We Study Billionaires - The Investor’s Podcast Network - TIP 011 : Billionaire Jeff Bezos - The Secrets to his Success (Investing Podcast)

Starting point is 00:00:00 This is episode 11 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish and Sting Broderson. All right, how's everybody doing out there?

Starting point is 00:00:29 This is Preston Fish. And as usual, I am accompanied by my co-host, Stig Broderson. And today we're doing another book. This book is by Bradstone, and it's called The Everything Store, since Hari Ramatranja spends a lot of time out in Silicon Valley, because he lives there. And he also read this book. We brought him back on the show, and he is from bitsbusiness.com. And so we're going to be going through this book, and we're going to be picking it apart. We could probably spend about five episodes on this book, but we're going to just narrow it down to this one and try to pick out the highlights and the high points for you.

Starting point is 00:01:00 So let's start off. The book is really primarily about Jeff Bezos, who's the CEO and founder of Amazon. Jeff Bezos's net worth is $30.3 billion here in November, the middle of November 2014. The thing that I really took away from the book initially was just the intelligence level of Jeff Bezos. This is an extremely intelligent individual. And this is a person like most billionaires that thinks about things in a different perspective and typically sees things from the inverse that the rest of the world sees things. So the primary point and the highlight that I really want to bring out of the book initially,

Starting point is 00:01:38 the biggest thing that I took away was this focus that Jeff Bezos has on the customer and not necessarily as shareholders or the employees or anything else. He is totally focused on the customers of Amazon. So whenever I typically talk to people that are in a leadership position or a CEO of a business, The biggest challenge that these CEOs, these managers have is it's a big balancing act. And it's really a balancing act on three different levels. They have a balancing act where they've got to please their customers, they've got to please their employees, and they've got to please their owners or their shareholders. And if you think about that three-prong approach to leadership within an organization, you can almost think of it like a tripod.

Starting point is 00:02:22 And if one of those legs in that tripod is not strong or it's weak, the whole thing is going to be out of balance and out of whack, and it's probably going to lead to unstable results within the business. And so when you read this book and you study Jeff Bezos like Brad Stone had done, who's the author of this book, it was really interesting to me because this is a tripod. And whenever you see a good solid business, it's always really well balanced among those three prongs, the customers, the employees, and the owners. The way Jeff Bezos looked at things is he just totally flipped this around and said, you know what, I don't really care what the owners think. I'm not going to really be too concerned about the profit margins. I'm not really too concerned about working my employees too hard and giving them, you know, big bonuses like some of these companies like Goldman Sachs and whatever. He says, no, all I'm going to do is I'm going to put laser focus on my customer. If my customer's happy, everything else is going to work out. And so that's the thing that I just saw throughout this entire book is how.

Starting point is 00:03:21 how laser-focused Jeff Bezos is on his customer. So the thing that, you know, for Stig and myself, we have this website that talks about accounting. So for me, I initially go into the income statement, the balance sheet, cash flow statement for Amazon and start picking this thing apart. And so for me, I'm really interested in how a business can continue to grow its revenues at the rate that Amazon has done, but yet they don't have a bottom line that's really kind of feeding things that they can tap into in order to continue to grow their asset base. And so whenever we look at Amazon's income statement, let's just pull this up and look at this.

Starting point is 00:03:56 So last year, one year ago, Amazon's revenues were $17 billion for that quarter. That's just one quarter. This past quarter here in 2014, they've continued to grow those revenues to $20.5 billion in revenues. Okay. Now, that's really sounds like a lot of money, and it is a lot of money. But the interesting part with Amazon is, what's their profit on that $20.5 billion in revenues? And so, whenever we look at the bottom line of their income statement, we see that they had a loss, they actually lost money to the tune of $437 million last quarter. So they're bringing in $20.5 billion and then they're losing 437 million.

Starting point is 00:04:43 And if you look at their income statement for the last decade, you're going to see a very similar theme where they're just basically breaking even every single quarter. If they make a profit, it's only a couple hundred million dollars on billions that they're bringing in. So it's just a very interesting approach that you haven't really seen any other company operate in this model in this direction where it's just all focused on the customer. Oh, definitely. And one takeaway from the income statement, as you say, is definitely that they're not

Starting point is 00:05:16 making any money, they're just really having a lot of revenue. But if we turn our attention to the balance sheet, I think that is even more interesting. Because I think you also briefly mentioned this, they don't have any retained earnings. And that's very large because they're not making any money. So when you look at it, you can actually see that they have a lot of additional paid-in capital, which is probably quite unique, giving how big they are and, well, even though it's a new company and still have existed for 20 years. Also, if you look at how the assets are composed, you can also see that they don't have

Starting point is 00:05:50 that many fixed assets. They have a lot of current assets. That's also one of the reasons why they have been able to expand so fast because that's financed by their current liability, so they have a lot of accounts payable, for instance. So it's a very interesting business model. And perhaps it's a bit too progressive to what I'd like to see, but I think it's a really interesting study. So I started thinking about this as well, Stig. You brought up a great point about the balance sheet.

Starting point is 00:06:17 So when you think about it, why does a company retain earnings? Okay, why do they do that? And really the answer is because they want to have that war chest of cash that they can employ whenever a new opportunity or a new market opens up that they think that they can employ that capital advantageously and grow. So Bezos has basically shifted this on its head and said, well, if I control enough flow of capital, if I control enough money through my organization, I can basically flex my profit margin in a short amount of time to quickly grow the capital that I need in order to employ it into whatever my next asset that I want to buy is. Instead of just socking it away and sticking it over here in the corner and just letting it sit there, not really. having a large return, his opinion is that. Let's just continue to grow the revenues. Let's grow the revenues. Let's grow the revenues. And then whenever I have an opportunity that I actually want to pounce on, I'll shift my prices. And if you notice on Amazon, the prices on Amazon are

Starting point is 00:07:20 constantly fluctuating all the time. Every day it's a new price. And I think that they had that variability in their price because he can quickly bring in a 10 or 20 percent increase in the cost of something, call it for 15 days, he can generate millions of dollars in profit from that quickly and then employ that for whatever he's trying to buy next. And it's just a, this model was crazy. I've never seen anything like this. So, Harry, I saw you had something you wanted to say. Yeah. You brought up a very good point. In fact, Jeff talks about it and even in the book, Bradstone has touched upon this prugality and low margin mentality. in Amazon.

Starting point is 00:08:04 And Jeff has famously said that your high margins are my opportunity for any business around. Jeff, before he started Amazon or while he was founding Amazon, he read about Sam Walton, his biography. And he was very much influenced by how Sam was obsessed about cost and innovation. And Jeff has embodied that in his operations. In fact, in an interview, Jeff talks about what it takes to be in a low margin and high volume business. And in that interview, he says that companies with high margin have a luxury, but a lot of

Starting point is 00:08:49 sins are hidden because of that. Yeah. And it's very short term because, and this is something that he talked about later in the book, is he said that I view high margins of a business as something that attracts a lot of competitors. I don't want to attract a lot of competitors, so I keep my margins low. It's just like, you know, this is a lot like Peter Thiel. Everything that he thinks, he just takes the exact opposite. Like, well, you know, everyone out in business thinks high margins are good. He's of the opinion that they're bad. And then he somehow figures out a way to justify it. And

Starting point is 00:09:22 then it's true in the way that he's employing this and grown. I just find it fascinating. Absolutely fascinating. Go ahead. Stig, you had something you want to say? Yeah. And I think he brings an example with Aval. Is he saying that Aval have high margins, but that's attracting a lot of competitors in terms of, for instance, the smartphones. Yeah. While low margins, that attracts customers. And that is the viable strategy.

Starting point is 00:09:45 Yeah. No, I saw you had one thing before I took your word there. No worries. In fact, he ties this low margin back to his customer sensitivity. He says that if I'm operating at low margin, it is good for my customers because I'm delivering value to them in the end. So it's funny. All this discussion kind of has me thinking of this particular piece in the book.

Starting point is 00:10:10 It was early on, I want to say like maybe chapter two. And the employees were recalling this quote that Bezos had said during one of their meetings. And he said, we don't make money when we sell things. We make money when we help customers decide on the right purchase. And it's just, I mean, it's just another thing. And you're like, you know, most people, if they ever heard that, would think, that guy's out of his mind. But then you look at what he's creating and it's just, it's mind-blowing. Hari, go ahead.

Starting point is 00:10:35 You hit some. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord. And every conversation you have is with people who are actually shaping the future. That's what the Oslo Freedom Forum is. From June 1st through the 3rd, 2026, the Oslo Freedom Forum is entering.

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Starting point is 00:14:47 Kristen, you're about a good point. In fact, while talking about Kindle, Bezos says that we sell Kindle. at near break even because we don't want to make money when we sell the product, but we want to make the money when the customer actually uses it. And that goes back to what Stig was talking about how Apple has a huge margin on their products, whereas Amazon just took the completely opposite approach. So let's go ahead and move. So that was the first point that we all kind of extract out of the book, which was this idea that he is just absolutely focused on the customer and just, you know, his employees and from the shareholder or owner's standpoint, it's just like they don't even

Starting point is 00:15:30 exist. So that's really the first point we pulled away. So Stig has a second main theme that he found in the book that he wants to bring up. I really like the thoughts about whether Amazon was a retailer or Amazon was a tech company. And there was something that was going on and on and on about the book. And to be honest, I think that's something that's something that. that they are, if not struggling with right now, it's definitely something that is challenging them right now. Because they definitely started out as a retailer and the way they were doing things was definitely as a retailer.

Starting point is 00:16:02 So for instance, they were starting out with books because they said that books was a commodity. So that was something that all customers understood and it was also, by the way, a low margin product. And they're thinking like retailer in terms of they want to have everything. It's really the everything store. And they have these funny stuff,

Starting point is 00:16:20 about how they were building inventories by buying toys from the competitors. So it was really like entering themselves. So it's a really like a retail way of thinking. But at the same time, they're thinking like a tech company. And they now implemented big data. They want to, when they started developing Kindle, they didn't have any resources, internal resources, but simply, you know, build up a division that could build these Kindle.

Starting point is 00:16:49 They are competing with Google about high-scale programmers. So I think that what Jeff Bezos is actually doing is he's saying, you cannot put me in a box as a retailer, or you can't tell me that I have a tech company. I can actually take the best from both worlds. At least that's my expectation. I don't know how you see that discussion going on. Yeah, I'm really interested to hear Hari's opinion out there in Silicon Valley.

Starting point is 00:17:15 What's, you know, everyone out there say? That's a good point, Stig. In fact, in the last chapter of the book, the author talks about how Amazon is moving from an everything store to an everything company. And if you look at the history of Amazon and how Jeff got the idea of Amazon, it was actually in his hedge fund, D.E. Shah, where he was working for this charismatic leader. and the hedge fund were set up as a technology shop focusing on finances. And in fact, I think Bezos took that idea. And one of the ideas was actually everything stored that was being discussed in the DeShop company. And that's how Amazon was born.

Starting point is 00:18:05 Bezos is a computer graduate by education. So he is well aware of technology. he has expanded into a lot of areas that traditionally belong to, say, Googles and apples of the world, but he had a lot of struggle in doing that. In Silicon Valley, he has set up two subsidiaries of Amazon, Lab 126 and A9. It has been a struggle, but it's catching up now. However, within the valley, from my personal experience, Amazon is not among the top employers in terms of, you know, engineers' preference.

Starting point is 00:18:47 If you look at some of their products, maybe the recent phone that they released, it's really hard to compare them with somebody like Apple or Google and the programmers. In the Valley still, I think Google and Apple are treated as the A team. Yeah. When it comes to like, you know, mobile devices or application development. Amazon is getting there, but I don't think they're still in the same link. Yeah, I don't think that their phone has been selling. The new phone that they just came out with has been selling as well as they would like.

Starting point is 00:19:22 I don't know if it's really a branding issue. I really think there's so much stickiness with the iTunes for the phones and the applications and same with the droid that I think it's very hard for them to step into that market. I mean, they are really going to have to practically give away, I think a lot of applications for people in order for them to start. it's switching over. But let's move to your point, Hari. The third point that we're going to bring up the third theme in the book,

Starting point is 00:19:49 Hari's going to go ahead and discuss. Sure. So before I talk about my third theme, I just want to add that even though they are not really good at the mobile devices, the phone or the tablets that they have recently released, we have to give them credit for finally solving the computing problem with Amazon Web Services. In fact, Eric Smith, the chairman of Google, gave them credit that what the computer guys couldn't solve, this retailer finally solved it for the customers. I like how you guys referred to them as the retailer.

Starting point is 00:20:29 All right. Cool. Yeah. So going back to my thing, the final thing that we're going to discuss today, the key takeaway for me from this book and from Jeff is time horrid. reasons matter. In fact, this is in the book as well as in an interview that Jeff gave recently. He said if we, when he says we, it is humans. So if he says if we think long term, we can accomplish things, we wouldn't otherwise accomplish. He gives an example. He says if you are asked to solve world hunger in five years, you would rightly decline the challenge because you think it's impossible.

Starting point is 00:21:11 But he says, if I ask you to solve world hunger in the next hundred years, now that is a different question altogether, and it's more interesting. So he says that by changing the time horizon and by being persistent, a business or an individual can accomplish things that he would otherwise think are impossible. In fact, one of his friends, Danny Hills, in an interview said that it's not what just Jeff thinks, but this was what Jeff had in his mind when he started Amazon. For Jeff, Amazon was a multi-decade project. And he believed that he can accomplish his vision if he thought long time.

Starting point is 00:22:01 And as you said, Kristen previously, that, like how Peter Thieryth, Phil mentions in his book 0 to 1 about monopolizing a small market segment, even though your vision might be big, Jeff really embodied that when he started Amazon. He started small, focused on books, really monopolized that industry while others were not paying attention. And then he started expanding out. I mean, he was so focused. This was another point. And it was later in the book that I just was, in my eyes were just like, oh my God, this guy's brilliant. He was, he set up a team, which was a competitive advantage team.

Starting point is 00:22:42 And what they would do is, let's say that they were, one specific niche on his site was selling something and there was some competitor that was coming along and doing things better. This competitive advantage team, their job was to find somebody out there that was doing something or selling something better than they were, figure out how and why they were doing it, determine whether they could implement that. process that this competitor was doing within their own ranks. And if they couldn't, what could they do in order to purchase and buy them out? And what was their strategy in order to do that?

Starting point is 00:23:12 And I just was just like, this guy's amazing. Like, it was unbelievable. Some of the things that he was that he was putting in place and managing within the company at such a large scale, especially later on, it was just fascinating. Preston, you brought a very good point. In fact, Jeff has an interesting take on competitive advantage for Amazon. And he says, we would like to weave a rope of many small advantages to build our motor, our competitive advantages. So that's, that I thought was an interesting take on competitive advantage.

Starting point is 00:23:49 You know, this is something that I really took away from it, is his biggest competitive advantage is trust. Like, he doesn't put more value in anything other than trust. It was really near the end of the book. He was talking about how his email marketing team were sending out something and it could potentially compromise a person if they were looking at something that was like a little off topic on their website and then they would send out messages later on. And that just really disturbed Bezos. He was really upset that these messages that were going out could potentially break that trust that they had with their customers and that he didn't really place anything bigger and more important within the company than that trust. I think that that's his true competitive advantage over anything else is that he has this trust with the customers and that people just keep coming back and coming back because they have that trust of the company.

Starting point is 00:24:44 And just something to add here, when Amazon started with the reviews, and I think that's really something that Amazon is famous for here. I know, at least for my part, I'd like to read reviews before I buy a product on Amazon. The first reviews that was written on Amazon was actually done by the employees of the company. and some of the reviews, which was books back then, were actually negative. And there was a publisher who called up Bezos and told him, what are you doing? You're supposed to sell books. Why are you writing bad reviews?

Starting point is 00:25:16 He's saying, I'm not in the business of selling books. I'm in the business of helping customers to make the right decisions. And I just thought that was so strong and that's really related to this thing about trust that President was talking about. Let's take a quick break and hear from today's spot. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one

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Starting point is 00:28:43 can be found in the income funds prospectus at fundrise.com slash income. This is a paid advertisement. All right. Back to the show. Oh, that's a great point, Stig. I really like that. So I'll tell you, you guys are probably listening to us talk about this and we're kind of jumping all over the place. And it's probably more because this book was so filled with just amazing business information. I mean, it's the Financial Times and Goldman Sachs Business Book of the Year. So if you haven't read this thing and you're interested in business, I'll tell you, you've got to get out and read this book. It's unbelievable. I want to really quickly go over one piece here and then we're going to have to try to wrap things up.

Starting point is 00:29:21 The one thing that I wanted to cover was Amazon's six core principles. We can't really go into depth kind of describing all these. And to be honest with you, if you want to really kind of get the full gist and something that's a little bit more organized in the way that we're talking through this, you're going to want to go and download all of our executive summary that Stig and I are putting together. It's about five pages long in a PDF format. So you can go to our website and download that. And it's going to be much more organized than really the show notes. But real fast, let's go through these Amazon six core principles. The first one is customer obsession.

Starting point is 00:29:54 So that's one we kind of already hit on, and that's his very first core principle. The next core principle was frugality, and he talks about how really, I guess the best word is, how cheap he was by employing the company's money. If he was going to take a jet ride out to Hawaii for one of his employees or something like that, it was always done on his own dime. He never used company funds in order to do something like that. He was very frugal with the company money and how he employed it. The third one was his biased for action.

Starting point is 00:30:23 So this one really kind of covers just having really big and great ideas, but putting a small amount of capital on a small team to try to exercise and start to discover whether there's some traction in that particular area of interest. So he had a bias for action in these different ideas and these different segments that he'd come up with. The fourth point that he had was ownership. This kind of goes back to the last book that Stig and I read with a science of success with Charles Koch, and that he wants people within his.

Starting point is 00:30:53 company to think from that ownership standpoint. So you see a lot of very similar themes amongst all these billionaires and these top CEOs, and that's one of them. The next one, which is number five, which also is another one that Charles Koch and Warren Buffett and a bunch of others have, is that they have a very high bar for the talent within their organization. They are looking for the top people and what they've got to do in order to get them, and more importantly, what they've got to do to retain them. And then the very last one is innovation. Jeff Bezos is, a very innovative person. He might just have started off as a retailer, but he has some very grandiose ideas. And some of them relate to doing space exploration, to being a technical

Starting point is 00:31:35 company that's giving IBM a run for their money, amongst many other things. So those were his six core principles. I wanted to talk about those. And the final thing that we want to discuss on the show, I want to throw it over to Hari because he wants to talk about this relationship between Jeff Bezos and Steve Jobs. Thanks, Christian. While I was reading the book, a couple of things stuck me, and one of them was the parallel between how jobs operated and thought and how Jeff has been operating Amazon and how he thinks. I want to highlight some of the key points that I found were interesting or very similar. The number one, which is common among many entrepreneurs, not just between Jeff and job,

Starting point is 00:32:18 is the drive, intensity and the vision. both of them had intense drive and also they stuck to their through thick and thin and then employees or people gathered around and started following them both of them have embraced disruption in fact cannibalized their own products jobs doing it with iPod when he launched iPhone pretty much he cannibalized iPod at that point of time and Jeff did it with his Kindle business where he knew it will eventually cannibalize his book retailing business and he was aware of it and he did it deliberately. And in fact, he says that it's always better you cannibalize your own business rather than letting somebody else do it for you.

Starting point is 00:33:10 And the next one is a relentless focus on customer, in fact, an obsession. And Jeff, in fact, was famous for having an empty chair in a conference room representing the customer. So both of them were obsessed with customers then, as you mentioned earlier, gaining their trust. And the last one, though it's not really important, but is a coincidence in their personal life, is that both of them were separated from their biological fathers at a very early age and adopted by somebody else in case of Steve Jobs and in case of Jeff Bezos, his mom married another person. But both of them had a very good childhood nonetheless. Very interesting points, Hari.

Starting point is 00:33:56 It's interesting to see both of these gentlemen have a much different approach than like Warren Buffett, who we usually spend a lot of time on. And yet here they are enormously successful in business, but yet they've taken on a different approach and a different model. So, okay, guys, well, let's go ahead and move to our question that was submitted to the show this week. And this question here, we're going to go ahead and read because it was typed up and sent to us. And this question comes from internet cret. And what she says is that what is the best way to find companies to evaluate based on Buffett's criteria? Do you use an

Starting point is 00:34:28 online stock screener, companies you know, newspapers? What do you guys use? So Stig's going to go ahead and answer this question. I'd say I'll probably have three different approaches to finding finding right stocks. I definitely think that stock screens are a good idea. You probably looked at it yourself and you can put in inputs like what should the RREE be of the company and what should the price earnings be and these things. So I definitely think that that's a viral strategy. Other than that, I am looking at the filings that investors that really respect but they're buying. So for instance, Warren Buffett, he has to file four times a year and telling your public what he is buying. So I would use that as a sheet to go buy one by one and say, is that something with me?

Starting point is 00:35:19 Is that within my circle of competence to invest in that company? And then the third thing, I just talk to a lot of people. And if there are some people not at trust, then I will look closer into it. I don't think that necessarily you have to be a billionaire to make good stock picks. But if a trustor source is telling me that he or she are going into a stock, very often I would take a closer look at it. With that said, I really want to stress that because Warren Buffett is buying something or you hear that your best friend is buying something,

Starting point is 00:35:54 you really shouldn't act too much. I think I bought two stocks this year. And I kind of feel like I've been over-trading. So you probably also feel that I'm pretty conservative. But I don't think I get all the good ideas myself. I think that you mainly get that from other people. Stig, that's a great point because I think a lot of people don't realize how few times we're actually buying a different company.

Starting point is 00:36:21 For this past year, I'd say I'm pretty close to where you're at where I've only really been buying about four to three maybe different companies throughout the throughout the year. Now, I'm buying them, you know, I typically only do one purchase per month. So all of my cash flow is put into that one particular pick. But I'm buying the same type of pick over and over again. And I'm not really making a lot of, you know, I'm not picking 20 to 25 different companies here. It's usually pretty focused on companies that I feel are a good price at a particular point in time. And if the market kind of moves in a different direction and something else becomes undervalued, then I might start moving into that and focusing my cash flow into that monthly.

Starting point is 00:37:03 So, okay, yeah, go ahead, Hari. Preston, you brought up a very good point. 13F is a great way to follow a lot of great investors, but the danger or the risk is that you might follow too many of them, and you might start buying a lot of stocks that you can comprehend and you can understand. and you both brought up a really good point that we should limit ourselves to few that we can understand and focus on that. Yeah, I mean, if you're really reading the 10Q and the 10K on these companies, if you own more than 10 or 15 picks, I mean, that's all you'd be doing would be reading these things. So I personally have to keep it to a manageable level.

Starting point is 00:37:48 And I mean, when you look at a company like, let's just say, Berkshire Hathaway, I mean, he owns, what is it, 67, or 70 different operational companies that are on all these different fields. So if you're buying that particular pick, you're literally spreading your money across a breadth of all these different companies, not just an individual pick. Same thing with Amazon. I mean, that's obviously something that I'm not buying because of the profit margin versus everything else and the capitalization rate on it. That's a company that's spread across all these different areas.

Starting point is 00:38:21 It's not just focused in one particular thing. And so when you're buying an individual pick or you're buying an index or something like that, you can focus on that one thing if it's a large cap company that has things spread across a breadth of different areas. So just something to think about for people as they go forward. So that concludes our show this week. We would really like to thank Hari Ramachandra for coming on the show. If you'd like to read more about Harri's blog, you can go to bitsbusiness.com. Hari, thanks for joining us. We'd really highly recommend this book.

Starting point is 00:38:51 It's called The Everything Store by Bradstone. and it's all about Jeff Bezos. If you'd like to read our executive summary, if you don't have time to go through the whole book, Stig and I will have that posted on our website. And if you sign up on our mailing list, you'll get all of our executive summaries for all the books that we read. So thanks for joining us this week, and we'll see you next week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show,

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