Money out of Air
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Money out of Air

The Most Important Investor Letter Jeff Bezos Ever Wrote

Amazon spends more money on research and development than both Apple and Alphabet (Google). My first thought after reading this was: no way and how? Apple nearly has a monopoly on the smartphone market and Google is still the largest search engine and yet Amazon is still investing more into product. Here’s the chart for those who want to see it:

After seeing how much money Amazon spends on R&D, I set out to figure why. I had to know what Amazon was doing and why they were doing it. I found the answer in an investor letter written by Jeff Bezos back in 2010. I’ve read the entire thing and below I’ve shared the most important things he said below. This investor letter set the stage for Amazon’s decade of growing faster than everyone in retail sales.

1. What the Amazon campus feels like

“Random forests, naïve Bayesian estimators, RESTful services, gossip protocols, eventual consistency, data sharding, anti-entropy, Byzantine quorum, erasure coding, vector clocks… walk into certain Amazon meetings, and you may momentarily think you’ve stumbled into a computer science lecture.”

2. Amazon pushes to always be better focused on the future than the next competitor

“While many of our systems are based on the latest in computer science research, this often hasn’t been sufficient: our architects and engineers have had to advance research in directions that no academic had yet taken. Many of the problems we face have no textbook solutions, and so we — happily — invent new approaches.”

3. Amazon thinks deeply about system architecture

“Our technologies are almost exclusively implemented as services: bits of logic that encapsulate the data they operate on and provide hardened interfaces as the only way to access their functionality. This approach reduces side effects and allows services to evolve at their own pace without impacting the other components of the overall system. Service-oriented architecture — or SOA — is the fundamental building abstraction for Amazon technologies. Thanks to a thoughtful and far-sighted team of engineers and architects, this approach was applied at Amazon long before SOA became a buzzword in the industry.”

4. Amazon started AWS because they had no other choice and they saw the future it opened up for them

“The advances in data management developed by Amazon engineers have been the starting point for the architectures underneath the cloud storage and data management services offered by Amazon Web Services (AWS). For example, our Simple Storage Service, Elastic Block Store, and SimpleDB all derive their basic architecture from unique Amazon technologies.”

5. Tech is not a department, it’s built into each team

“All the effort we put into technology might not matter that much if we kept technology off to the side in some sort of R&D department, but we don’t take that approach. Technology infuses all of our teams, all of our processes, our decision-making, and our approach to innovation in each of our businesses. It is deeply integrated into everything we do.”

6. How finished products should look according to Bezos

“To paraphrase Arthur C. Clarke, like any sufficiently advanced technology, it’s indistinguishable from magic.”

7. Bezos firmly believes his tech will lead to free cash flow, which pleases investors

“Now, if the eyes of some shareowners dutifully reading this letter are by this point glazing over, I will awaken you by pointing out that, in my opinion, these techniques are not idly pursued — they lead directly to free cash flow.”

8. There is a distinction between tech and invention

“Invention is in our DNA and technology is the fundamental tool we wield to evolve and improve every aspect of the experience we provide our customers. We still have a lot to learn, and I expect and hope we’ll continue to have so much fun learning it.”

Amazon’s stock price is up more than 500% since Bezos wrote this 2010 investor letter. Over that time frame, many investors and market thinkers were baffled by Amazon. The company had no earnings. Why would you buy a stock that has almost no earnings? Had you read this one investor letter, you would have understood Bezos was focused on technology and free cash flow, which lead to getting ahead of the next company or competitor.

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Scheplick

I write about investing and manage my own account. I look for misunderstood companies that can be big long-term winners.