Amazon released its annual letter to shareholders and Jeff Bezos touched on several reasons for the companies success.
A customer first mentality was one piece of it. Long term focus was another. As was luck. Lastly, there was a willingness to fail more than its competition. Bezos explains:
Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. 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 longtailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments. – Source
Amazon, at its most basic level, is like a Venture Capital fund – continuously funded by its retail division – placing many small bets, expecting mostly failure, and knowing only a couple will pay off big.
As an investor, you have to accept some amount of loss but most of us can’t place bets like Amazon because you won’t survive mentally or financially with that failure rate. You’ll end up with no money.
But you can place smarter bets, that lean more in your favor and bring a lower chance of loss. To use the baseball analogy, you just want to get on base. Really, you’re swinging for singles knowing a few might turn into doubles or triples, and on the rare occasion, you might hit a homerun.
Peter Lynch said something similar about investing:
Well, I think the secret is if you have a lot of stocks, some will do mediocre, some will do okay, and if one or two of ’em go up big time, you produce a fabulous result.
In this business if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten. – Source
Index funds do this to a lesser degree. An index is literally 100s of tiny bets where only a portion payout over time. Most companies in an index are mediocre at best. Some don’t even survive. But there are enough good and great ones to make up the difference and more.
You don’t need a lot of great companies to produce great results. It only takes a few. But you must be willing to stick around long enough, and fail 40% of the time, to actually succeed.
- The Babe Ruth Effect in Venture Capital – C. Dixon
- Success Always Starts With Mistakes – MicroCapClub
- It’s Time for Investors to Re-Learn the Lost Art of Reading – J. Zweig
- The Problem with Studying the Past – M. Housel
- Think Half of a Cycle Ahead – Aleph Blog
- This Is Your Brain on Risk – N. Smith
- Update on the Valuation Metric Horserace – AlphaArchitect
- A Refresher on Return on Assets and Return on Equity – HBR
- How the Average Triumphed Over the Median – Priceonomics
- Letter to the Equity Partners of Philadelphia 76ers (pdf) – ESPN
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