LongRiver Investments, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly portfolio return of 23.6% was recorded by the fund for the first half of 2021, outperforming its benchmark that delivered a 13.5% return for the same period. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of LongRiver Investments, the fund mentioned Amazon.com, Inc. (NASDAQ: AMZN), and discussed its stance on the firm. Amazon.com, Inc. is a Seattle, Washington-based e-commerce company, that currently has a $1.8 trillion market capitalization. AMZN delivered a 14.17% return since the beginning of the year, extending its 12-month revenues to 20.58%. The stock closed at $3,718.55 per share on July 12, 2021.
Here is what LongRiver Investments has to say about Amazon.com, Inc. in its Q2 2021 investor letter:
“There are a few new learning positions too, as I described I would make in my previous letter. I’ve written on my blog about Amazon (here), if you’d like to learn about their specific investment cases.
‘Amazon Unbound: Jeff Bezos and the Invention of a Global Empire’ is author Brad Stone’s follow up to his 2013 book, ‘The Everything Store: Jeff Bezos and the Age of Amazon’. If the first book was Amazon’s origin story, this second is a recounting of the wide array of bets the company placed over the last decade; where its ambitions put it into conflict with its ideals; where its size has brought it uncomfortably into the public eye; and Bezos’ own personal journey from outsider to collosus. This is a great book if you want to learn about the history of products and services which have come to define Amazon like Alexa, Prime Video and Amazon Go; as well as the company’s ongoing efforts in eCommerce and logistics; and its hopes to dominate in emerging markets like India, Brazil and Mexico.
‘Amazon Unbound’ is a more complex book than its predecessor though because Amazon – and Bezos – have themselves become more complex. I think one of the main questions Stone wrestles with is the degree to which Bezos’ and Amazon’s stories need to be told separately, particularly as Bezos stretched Amazon’s ambitions and then outgrew them – think The Washington Post, Blue Origin, Bezos’ own growing celebrity, and even his divorce and new relationship. This was particularly pertinent for me as one of my main goals reading the book was to better understand what Amazon might be like once Bezos resigns as CEO on July 5 this year (and joins Blue Origin’s first human flight on July 20).
In so many respects, Bezos – “the CEO who thought of himself as a swashbuckling inventor” – will be irreplaceable. As Stone recounts, he played a seminal role in the conception and development of most of the company’s great ideas. We know he conceived the original blueprint for an online ‘everything store’ in the early days of the internet; Stone’s book shares how he also had the imagination to sketch the initial concept for the Alexa smart speaker (see below); the perception to formulate a twelve step guide for making iconic television; and even the obsession to pursue the design and manufacture of a burger made from the meat of a single cow (yes, that’s right – see here and here).
Bezos could jog through ideas using two simple criteria: if they work, will they grow to become big businesses? And if Amazon didn’t pursue them aggressively now, would it miss an opportunity? When an idea fit the bill, Bezos could lend his full authority to the project, bringing Amazon’s massive resources to bear and providing cover for the team responsible to take risks and fail. This is what he said to the executives building Amazon India, for example:
During a quieter moment of his trip, Bezos talked to his local executives at a nearby hotel. He reiterated that he wanted them to think like cowboys, with India as the Wild West frontier of e-commerce. “There are two ways of building a business. Many times, you aim, aim, aim, and then shoot,” he said, according to three executives who were there. “Or, you shoot, shoot, shoot, and then aim a little bit. That is what you want to do here. Don’t spend a lot of time on analysis and precision. Keep trying stuff.”
It’s hard to imagine someone other than a founder being willing to take these bets and size them so big. Or to risk failure so publicly. But this was the rational approach, as Bezos explained to a class of MBA students in the late 1990s:
‘We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold.’
What reassures me therefore as Bezos prepares to formally step back from day to day operations to focus on the Chairman’s role is how consistently he has emphasised systems and process. Stone repeats this over and over: “Bezos liked to say that “good intentions don’t work, but mechanisms do.””; or “Bezos, on the other hand, dove into the tedious details of HR and tried to formulate mechanisms that would substitute for good intentions.”; and “[Bezos] endeavored to put systems and values at the center… instead of the heavily regulated resources of his own time and reputation.”
It’s as if the inventor invented an invention machine to both amplify and outlast himself.
This is best embodied in Amazon’s Leadership Principles (shared below), which start with the famous edict on customer obsession. These principles are a north star for decision-making, with ‘Amazon Unbound’ full of conversations like this:
“You are going about this the wrong way,” Bezos said after reading about the delay. “First tell me what would be a magical product, then tell me how to get there.”
The principles also make the invention machine into a perpetual motion machine, as described by former Amazon Treasurer Kurt Zumwalt:
“This is not a typical corporate conglomerate like Berkshire Hathaway or General Electric. Almost every aspect of Amazon is built around subtly increasing its connection to customers. The power of the business model is the combination of the sum of its self-reinforcing businesses and services, enabled by world-class technology, operational excellence, and a rigorous review and measurement process.”
Andy Jassy, Bezos’ successor as CEO, may well be the inventor’s finest addition to – and greatest test of – his machine. He was Bezos’ first ever Technical Advisor, a junior executive handpicked to shadow Bezos for two years to imbibe the Amazon’s founder’s way of doing things. Some of the best chapters in ‘Amazon Unbound’ introduce us to Jassy and other senior executives in Bezos’ inner circle. Like Dave Clark, now CEO of Amazon Worldwide Consumer, their skill is to “take Bezos’s ambitious visions, convert them into something approximating reality, and then grow them into systems that [don’t] blow apart at Amazon’s tremendous size.”
Elsewhere, I was grateful that ‘Amazon Unbound’ did not shy from controversies and hard questions. One of these is Bezos’ paranoia that relentless ‘Day One’ at Amazon will become complacent, entitled and bureaucratic ‘Day Two’. According to Stone, Bezos “solemnly declared that one of the biggest threats to the company was a disgruntled and entrenched hourly workforce – like the unionized workers that impaired U.S. automakers with strikes and onerous contract negotiations”. Perhaps anticipating efforts to unionise, Bezos’ 2020 shareholder letter put worker relations front and centre; Amazon is also already making changes to its HR policies and workspaces, both financially and non-financially.
To keep Amazon’s white collar workforce on its toes, Stone tells how Bezos “could be a remorseless boss capable of terrifying employees when they failed to meet his exacting standards”. He could zero in with laser focus on inefficiency, like he did to challenge the core US eCommerce business to stop using advertising revenues to cushion worsening economics. More persistently, Stone describes “an informal cruelty present in the corporate culture” as employees were stack ranked and left scrambling in various corporate restructurings. Can a professional CEO like Jassy maintain this pressure? I think he’ll have to.
Perhaps the most troubling controversy raised in the book is where the ideal of customer obsession diverges from reality. Nothing symbolises this more than Advertising, which may now be Amazon’s largest profit driver. Despite knowing from tests that placing paid search results above organic ones would diminish the customer experience, Bezos gave the green light because advertising profits could fund investments elsewhere.
For similar reasons, Amazon has allowed its Marketplace to become a sprawling flea market, which Stone alleges is now dominated by Chinese merchants who compete with low costs and a willingness to game the review system. While Alibaba has long taken an active and aggressive stance to root out such bad behaviour, Amazon has so far kept a laissez-faire attitude (although it did remove some Shenzhen-based merchants days before Stone’s book was released).
Another thing which becomes uncomfortably clear in the book is that while Amazon likes to celebrate its swift reaction to failure – most famously with the Fire Phone – in reality, there are many projects stuck in an ambiguous doldrum. For example, after a decade, none of Amazon’s multiple and overlapping efforts in physical retail seem to have reached escape velocity. Prime Video has occupied an enormous amount of Bezos’ time and Amazon’s resources but as Stone asks, it’s not clear whether it really is driving more Prime Memberships and more retail sales.
The book’s title is a pithy summary of how Amazon appears in 2021, “totally unbound from the laws of corporate gravity”. However, Stone does not neglect another force tugging at Amazon: the rules and mores of global society. Here, unfortunately, Stone can verge towards the sensational, whether it be the activists at fulfilment centres or the small merchants who are no longer competitive on Marketplace.
The chapter on Amazon’s role – and Bezos’ comeback – during COVID is one of redemption and a nice place to end. But Stone could have found more balance by reminding us of the many humdrum ways in which Amazon has made all of our lives better, most of which are so good they’ve become unremarkable. AWS, for example, turned compute from a fixed to a variable cost, radically transforming the economics of a startup and facilitating an age of unprecedented innovation.
From Stone’s first book to his second, Amazon stock returned 952%, equal to a 36% p.a. compound return. And while ‘Amazon Unbound’ can sometimes feel like distant history, it’s worth remembering that the company’s story is far from over. Bezos will remain Chairman and the company’s single largest shareholder. Jassy is a proven lieutenant who has been with the company since its beginnings. And they are supported by a strong bench of talent, glued together by ambition and a common culture.
So I prefer this other definition of ‘unbounded’ offered earlier in the book, when we see Bezos the inventor at his finest:
Later, Alexa execs would say that Bezos’s close involvement made their lives more difficult but also produced immeasurable results. Jeff “gave us the license and permission to do some of the things we needed to do to go faster and to go bigger,” Toni Reid said. “You can regulate yourself quite easily or think about what you’re going to do with your existing resources…. Sometimes, you don’t know what the boundaries are. Jeff just wanted us to be unbounded.”
Pixabay/ Public Domain
Based on our calculations, Amazon.com, Inc. (NASDAQ: AMZN) ranks 3rd in our list of the 30 Most Popular Stocks Among Hedge Funds. Amazon.com, Inc. was in 243 hedge fund portfolios at the end of the first quarter of 2021, compared to 273 funds in the fourth quarter of 2020. AMZN delivered a 9.37% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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