My summary of “A Few Lessons for Investors and Managers”
I think value investing provides a sophisticated lens for viewing technology companies and technology investments. Ultimately, successful businesses have commonalities — even though the particulars change by location, time, and industry.
“A Few Lessons for Investors and Managers” is a distillation of Warren Buffett’s advice. The book primarily cites Buffett’s annual letters to Berkshire Hathaway shareholders and his booklet titled An Owner’s Manual.
Buffett, a student on Benjamin Graham and the most famous value investor, has much to share. The following are my key takeaways from the reading.
Quick note: The numbers in parentheses relate to the specific shareholder letter that is referenced. In other words, “2010” means it came from the 2010 Berkshire Hathaway Shareholder Letter.
“Our inability to pinpoint a number doesn’t bother us: We would rather be approximately right than precisely wrong.” (2010)
“Using precise numbers is, in fact, foolish; working with a range of possibilities is the better approach.” (2000)
If you are concerned with protecting your ego, you build a vast army of support for your assumptions. And you are lulled into a false sense of security based on the accuracy of your projections.
Will you really earn $10,200,000 in revenue next year? Or is somewhere based on $8,000,000–11,000,000 based on numerous internal and external factors?
“The situation is suggestive of Samuel Johnson’s horse: “A horse that can count to ten is a remarkable horse — not a remarkable mathematician.” Likewise, a textile company that allocates capital brilliantly within its industry is a remarkable textile company — but not a remarkable business.” (1985)
I cannot stress how important this is. Buffett wrote this in over three decades ago. It was 1985! That was the year the Chevy Celebrity was selling like hot cakes. (Nobody to this day knows why.) 1985 was also the year a movie called Back to the Future aired on screens nationwide.
Since then, we have lived through the dot-com and housing corrections. In both cases, we collectively forgot this lesson. To put it bluntly: Food delivery is a terrible business, even if you offer a great service. Hell, I even see this being tried again today and I still don’t understand it.
Let me be clear, I have yet to see a food delivery company that has attractive unit economics. If you have proof to the contrary, please let me know.
So who does this well? Jeff Bezos and the entire Amazon team understand this concept at their very core. Bezos is remarkable for his ability use Amazon’s revenue from its retail business to fund new, exploratory ventures.
Notable examples include: Amazon Prime, Amazon Video, Amazon Music, Amazon Fresh, Amazon Go, Amazon Web Services, Amazon Studios, Kindle, Fire Tablets, Fire TV, Alexa (including Echo, Tap, and Dot), Audible, CreateSpace, A9.com, Twitch.tv, Goodreads, Woot, IMDb, and Zappos.
While these may seem like different businesses stitched together, they actually (1) work very well together and (2) all provide a return-on-investment that is higher than the cost of capital.
And since I love shareholder letters:
“This year, Amazon became the fastest company ever to reach $100 billion in annual sales. Also this year, Amazon Web Services is reaching $10 billion in annual sales.
Superficially, the two could hardly be more different.
Under the surface, the two are not so different after all. They share a distinctive organizational culture that cares deeply about and acts with conviction on a small number of principles. I’m talking about customer obsession rather than competitor obsession, eagerness to invent and pioneer, willingness to fail, the patience to think long-term, and the taking of professional pride in operational excellence. Through that lens, AWS and Amazon retail are very similar indeed.”
— Jeff Bezos, 2015 Amazon Shareholder Letter
There is a dichotomy in types of business. There is an “I-have-to-be-smart-every-day-business” and there is an “I-have-to-be-smart-once-business”. An example of the former is retail, where you always have to stay ahead of your competition and other companies can quickly copy or learn from you. An example of the latter is provided by Buffett himself:
“In contrast to this have-to-be-smart-every-day business, there is what i call the have-to-be-smart-once business. For example, if you were smart enough to buy a network TV station very early in the game, you could put a shiftless and backward nephew to run things, and the business would still do well for decades.” (1995)
“In a finite world, high growth rates must self-destruct. If the base from which the growth is taking place is tiny, this law may not operate for a time. But when the base balloons, the party ends: A high growth rate eventually forges its own anchor.” (1989)
There are very few businesses that can continue to scale long enough to become a publicly traded company. If you think of the total addressable market (TAM), it needs to be in the tens — or hundreds — of billions for several reasons.
First, no business reaches 100% market share. Not even Windows or Google search. Second, most TAMs are not as large as people predict. The operating system Windows generated ~$20 billion per year for Microsoft at its peak. Keep that in mind when you see entrepreneurs talking about markets that are $10 billion, $50 billion, or $100 billion in size.
Noteworthy exceptions chasing huge markets: Stripe and Braintree in online payment processing. As long as credit and debit cards are used, both companies have bright futures. Stripe’s CEO Patrick Collison estimates that about 2% of financial transactions by volume happen online and 98% happen offline.
So even if there’s no economic growth, there’s a potential that all online payment processors combined could still grow to be 30, 40, or 50x larger than it is today. That’s a rare thing.
And my favorite one:
“More money, it has been noted, has been stolen with the point of a pen than at the point of a gun.” (2000)