The CCM Intelligent Wealth Fund’s shareholding to highlight this month is Amazon.
Amazon’s growth into a giant company over the years has been truly amazing. It was originally created as an online bookshop. From the very start, Jeff Bezos was convinced that Amazon would have a competitive advantage over physical bookshops because his business model was an online one.
From the beginning, Bezos was obsessed with 3 things – excellent customer service, business efficiency and low prices. So much so that analysts and investors largely ignored Amazon because it didn’t make any money in the early years and when it did the margins were very small. However, Bezos had a master plan. He wanted to plough the profits back into the business by growing it and creating economies of scale. He was prepared to be patient and slowly create a giant company that would dominate the world. His patience or deferred gratification has paid off handsomely. He is now the richest man in the world and Amazon is a dominant giant.
Interestingly what Bezos has done is nothing new but it is incredibly effective. He has used the scale-economies-shared model. None other than Henry Ford used the same strategy when he created the first mass-produced car – The Model T. He used the benefits of assembly-line production to reduce the cost of the car from $850 in 1908 to less than $300 in 1925.
The scale-economies-shared model involves using economies of scale to improve the customer experience, reduce prices and pass on most of the savings to customers which in turn creates greater customer loyalty with regular repeat purchases. It’s a virtuous circle. Bezos and Amazon have mastered this to a tee.
Companies such as Berkshire Hathaway, Costco, ASOS and Boohoo have similar business models. We are currently researching ASOS and Boohoo as potential investments for our fund. Unfortunately, both Berkshire Hathaway and Costco do not qualify for the 7 themes of our fund.
The beauty of scale-economies-shared businesses is that you can invest in such companies long term and just watch them grow. So they are known as great compounders. In other words, the growth in value of their shares is compounded year by year so such shares tend to have high annual compound growth rates. Just take a look at the figures below
Amazon’s share price
16 May 1997 $1.73 public flotation
9 July 2021 $3,719.34 latest share price
214,890.75% increase in value
That is extraordinary, isn’t it?
Amazon was founded in the garage of Bezos’ rented home in Bellevue, Washington. Bezos’ parents invested almost $250,000 in the start-up. In July 1995, Amazon opened as an online bookseller, selling the world’s largest collection of books to anyone with Internet access. Since then the company has evolved and it now sells a vast array of goods and services.
So what do scale-economies-shared companies such as Amazon have in common?
- An obsession with great customer service.
- Great attention to detail.
- Focus on economies of scale.
- Continual improvement in business efficiency.
- Highly competitive prices.
- Passing on most of their cost savings to their customers.
- A subscription service.
- A visionary founder.
Research also shows that great founder owners companies’ share prices tend to rise by more than the best fund managers’ fund prices. So companies such as Amazon (Bezos), Microsoft (Gates) and Walmart (Sam Walton)) are examples of this phenomenon.
https://www.woodlockhousefamilycapital.com/post/the-best-investors-of-all-time
Jeff Bezos once claimed that he re-invents Amazon every day. I really liked that quote. It demonstrated that this man is obsessed with constant never-ending improvement. It also shows that he will never be complacent. This is a key attribute. Too often great companies lose their way when the founder dies. The reason for this is because their successors never truly understood the company’s purpose. Examples such as IBM, Walmart and Ford are testimony to this fact. The only exception to this in recent years has been Steve Jobs’ successor at Apple – Tim Cook. Tim doesn’t have the creative flair of Steve Jobs but he really understands Apple’s purpose so the company has continued to go from strength to strength.
So we will continue to invest in Amazon as the company has a very bright future. You know it makes sense*.
*The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change.
