Investing lessons from Jeff Bezos

By Larissa Fernand |  21-11-18 | 
 
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About the Author
Larissa Fernand is Website Editor for Morningstar.in. She would like to hear from you and welcomes your feedback.

Jeff Bezos is the embodiment of successful entrepreneurship.

The idea of Amazon was born when he was tasked with researching new business opportunities on the rapidly growing Internet at hedge fund D.E.Shaw.

Two large book manufacturers (Ingram and Baker & Taylor) were amongst the first to utilize digitized inventory lists. Up until that point, if a person went into a bookstore and a particular book wasn’t in stock, they had to make a request to the manufacturer to find a storage facility that had the title in question. Bezos realised that one could build an online store by cutting out the middlemen and provide titles direct-to-consumer. He also saw that internet usage had grown 2,300% between 1993 and 1994. His boss told him it was a pretty good idea but that it was “a better idea for someone who didn’t have a good job.” Bezos walked away from his 1994 bonus in the middle of the year and Amazon was born.

Since then the company has experienced a meteoric rise across the globe. Making Bezos one of the richest men in the world.

Here’s what investors can learn from him.

Start Small.

Everything I've ever done has started small. Amazon started with a couple of people. It was like yesterday that I was driving the packages to the post office myself and hoping one day we could afford a forklift. - Wall Street Journal

Many individuals wait to be “in a position” to invest. This is specially with regards to equity. Don’t waste time. If you can spare as little as Rs 1,500 per month, start systematically investing in an equity mutual fund.  Or at least a balanced fund with a predominantly equity orientation. Start small, but start now.

Avoid comparisons.

 "You have to realize: decision making isn't one size fits all." - CNBC

A particular fund may be excellent for one individual’s portfolio, does not mean that it is a good fit in yours.

You may be a 32-year old investor who thinks that it is quite alright to copy the asset allocation of a friend who is the same age.

But consider two 32-year olds, both earning identical amounts.

Individual A is married, his parents are not dependent on him, his spouse is also employed, and they plan not to have children. Won’t his asset allocation, investment potential, risk taking ability and insurance needs be different from Individual B, who has four dependents – spouse, parents and child; and who is also servicing a home loan?

There is no one-size-fits-all when it comes to matters of finance and investing. If confused, talk to a financial adviser who can tailor an investing plan based on your circumstances.

Edward Smith shared his views on building a winning investing strategy in Money Management when he was at Australian Unity Investments. He used the analogy of cyclists to drive home his point.

Sprinters have perfect timing and immense power to accelerate over a short distance. However, the sprinter’s attribute of pure power entailing plenty of fast-twitch muscle, becomes a liability in the mountains.

The key factor for mountain climbers is the power-to-weight ratio - they invariably have a bird-like frame, are mentally very tough and have immense stamina. Unfortunately, mountain climbers can’t sprint with the best.

Time trial specialists have plenty of power coupled with a highly efficient cardiovascular system, allowing them to maintain high power output for long periods of time. But they must grit their teeth to hang on in the mountains.

In a nutshell, Smith said, no one cyclist is good at all geographical conditions. Similarly, what is good for one investor, may not be good for another.

Be focused.

The thing that connects everything that Amazon does - our conviction and idea and philosophy and principle - is customer obsession, as opposed to competitor obsession. - Vintage Value Investing

Pick an investing philosophy that works for you.

There are numerous investing styles. Long-term. Short-term. Contrarian. Value. Growth. While some swear by moats, others believe that since we are in a disruptive age, moats are hard to come by.

Bill Ackman and Michael Price are known as activist investors. Seth Klarman believes in a long-term orientation and patience. Howard Marks buys assets that are out of favour and his style is embodied by the motto “if we avoid losers, the winners will take care of themselves”. Sam Zell looked for distressed companies sitting on quality assets. Marc Andreessen bets on change and says that Warren Buffett bets on things that won’t change. Philip Fisher believed in holding a concentrated portfolio of outstanding companies over the long term. (Outstanding meant superbly managed companies with compelling growth prospects that he understood well). Anthony Bolton stressed on diversification. Ralph Wanger hunts for smaller fare.

Pick an investing iteration that you believe in. And stick with it. It will provide you with consistency in your decisions and keep you grounded when your stocks are out of favour with the market.

In an interview last year, investor Tom Russo commented that Amazon has nothing to do with technology, but all about customer service and the consumer experience. He referred to it as the ‘Charlie Munger story’. Charlie has said the way to live your life is through the power of ‘inversion’. Think of what it is you want to create, and reason backwards to come up with most efficient way to get there. That’s Charlie Munger in spades and that’s exactly what Bezos is talking about.”

Don’t obsess over stock price.

When the stock is up 30% in a month, don't feel 30% smarter, because when the stock is down 30% in a month, it's not going to feel so good to feel 30% dumber -- and that's what happens. Never spend any time thinking about the daily stock price. I never do. - Wall Street Journal

Don’t obsess over the market. Or the stock price. Whether it is going up or down.

Market volatility is never going to go away. Bear markets are never going to disappear. Both are a feature of equity investing. Both are a feature of markets, not a bug.

A pure macro, top-down call may not result into transmission into specific stocks. Some bull markets are very polarised with just a few stocks taking the indices higher.

Stick to a bottom-up approach. Always. Ask yourself what the reasons are for investing in a company? Are you still prepared to hold the stock for many years? Is your investment thesis still sound or has it changed? It makes complete sense to retest the thesis at regular intervals. If the thesis still holds and the stock price has dropped, it may be good to add to your position. Value investor Seth Klarman always advises that investors buy on the way down. It’s impossible to always catch the bottom, but it does ensure ample margin of safety. He makes money “when he buys” and captures profit “when he buys the bargain”.

Finally, a quote that would apply to any equity investor. My own view is that every company requires a long-term view.

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