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I enjoyed reading Jeff Bezos's final letter to shareholders . I don't read CEO letters often, but this one is worth it. I want to highlight and spend some time discussing the following paragraphs from the letter.
"If you want to be successful in business (in life, actually), you have to create more than you consume. Your goal should be to create value for everyone you interact with. Any business that doesn’t create value for those it touches, even if it appears successful on the surface, isn’t long for this world. It’s on the way out."
He went on to try to quantify how much value Amazon creates.
"If you assume that a typical Amazon purchase takes 15 minutes and that it saves you a couple of trips to a physical store a week, that’s more than 75 hours a year saved. That’s important."
"So that we can get a dollar figure, let’s value the time savings at $10 per hour, which is conservative. Seventy-five hours multiplied by $10 an hour and subtracting the cost of Prime gives you value creation for each Prime member of about $630."
These numbers are impressive. Amazon is successful because it just works. They've managed to create more time for millions of people. Reviews shorten the time spent debating on what to buy. Their frictionless commerce reduces the time between wanting something and owning the thing, and 1-day shipping takes care of the rest. Amazon has not only created more time. It has also managed to free up our brains from the complex cognitive thinking that decision-making requires. It is one of the reasons why the value creation Bezos tried to quantify is understated.
To get a real sense of actual value creation, don't compare the time and money saved. Instead, compare the alternative utility of the time and money saved. What you do instead of shopping at a physical store dictates what those seventy-five hours mean to you. The value could be much more than $630 if you spend it with friends and family, for example (assuming you like them). My point is that while Bezos's calculations are awe-inspiring, the real value created by Amazon is more significant.
- NFLX added 3.98 million subscribers in Q1 2021. They forecasted 6 million, and analysts were expecting 6.29 million.
- For Q2, analysts were expecting 4.44 million, but Netflix is forecasting just 1 million
- Shares fell as a result
Is this the beginning of a larger trend? We've had over a year of lockdowns and limited economic activity in the United States. Many stay-at-home stocks have benefited as a result. Netflix, Zoom, and Peloton are some of the companies in this category. As more people get vaccinated and lockdown restrictions are lifted, how will these companies fare? These companies are down -3.31%, -6.42%, and -30.76% year-to-date vs. QQQ which is up 9.73%.
If these companies continue to meet and blow past expectations, then great. But it won't be enough. Growth companies would need to continue raising the bar. This feat, while not impossible, is very unlikely. – Full Post
Last year, I wrote about how the pandemic raised the bar for growth companies, and recommended investors have some exposure to small value companies.
The idea is not to get rid of them, but to include small and value stocks in the mix.
Year-to-date, small value has returned 24.78% vs 11% for large growth. Good times don't last forever, and bad times don't last forever. Still, the future remains unknown.
What to Read
The best feeling is when you realize that you're not as competent on a topic as you thought you were. To be aware that you're on Mount Stupid (Dunning-Kruger Effect) is to know that you don't know. You're better off as a result.
I recommend reading Know What You Don't Know because I realized that I wasn't thinking about the blockchain correctly. Patrick O'Shaughnessy's conversation with Chris Dixon on The Potential of Blockchain Technology (spotify link) was eye-opening for me. I recommend it.
You Made It To The End! Don't go too crazy now, but celebrate a bit by forwarding this email to a few friends.