23 years of Jeff Bezos' Amazon Shareholder Letters: Key Lessons and Insights
“It’s All About the Long Term”
Today’s newsletter is a compilation of insights from Bezos’ writing. This newsletter comes from our archives and is being republished with new illustrations for Bezos’ principles. These illustrations have been made by our brilliant new intern - Urvi.
We hope you enjoy learning more about the Amazon way of doing things, especially how he operates.
“The core of the company is customer obsession as opposed to competitor obsession,” says Bezos.
“Working backward” from customer needs can be contrasted with a “skills-forward” approach where existing skills and competencies are used to drive business opportunities. The skills-forward approach says, “We are really good at X. What else can we do with X?” That’s a useful and rewarding business approach.
Listen to customers, but don’t just listen to customers—also invent on their behalf. An example is Amazon Web Services (AWS). No one asked for AWS. No one. Turns out the world was in fact ready and hungry for an offering like AWS but didn’t know it. Bezos had a hunch, followed his curiosity, took the necessary financial risks, and began building—reworking, experimenting, and iterating countless times.
To start, you need to understand how Bezos quit theoretical physics and switched to electrical engineering and computer science. Turns out that he and his roommate were stuck trying to figure out a differential equation. They could make no headway for hours until they went over to one of their friends down the hall. That friend looked at the problem, blurted out the answer and then explained the answer in 3 pages rich with rigorous math. Bezos was amazed that his friend had done the calculation—which took three pages of detailed algebra to explain—in his head.
“That was the very moment I realized I was never going to be a great theoretical physicist, and so I started doing some soul-searching. In most occupations, if you’re in the ninetieth percentile or above, you’re going to contribute. In theoretical physics, you’ve got to be, like, one of the top fifty people in the world, or you’re really just not helping out much. It was very clear. I saw the writing on the wall and changed my major very quickly to electrical engineering and computer science.”
His decision to switch majors can be explained by the “category of one” philosophy that I have explained in my Harvard Business Review article. If there is one thing you learn from Jeff, let it be this – learning where to play and who to play with is far more important than the seductive illusion of hard work. If Jeff tried to be a better theoretical physicist than his friend down the hall, his career and the trajectory of the world at large would have been very different.
#2. Work with people you admire
Jeff has tried hard to work only with people he admires, and he encourages us to be just as demanding. Life is definitely too short to do otherwise. When deciding ask whether this person/ set of people will raise the average level of effectiveness of the group they’re entering?
#3. Combine math with judgment and intuition
Math-based decisions command wide agreement, whereas judgment-based decisions are rightly debated and often controversial, at least until put into practice and demonstrated. Any institution/ person unwilling to endure controversy must limit itself to decisions of the first type. In Jeff’s view, doing so would not only limit controversy —it would also significantly limit innovation and long-term value creation.
#4. Don’t enter new things without thinking through your competitive advantage or lack thereof
Jeff says that before Amazon invests shareholders’ money in a new business, they have several rounds of discussions whether the new opportunity can generate the returns on capital investors expected when they invested in Amazon.
In addition, the opportunity must currently be underserved and take into account if Amazon has the capabilities needed to bring strong customer-facing differentiation to the marketplace.
Amazon has long been toying with the idea of physical stores as online retail is still a very small component of the overall retail market globally. Even though the potential size of a network of physical stores is exciting, Amazon isn’t sure how to do it with low capital and high returns. That might change in the future but waiting for the right timing to meet right preparation is an important life lesson.
To sum up, don’t do something just because it seems shiny.
#5. Be inspired but don’t copy
Amazon launched by selling books but they didn’t duplicate physical bookstores.
Similarly, when launching Kindle (Amazon’s e-book reader), Bezos didn’t try to copy every last feature of a book—they knew they could never out-book the book. They had to add new capabilities.
#6. Focus on the long term and avoid instant gratification
From the beginning Amazon has been fervent about driving free cash flow per share and returns on capital. Bezos says, “Seek instant gratification—or the elusive promise of it—and chances are you’ll find a crowd there ahead of you.”
#7. Gate keepers slow innovation
With the launch of Amazon Web Services, Fulfilled by Amazon, and Kindle Direct Publishing, Amazon created powerful self-service platforms that allow thousands of people to boldly experiment and accomplish things that would otherwise be impossible or impractical. Because they are self-servicing platforms, they propel innovation by the people and for the people. Bezos often says that even well meaning gate keepers slow innovation by creating artificial bottlenecks.
When a platform is self-service, even the improbable ideas can get tried, because there’s no expert gatekeeper ready to say, “That will never work!”
#8. "In the short run, the market is a voting machine but in the long run it is a weighing machine" Value investing pioneer Benjamin Graham
Bezos says, “We aren’t 10 percent smarter when the stock goes up and conversely aren’t 10 percent dumber when the stock goes the other way.” This also highlights the importance of thinking in long term big bets and avoiding short term vagaries that are inevitable.
If you fail to achieve a short term goal, that is ok as long as you are doing what you can to get a small number of high value decisions right.
#9. If you know in advance that it’s going to work, it’s not an experiment.
You owe it to yourself to constantly conduct experiments to learn more about yourself – what you want, what you like, what you dislike – and figure out the operating context. Experiments must have real skin in the game.
#10. Don’t wait for perfect information
Bezos suggests taking most decisions with 70% of the information you wish you had. Waiting for 90% of 100% might cause precious delay.
Here it is important to distinguish between reversible and irreversible decisions. For super strategic irreversible decisions, you are better off taking your time and thinking about all possible angles.
Eisenhower matrix is a useful tool for prioritization.
#11. High standards are teachable but context specific
Jeff believes that high standards are teachable. In fact, people are pretty good at learning high standards simply through exposure. High standards are also domain specific, and that you have to learn high standards separately in every arena of interest.
The football coach doesn’t need to be able to throw, and a film director doesn’t need to be able to act. But they both do need to recognize high standards for those things and teach realistic expectations on scope. Even in the example of writing a six-page memo (Amazon has a famous no powerpoint rule as they work on well written memos), that’s teamwork. Someone on the team needs to have the skill, but it doesn’t have to be you. (As a side note, by tradition at Amazon, authors’ names never appear on the memos—the memo is from the whole team.)
Therefore, the four elements of high standards in Bezos’ work are:
1. They are teachable
2. They are domain specific
3. You must recognize them
4. You must explicitly coach realistic scope.
#12. Wandering vs Efficiency
Wandering is an essential counterbalance to efficiency. You need to employ both. The outsized discoveries—the “nonlinear” ones—are highly likely to require wandering.
#13. Scale failure but learn from it
There are two different kinds of failure. There’s experimental failure—that’s the kind of failure you should be happy with. And there’s operational failure. Amazon has built hundreds of fulfillment centers at over the years. If they build a new fulfillment center and it’s a disaster, that’s just bad execution. That’s not good failure.
While the Fire phone was a failure, Amazon was able to take learnings (as well as the developers) and accelerate efforts building Echo and Alexa. Both turned out to be huge hits. Failure is a great teacher as long as we learn from it. Ray Dalio’s mental model is a useful reference. Pain + Reflection = Progress
Pain (Fire Phone Failure) + Reflection (Why it failed) = Progress (Alexa, Echo)
When something bad happens you have three choices. You can either let it define you, let it destroy you, or you can let it strengthen you. We hope you become anti-fragile with each failure and emerge stronger. It would make Taleb happy.
#14. Will you be guided by inertia or passion?
Hope you choose neither. Inertia is debilitating and passion, transitory. As I explain in my INK talk, follow your passion is confusing career advice. Instead follow your curiosity and tinker away to success, the way Bezos did and strongly advocates for when hiring at Amazon.
#15. Take 3 good decisions a day
More decisions = bad decisions. Bezos tries hard to get 3 good, high-stake decisions every day. Warren Buffet takes 3 big decisions a year. You and I don’t need to get hundreds of things right every day. Just a few will do as long as they are the ones that move the needle.
#16. Work-life balance vs Work-life harmony
Work-life harmony is when you are energized at work, happy at work, feeling like you are adding value. That will make you a better friend and a better family member.
Work life is a flywheel, not a balance. That’s why that metaphor work-life balance is so dangerous. According to Bezos, it implies there’s a strict trade-off. You could be out of work, have all the time in the world for your family, but be really depressed and demoralized about your work situation, and your family wouldn’t want to be anywhere near you. They would wish you would take a vacation from them.
Have a wonderful Sunday!