Drugstore.com, which cost Amazon half a billion dollar, before selling it for a fire-sale price.
However, Bezos wrote in his 2013 letter to shareholders that “Failure comes part and parcel with invention.”
In his words, “The difference between baseball and business is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score a thousand runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.”
And this applies as much to business as it is to the lessons on investing.
Big Successes Compensates For Dozens of Failures
For the billions of dollars of failures that Amazon suffered, just the few big winners, such as Kindle, Amazon Web Services and Amazon Prime, have more than compensated for these failed experiments. At the same time, they have created new economic opportunities with tremendous growth prospects.
So, what we can learn from Bezos here is to be willing to take on experiments in your investment journey.
However, there can be some important differences between experimenting in new business initiatives and stock investments. The main one being the level of control that you can have on a company’s operations.
But there are also similarities between the two. For example, both require thorough market research and analysis before jumping in on the new project or investment.
The takeaway fro investor is that, you will not be able to know all aspects of a potential investment. Therefore, you should not let the fear of the unknown and uncertainty stop you from taking the next step.
But that does not mean that there is no need to do your due diligence before making an investment decision. Because, as Warren Buffett puts it, “it is better to be approximately right than precisely wrong.”
So next time when you are researching a potential investment with tremendous growth potential, make sure to do your homework. Once you have assessed that it is not overvalued currently, then have the courage to make the investment!
Lesson on Investing: 3. Invest In Missionary Instead of Mercenary
Finally, in scouting for opportunities, Bezos looks for CEOs and leadership teams who are missionaries. These are groups of people who love their product or service and their customers. And they are trying to build a great service. He feels that mercenaries are trying to flip their stock for a quick buck.
As Bezos puts it, “the great paradox here is that it’s usually the missionaries who make more money. This is something that most lessons on investing overlook.
For instance, in 2017, Amazon made the biggest acquisition of Whole Foods at a whopping $13.7 billion. Whole Foods’ founder, John Mackey, is a missionary that Bezos likes. Mackey founded the company back in 1980, and is an evangelist for clean eating.
He leads the company with a clear mission, which is to serve only the highest-quality foods. Whole Foods bans a list of food products and ingredients from their stores. For example, they don’t hold non-beneficial drinks like Coca-Cola.
You may think that championing such cause may come at a cost to the company’s bottom line. Well, no. In fact, Whole Foods has been beating its competition in terms of growth and profitability.
So, you as an investor should start scouting for founder-led companies, exhibiting the traits of missionaries. Yet, they should be able to outperform other companies financially as well.
So there you have, the 3 key lessons on investing that have made Jeff Bezos such a successful investor.
It is no accident that Bezos became one of the most admired leaders in business and investors. Even Buffett sings praises of him, commending Bezos as “the most remarkable business person of our age.”
So if you want to create massive returns from your investment, remember these 3 principles:
- Think long-term.
- Be willing to experiment, and
- Invest in missionaries if given the opportunity.
Now go out there and find some great companies to invest! If you want to find out how we research and look at companies, and other lessons on investing, join our mailing list below, so that you can be informed once our analysis is out!
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Keep learning and happy investing!