Conclusion on Amazon.com, and a word on intelligent fanatics

I hope you enjoyed my first two posts on Amazon.com. If you missed them, you can read them here:

Why Amazon.com scares, and fascinates me – Part 1

Why Amazon.com scares, and fascinates me – Part 2

The focus of these two posts were the disruptive nature of Amazon.com. I looked at how reading a few books on Amazon.com had been enough for me to evaluate my current portfolio, and to put on hold any future investments. I really felt that I needed to fully grasp what Amazon.com has become, and more importantly what it will become in the future.

The impact of Amazon.com extends far further than the impact it has on retailers, and the online stores vs bricks and mortar debate. Among many others, it includes the impact on manufacturers and consumer brands. Does Proctor & Gamble have the same value it used to?, when a company like Dollar Shave Club can so quickly take away market share in the razor blade market, largely using Amazon.com for distribution.

So I hope I have been able to convince you that Amazon.com is a factor to consider in making any future investment decisions. I am not an Amazon.com basher in that I like the convenience of their service, which I must say is very good and efficient. I do take the point that they have put many small independent stores out of business, especially book stores for example which I am sad about, but my question here would be, was this because of Amazon.com or because of changes in technology? If not Amazon.com then surely somebody else would have done the same. Amazon.com did not invent the internet or e-commerce, but you could argue they have perfected it. There are other issues like them not paying tax in certain jurisdictions/countries, but that is not within the scope of this post.

Lastly, before moving onto Jeff Bezos himself, I think a quote from the everything store book by Brad Stone sums up my reasons for considering Amazon.com as a factor to consider in any future investments. “Amazon may be the most beguiling company that ever existed, and it is just getting started. It is both missionary and mercenary.” And if that was not enough to get you worried, he continues to say “It will continue to expand until either Jeff Bezos exits the scene or no one is left to stand in his way.” Ouch!

Jeff Bezos, the intelligent fanatic

It was Warren Buffet’s business partner Charlie Munger who first coined the phrase ‘intelligent fanatic’. He used the phrase when describing business CEO’s who were fanatically building businesses, and who had the necessary intelligence, focus and energy to rise above competitors. He used the example of Sam Walton who, starting at the age of 44 and with one store in Bentonville, Arkansas, went on to build the massive retailer that is Wal-Mart. You would quite simply have to be fanatical to build such a big business so quickly. I read Sam Walton’s autobiography Made in America, and remember reading how he would be in the office at 4am, even on a Saturday! He was a retailing genius, but it was combined with fanatically hard work, focus and energy.

Jeff Bezos is without doubt also an ‘intelligent fanatic’. Starting Amazon.com in 1994, out of his garage, he has built it into what it is today. Not without help of course, because he had the foresight to hire only the most intelligent people right from the beginning. He is not easy to work for and drives people extremely hard.

However, reading the various books and articles about Jeff Bezos, the central theme is that he was fanatical about the customer having a good experience. In the early days, the book chain Barnes & Noble said they would crush Amazon.com. Jeff Bezos told his staff to wake up scared, but not scared of Barnes & Noble, but of not satisfying a customer. He has always been fanatically obsessed with the long term and doing things which will make Amazon.com a better company at the expense of short term profits.

I have recently been reading all the annual shareholder letters written by Jeff Bezos since 1997. He still includes the 1997 letter with each years annual report, because the vision was set then. He said then that the emphasis is on the long term and he wants to build a company with scale, before he worries about profits. The stock was punished for a long time because profits were slow in coming, but his vision has been validated. You could also have bought the stock in 1997 for under $5. Now you will pay around $760. So a $10000 investment in 1997 would be worth around $1.52m today. Even in 2007 you could have bought the stock for around $40.

I am now spending a lot of time looking at past annual report letters and articles on CEO’s, and trying to identify a future ‘intelligent fanatic’. It needs to be in an area that you are comfortable with. I for example would not be looking at a fanatical CEO of an auto stock. I may however look at a list of beverage businesses or retailers, and see who stands out.

You need to look at your own strengths, and be a little fanatical yourself in uncovering a great business, led by an ‘intelligent fanatic’. There are other future Amazon.com’s out there, although perhaps in other industries.

I must just add my appreciation to Ian Cassel here, whom I follow on twitter (@iancassel). I learnt the concept of an ‘intelligent fanatic’ by reading some of his posts, and he is writing a book on the subject which is being released on 15 September 2016. The book is called Intelligent Fanatics Project: How Great Leaders Build Sustainable Businesses. I am sure it will be an excellent read based on what I have read so far on his website.

Conclusion

Part of my reason for starting this blog was that it concentrates ones thoughts, and is a sort of memo to yourself.

So to conclude, the three main lessons I have learnt from writing these posts are:

  1. Amazon.com is a formidable company, you need to consider them whenever investing. Think of industries that have not yet been affected. I read recently that they are making inroads into the auto business. This list will get ever longer.
  2. Jeff Bezos is an intelligent fanatic. Finding an intelligent fanatic early, may lead to a life changing investment. Look at what CEO’s say in their letters, and then also what they do.
  3. Amazon.com may be an expensive stock, but I for one will be keeping an eye on it. It has been going 21 years, it is still a young company. It is run by an intelligent fanatic. Perhaps a great opportunity is still staring us in the face.

Lastly, if you know of any other fanatics, let me know. Who says investing is not interesting!

Recommended reading:

 

 

 

 

 

Why Amazon.com scares, and fascinates me – Part 2

Last week I looked at why you need to consider Amazon.com when making investment decisions (see Part 1 here). I said that I had put all investment decisions on hold until I could grasp the effect of the story of a company called Dollar Shave Club, which has disrupted the razor blade market.

Here are a few more areas of concern, where I would not allocate capital without a great detail of research:

Food retail:

Amazon.com now has a grocery delivery service in London called Amazon Fresh. While still small, Amazon.com never seems to stay small, so what effect will this have on retailers in the UK like Tesco and Sainsbury’s? They are already in a deadly battle with discount retailers Aldi and Lidl. Sorry, but this Dividend tycoon will not be investing in mainstream UK retail stocks anytime soon.

I would probably extend this retailer investment ban on myself to retailers in the USA such as Wal-Mart, but I think many of these will be okay as long as they continue to develop their own online presence. Having said that my due diligence before investing in a company like Wal-Mart is higher than it used to be.

I have however invested in a small retailer in Africa, called Choppies. Very small, but a similar modus operandi to a 1970’s Wal-Mart, growing in small towns in countries like Botswana, Zimbabwe and Kenya. I am more confident that they will not be affected by Amazon.com for quite some time.

Property/Malls:

I read an article recently about America’s dying shopping malls. The article was specifically about some malls owned by General Growth Properties Inc. They had missed a payment on a mall in Detroit.

Now I am sure many malls will be fine, but older malls in poor locations are being hard hit by the rise in online shopping.

This is an area where I am still wanting to invest. I wrote a post on a stock which owns 9 prime malls in the UK, which I felt was showing value as a result of Brexit depressing the stock price. However, the amount of due diligence required before allocating capital to stocks which own shopping malls is certainly higher than ever.

Niche retailers:

Outside of food retailing, I believe the everyday products we buy from niche retailers, such as clothes, computers, kitchen products, and staples are in danger of being sold in ever greater quantities through Amazon.com rather than through traditional niche retailers.

Did you just read that I said ‘staples’? This idea came to me a few weeks ago when I was reading a 2013 issue of Fortune magazine. The title of the article was ‘Stocking up on Staples shares’. The article was positive on the prospects for Staples (a large retailer of office products), and in fact of the four main points they made, number two was that ‘Amazon won’t crush Staples’. The reason being that 80% of customers are business customers, not retail customers. At the time, the price was around $14, and an analyst thought that in a year or two it should be trading in the high teens.

I thought it would be interesting to see where the stock was now. Lo and behold it is around $8, so has decline massively. Some investigation shows that they have been trying to merge (unsuccessfully as it turns out) with Office Depot as they feel they cannot survive the onslaught from Amazon.com. Things change quickly.

The point being, that products like office supplies, are so easy for Amazon to slot into their system. Needless to say, the only staples I will be investing in are for my stapler!

Conclusion:

These are just a few examples of how Amazon.com is going to have an effect on the business landscape in years to come. Last week I spoke of the two books I have read, especially the everything store by Brad Stone, which I recommend you read in order to get a feel for Amazon.com. Reading this book you realize that Amazon.com is not the phenomenon it is because of the rise of the internet and online shopping. These things were bound to happen anyway. If Amazon.com was not around, others would be. However, the phenomenon that made Amazon.com the leader of the pack by far, is Jeff Bezos.

In my next post I will explore the reasons why Jeff Bezos has made Amazon.com into what it is today. I will also look at what a CEO like Jeff Bezos means in the world of investing, and why finding people like him, particularly if you can identify them early, can lead to life changing investments.

Full disclosure: I have not placed adverts on this site at all yet. If I do in future they will be for products I trust and believe in. However, in an act of irony I must disclose that the book I have recommended above is my first step into the e-commerce world and I am, yes, an Amazon associate now! If you cant beat them, join them! Anyway, the book really is a very good and informative read, and should you order it through this site, it would be greatly appreciated!

 

 

 

 

 

 

Why Amazon.com scares, and fascinates me – Part 1

As I alluded to in my July dividend update, I have recently been spending a lot of time studying Amazon.com. This has mainly been from reading two excellent books, the everything store by Brad Stone, and Amazon.com Get Big Fast by Robert Spector. I have also been going through the annual shareholder letters from 1997 up to the present day, written by Jeff Bezos, the Amazon.com founder and CEO.

As an investor, one needs to look around you, and think about what the threats to your investments may be, or the opportunities. I believe Amazon.com more than any other company poses greater threats to established businesses than any other, and you certainly ignore Jeff Bezos at your peril.

As a Dividend Tycoon you need to find stocks that will grow profits for many years, and pay dividends as a result. This has traditionally been fairly easy to predict with the large blue chips such as Proctor & Gamble, Johnson & Johnson, Coca-Cola, McDonald’s and Wal-Mart. However, the more I read and learn about Amazon.com, the more I realize that one cannot afford to be complacent and assume that the future will be as predictable as the past.

Disruption, via Amazon.com

What got me really thinking about Amazon.com was an article I read about a company bought by Unilever for $1bn, called Dollar Shave Club. The premise of Dollar Shave Club is that you can order, and have delivered to your home, a month of good quality razor blades, for $1. I wish I could get this service where I live, I am also tired of being ripped off when I buy expensive razor blades! Proctor & Gamble on the other hand paid $57bn in 2005 to buy Gillette.

How has it been so easy and quick for Dollar Shave Club to gain market share? They have bypassed traditional advertising, using YouTube etc, they have outsourced production to South Korea, and they are using, yes you guessed it, Amazon Web Services as their online portal. It is possible for companies to now use the Amazon infrastructure to sell their products. Having use of the technology of the worlds most efficient retailer means you do not have to beg for shelf space at the physical retailers. It would have been almost impossible to get your new product on the shelf of these retailers before, owing to the muscle of the large brands like Proctor & Gamble.

Who will win, who will lose?

I do believe that companies like Proctor & Gamble are going to find it much tougher going forward. This is why I prefer a companies like Coca-Cola or Pepsico where it is less easy for an upstart to disrupt them thanks to their brand loyalty being extremely high, although not impossible of course. I for one do not really mind the brand of razor I use as long as it works and is affordable. I like to drink either Coca-Cola or Pepsi-Cola though, and would not switch to Zip-Cola in order to save a few cents.

Of course the really big winner here is Amazon.com. They will profit from each and every sale, and as other categories of merchandise realize they can emulate Dollar Shave Club, more traditional brands will suffer and newer brands, along with Amazon.com, will prosper.

My preliminary reading on Amazon.com has led me to look at my portfolio with close scrutiny, to see where the weak links are, and to reassess future capital allocation decisions. I would not for example invest in Proctor & Gamble until I feel I have a solid grasp on the implications of the Dollar Shave Club story.

At this point you may say to me “Well why do you not just invest in Amazon.com if it is so great!” Well, it is in fact a possibility I am looking at, but it is not so easy. I have stressed in prior posts that a great business does not always make for a great investment. At the moment much of the good news may already be priced into Amazon.com, but alternatively nobody can quite yet comprehend how far Amazon.com will grow and how big it will be in 10 or 20 years. The title of the book “the everything store” does leave one pondering this question..

I am running out of time to write more as it is my girlfriends birthday today, so I will pick up next week on some more aspects to the Amazon.com story. Let me know if your investing strategy has been influenced by your views on Amazon.com and how you are Amazon proofing (I wonder if there is a word for this?) your portfolio.

 

 

Dividend Update and a few thoughts – July 2016

July 2016 Dividend Income: Nil

In previous updates I have touched on the reasons for not investing in US or UK stocks yet. At the moment I am waiting to receive funds from the sale of a small hotel stock, but more on that later.

My patience in not taking capital out of my home country has thus far been rewarded in that the local currency has been strengthening against the pound and dollar over the last few months and is over 25% stronger than the low point. Having said that, I do believe that when I have some fresh capital, now would be a good a time as any to invest into stronger currencies. I am hoping this will be fairly soon.

I do have dividend income in South Africa, which I currently use to cover part of my living expenses and which I have chosen not to disclose.

There are a few developments in my journey as an investor, which I plan to write about over the coming weeks, mainly the following:

  • The possibility of me becoming involved in some sort of stockholder activism. I am specifically referring to my hotel shares for which a delisting and buyout has been proposed. Initially I was very happy about this, you can read here about it. However, I have had the opportunity to talk to other minority shareholders, who believe the price should be far higher. I am willing to get involved in such an action, as this could increase my capital base, but is of course far from certain. I will keep you updated, it is something new for me, and perhaps would be interesting for others.
  • I have been doing a lot of reading, and am more convinced than ever that finding excellent companies is not as straight forward as it used to be. In particular I have been reading a book, as well as other information, about Amazon.com. Reading these books and documents has caused me to sit back and evaluate many aspects of my portfolio and investing strategy into the future. There are a few angles here, and I will share my thoughts with you in the coming weeks and months.

What I love about investing is that you are always learning interesting things, and the more you learn the more you want to learn. Each fork in the road takes you to another interesting road. I hope you will stick around to read some of my thoughts. Let me know if you have any comments or questions.