Preston Pysh 9:26
Yeah. And it’s, 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 what, you know, everyone out in business thinks marg–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 then he–if 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?
Stig Brodersen 10:04
Yeah. And I think he, he brings an example with, with Apple. There’s a saying that Apple have high margins, but that’s attracting a lot of competitors in terms of, for instance, the smartphones.
Preston Pysh 10:15
Yeah.
Stig Brodersen 10:15
While low margins that attracts customers, and that is the viable strategy.
Preston Pysh 10:19
Yeah.
Stig Brodersen 10:20
Hari, I saw you had one thing before, before I took over there.
Hari Ramachandra 10:24
No worries. In fact, he ties this low margin back to his customer centricity. He says that if I’m operating in low margin, it is good for my customers because I’m delivering value to them then.
Preston Pysh 10:38
So it’s funny. All this discussion kind of has me thinking of this particular piece in the book, 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 to 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. You had something?
Hari Ramachandra 11:12
Preston, you brought up a good point. In fact, while talking about Kindle, Bezos says that, “We sell Kindle at near breakeven 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 there on their products, whereas Amazon just took the completely opposite approach.
Preston Pysh 11:40
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, as employees and from the shareholder-owners’ standpoint, it’s just like they don’t even exist. So that’s really the first point we pulled away. So Stig has a, a second main theme that he found in the book that he wants to bring up.
Stig Brodersen 12:01
I real–really liked the, 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 they are if not struggling with right now, it’s definitely something that is challenging them right now. Because the definitely started out as a retailer, and the way they were doing things was definitely as a retailer. So for instance, they were starting up 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 stories about how they were building inventories by buying toys from the, from the competitors. So it was really a buy into (*inaudible*) their selves. 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 a big data. And 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. And they are competing with Google about high-skilled programmers. So I think that what this Jeff Bezos 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, that’s my interpretation. I don’t know how you see that discussion going on.
Preston Pysh 13:36
Yeah, I’m really interested to hear Hari’s opinion out there in Silicon Valley. What’s, you know, everyone out there say?
Hari Ramachandra 13:42
Oh, that’s a good point, Stig. In fact, the last chapter of the book, the author talks about how Amazon is going 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– beIsha where he was working for this charismatic leader. And the hedge fund was 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 store that was being discussed in in the D/E sharp company. And that’s so Amazon was born. Bezos is a computer graduate by education. So he is well aware of technology. He has expanded into a lot of areas that not traditionally belong to say Googles and Apples of the world. But he had a lot of struggle in doing that. In, in, 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 of from my personal experience, Amazon is not among the top employers, in terms of, you know, engineers’ preference. 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.
Preston Pysh 15:23
Yeah.
Hari Ramachandra 15:23
I mean programmers. In the valley, still, I think Google and Apple are treated as the A team.
Preston Pysh 15:29
Yeah.
Hari Ramachandra 15:30
When it still, like, you know, mobile devices are application development. Amazon is getting there, but I don’t think they’re still in the same league.
Preston Pysh 15:41
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. I don’t know if it’s really a branding issue. Just–I, 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 switching over. But let’s move to your point Hari: the, the third point that we’re going to bring up; the third theme in the book, Hari’s going to go ahead and discuss.
Hari Ramachandra 16:15
Sure. So before I talk about my–the third theme, I just want to add that even though they are not really good at the mobile devices, the, the phone or the tablets that, that they have recently released, we have to give them credit for finally solving the computing problem with Amazon Web Services. In fact, Eric Schmidt, the chairman of Google gave them credit: That what the computer guys couldn’t solve, this retailer finally solved it for the customers.
Preston Pysh 16:48
I like how you guys referred to them as as “The Retailer.” All right.
Hari Ramachandra 16:54
Cool. Yeah. So going back to my miting (*inaudible*), the final theme that we are gonna discuss today. The key takeaway for me from this book and from Jeff is time horizons 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 used 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. But he says, “If I asked 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 thought impossible. In fact, one of his friends, Danny Hills, in an interview said that, “It’s not just 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, he believed that he can accomplish his vision if he thought long term. And, as you said, Preston, previously, that like how Peter Thiel mentions in his book, Zero to One, 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.
Preston Pysh 18:54
He, I mean, he was so focused. This was another point and it was later in the book that I just was–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. 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? 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.
Hari Ramachandra 19:50
Preston, you brought up a very good point. In fact, Jeff has an interesting take on competitive advantages for Amazon, and he says, “We would like to be the rope of many small advantages to build our mortar, our competitive advantage, advantage.” So that’s that I thought was an interesting take on competitive advantage.
Preston Pysh 20:13
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, 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 basis, he was really upset that, 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, and I think that that’s his true competitive advantage or 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 with the company.
Stig Brodersen 21:08
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 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 running bad reviews?” 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 Preston’s talking about.
Preston Pysh 21:53
Yep. 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. 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, I’ll tell you gotta 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. 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, 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’s six core principles. The first one is customer obsession. So that’s one we’ve 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 right 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 bias for action. So this one really kind of covers just having really big and, and great ideas, but putting a small amount of capital and 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, 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 company to think from that ownership standpoint. So you see a lot of very similar things. 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, 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 company that’s giving IBM a run for their money, amongst many other things. So those were his six core principles. I want 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.
Hari Ramachandra 24:52
Thanks, Preston. While I was reading the book, a couple of things struck me and one of them was the battle 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 Bob–is the drive intensity and the vision. Both of them had intense drive and also stuck to their vision 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. And the next one is of 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 it’s 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.
Preston Pysh 26:55
Very interesting point, Hari. 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 online stock screener; companies you know; newspapers, what do you guys use?” So Stig’s gonna go ahead and answer this question.
Stig Brodersen 27:37
I’ll say I probably have three different approaches to finding, finding right stocks. I definitely think the stock, stock screens are a good idea. You probably looked at it yourself, and you can put in inputs like what should the RE of the company, and what should the price earnings be, and these things? So I definitely think that that’s a viable strategy. Other than that, I am looking at the filings that investors that I really respect, what they’re buying. So for instance, Mr. Buffett, he has to file four times a year and telling your public what he is buying. So I will use that as a sheet to, to go buy one by one, and say, “Is that something with me? 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 that I 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 I trust the sources telling me then that he or she are going into a stock; very often, I’ll take a closer look at it. And 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, you really shouldn’t. You shouldn’t act too much. I think about 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, all the good ideas myself. I think that you, you, you mainly get that from, from other people.
Preston Pysh 29:15
Stig, that’s a great point ’cause I think a lot of people don’t realize how few times we’re actually buying a different company. 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, 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 some–something else becomes undervalued, then I might start moving into that and focusing my cash flow into that monthly. So okay. Yeah, go ahead, Hari.
Hari Ramachandra 30:07
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’t comprehend, and you can’t 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.
Preston Pysh 30:36
Yeah, I mean, if you’re really reading the 10Q and the 10K on these companies. If you, if you have more than 10 or 15 picks, I mean, you–that’s all you’d be doing; would be reading these things. So I personally have to keep it to a manageable level. 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 the 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, but–and the capitalization rate on a bit. That’s a company that’s spread across all these different areas. 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, 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 Hari’s blog, you can go to bitsbusiness.com Hari, thanks for joining us. We’d really highly recommend this book. It’s called, The Everything Store by Brad Stone and it’s all about Jeff Bezos. Iif 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.
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Outro 34:02
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