How Amazon Made Jeff Bezos the Second Richest Man in the World

Amazon’s First of 14 Leadership Principles

In his magisterial work, A History of the American People, Paul Johnson, the eminent British historian, chose to largely ignore America’s presidents from 1865 through 1900, whom he generally considers a mediocre lot. Instead, he focused on the great entrepreneurs and industrial giants of the period such as J.P. Morgan, Andrew Carnegie, J.D. Rockefeller, Thomas Edison, and Henry Ford. Future historians may also choose to ignore the American presidents over the past thirty years and concentrate on the great entrepreneurs of the present age such as Bill Gates (Microsoft), Steve Jobs (Apple), Mark Zuckerberg (Meta Platforms, formerly Facebook), Elon Musk (Tesla among other companies), and Jeff Bezos (Amazon). In our commentaries over the past several decades, we have written about each of these men except Bill Gates. These men have surely done more to influence our culture and our country than our last five presidents.

Six years ago, we wrote an investment commentary on Jeff Bezos. So why write a second investment commentary on the same man? Much has changed in the life of Bezos since 2018, and the world has changed dramatically, too. Amazon’s stock has appreciated more than threefold since we wrote about Bezos, and he is now the second richest man in the world, with a net worth of more than $216 billion (behind Musk who is currently worth $257 billion). Bezos is currently the Executive Chairman of Amazon and Blue Origin as well as the owner of The Washington Post, which he bought in 2013. Moreover, Brad Stone, who wrote an outstanding biography of Bezos in 2013 called The Everything Store, published a sequel called Amazon Unbound: Jeff Bezos and the Invention of a Global Empire. It is an excellent book that describes in considerable detail the path of the retail and technological giant over the past decade. Amazon has built a global empire with annual revenues of over $600 billion. The book is also an intimate, albeit not necessarily flattering, portrait of Jeff Bezos. Accordingly, much of this commentary is based on Brad Stone’s books. This investment commentary is meant for those who do not have the time or inclination to read Brad Stone’s books but would like to know more about the man who founded Amazon, a company which touches almost all of our lives on a daily basis.

Jeff Bezos’s life story is a modern-day Horatio Alger story. He has lived the American dream in the land of opportunity. Bezos was born in Albuquerque, New Mexico in 1964 — the son of teenage sweethearts Ted Jorgensen and Jacklyn (Jackie) Gise. Several years after their marriage, they divorced, and Jackie then married Miguel Bezos, a young Cuban American who had come to America through Operation Peter Pan, a rescue program run by the Catholic Church that brought thousands of teenagers out of Castro’s grip. After graduating from the University of Albuquerque, a now defunct Catholic university which gave scholarships to Cuban refugees, Miguel (now called Mike) married Jackie, whom he had met at a bank where they both worked, and got a job with Exxon as a petroleum engineer. Four-year-old Jeff Jorgensen was adopted by Mike Bezos and became Jeffrey Preston Bezos.

Jeff was greatly influenced by his maternal grandfather, Lawrence Preston Gise, who owned a cattle ranch in Texas called the Lazy G. Jeff spent every summer there until he was 16, and he loved it there, working hard at cleaning stalls, branding and castrating cattle, and fixing tractors. In school, he was a bookworm and a big fan of science fiction. He would use the school’s computer terminal to play endless hours of a primitive Star Trek game.

Enrolling in Palmetto High School in Miami where his family had moved, Jeff was a highly motivated student with a formidable intellect, great self-confidence, and a competitive personality. He was valedictorian of a class of 680 students and got early admission to Princeton. His valedictory speech discussed his dream of saving humanity by creating permanent human colonies in orbiting space stations. At Princeton, he was a self-professed nerd, concentrating on computer science. He graduated with a 4.2 GPA and a membership in Phi Beta Kappa.

Between 1986 and 1994, Jeff worked for three different companies. The first was a start-up company with 15 associates which was trying to build a mini-internet, but ran out of money. Next he worked for Bankers Trust, becoming its youngest vice president at the age of 26. From there, he went on to D.E. Shaw, a hedge fund firm, which used computers and algorithms to do electronic trading of stocks. He learned a lot at this highly sophisticated technological firm, but more importantly, he met his wife-to-be MacKenzie Tuttle, who was a research assistant at the firm. In 1994, David Shaw asked Bezos to explore this new thing called “the Internet.” Bezos discovered that the internet was growing at over 2,000 percent a year, and was immediately intrigued with figuring out how to profit from this growth trajectory. Rather than creating computer terminals, software, or search engines, he thought about starting a company which could use the internet to deliver products to customers. He made a list of 20 possible products to sell over the internet and landed on selling books. Bezos told Shaw about his idea, and although Shaw tried to persuade him not to leave the company, Bezos came to the realization that when he grew old and looked back on his life, he knew his biggest regret would be not striking out on his own to start this internet company. So he decided to leave D.E. Shaw and, together with MacKenzie, founded a company which would sell books over the internet.

According to legend, Jeff and MacKenzie flew to Texas to pick up a gift from his father — a 1988 Chevy Blazer. MacKenzie drove from Texas to Seattle while Jeff wrote a business plan on the way. Bezos incorporated the company under the name “Cadabra, Inc.” — evidently a play on the word “abracadabra,” which was meant to imply instant delivery. It was the first example of Bezos’s lifelong pattern of trying something out and later changing course without remorse when he realized that he had made a mistake. The company was renamed Amazon.com, because Bezos wanted it high on any alphabetical listing and also to pattern it after the largest river in the world — with the .com to show that it was an internet company.

It took a year from the time Bezos arrived in Seattle to launch the company. He needed to assemble his small team of associates, build the technical infrastructure for an online book retailer, and create a database with millions of books. Amazon.com launched in July 1995, and in the first weeks, they received less than a dozen book orders a day. The team, including Bezos, would personally pack the books for shipment, and Bezos would drive them to the post office in his Blazer. They did no advertising, but news about Amazon spread by word of mouth.

Bezos had saved some money for the first few months of operations, and when he incorporated, he bought $10.2 million of stock for $10,000 — at one-tenth of a penny a share — and later lent the company $44,000. But, running out of money, he then went to his father, who invested $100,000 at 17 cents a share, keeping the company afloat. Through a Seattle friend, Bezos met with 60 prospects, encouraging them to invest, and ultimately 22 investors invested approximately $1 million, which gave them a 20% stake in the company. A year later, Bezos persuaded the premiere VC player in Silicon Valley, John Doerr of Kleiner Perkins, to invest $8 million for a 13% stake in Amazon. Realizing that he could raise money without turning a profit in those halcyon Internet bubble days, he postponed profits and focused on growth and increasing market share. Two years after opening its doors, Amazon went public in 1997 at $18 a share, raising $54 million, valuing the company, which had yet to make a profit, at $429 million. In Amazon’s 1997 Annual Report, he laid out in his letter to shareholders Amazon’s culture and how he intended to run the company. For many years, this was reprinted in every Annual Report; it became the equivalent of Holy Scripture, and Bezos, to his credit, held closely to it for decades. In a nutshell, his approach was that market leadership ultimately translates directly to higher revenue, higher profitability, greater capital velocity, and stronger returns on capital. He outlined his key operating philosophies as follows:

• Relentless focus on customers
• Long-term market leadership matters more than short-term profits
• Bold investment decisions with willingness to accept failure
• Lean and cost-conscious culture
• Recruit and retain talented employees who will think like owners
• Bias for action
• Innovation

Bezos’s operating principles ultimately morphed into Amazon’s famed 14 Leadership Principles, which supervisors and employees were instructed to model in their work at the company. There is not time nor space to list them here, but they can be found online.

During the next four years, Amazon pursued a path of frenetic growth, branching out from books to music CDs and movie DVDs. Amazon raised over $2 billion in three bond issues and bought dozens of companies. Despite losing hundreds of millions of dollars on these acquisitions, Amazon’s revenue and customer growth was enormous. In 1999, sales grew 99% over the previous year, and the company attracted 3 million customers, reaching 20 million accounts. Revenues were $1.5 billion but expenses were $2 billion.

During this period, the NASDAQ Composite plunged 78% from peak to trough. Amazon’s stock did even worse, dropping 95% to $5 a share. With continuing losses and significant debt on the balance sheet, many investors doubted that Amazon would survive. Bezos slashed expenses, laying off first hundreds and then thousands of employees. Workers often left voluntarily too, explaining that Bezos demanded too much. But in January 2002, Bezos announced that Amazon had earned a profit of $5 million in the 4th quarter of 2001. One cent a share — its first quarterly profit ever. Within a short period, the stock jumped 40%. Amazon had turned a corner and never looked back.

During this period, Bezos led Amazon to accomplish a remarkable number of innovations which changed the landscape in America. First his big successes, and then some of his failures. The first major success was Amazon Prime. Starting in 2002 as a service whereby customers could pay an extra fee to receive overnight, one-day, or two-day shipping, it became Amazon Prime in 2005. For $79 annually, Bezos offered free shipping with two-day service or better. His team thought he was crazy and that it would be a big money loser. Today approximately two-thirds of all American households (170 million) are Prime members, paying $139 annually and receiving not only free shipping but also movie and TV-streaming services similar to Netflix. Globally, there are 230 million Amazon Prime members. Another example of an Amazon invention that changed the culture was Kindle — the electronic reading device. The concept of manufacturing an electronic reading device was first broached in 2004, but it was way outside of Amazon’s core competency. It took four years to solve the litany of issues to launch the Kindle, not the least of which was to have more than 100,000 books available in e-book format. The Kindle has been enormously successful, and they can now be purchased with a variety of features in a range from $100 to $460.

During this period, the three biggest game-changers for Amazon were: opening the website to third-party vendors, AWS, and advertising. Amazon opened its website to third-party sellers during the dot-com bust in 2000, allowing them to list their wares alongside Amazon’s own products. As this service took off, Bezos realized that it created a “flywheel” cycle, which powered his business. Adding outside vendors to the website brought additional products, drawing in new shoppers and earning commissions on each sale. Amazon could use this revenue to lower prices on its own products or use the cash flow for more innovation. As more vendors listed their products, it drew more buyers, with the process repeating itself. Amazon Marketplace, where third-party sellers can list their wares, is currently offered in 19 countries.

But the most significant game-changer was Amazon Web Services, known as AWS. AWS had its beginning in 2002 when Bezos asked his technology team to create a new set of APIs (Application Programming Interfaces) which would allow developers to plug into the Amazon website. Amazon encouraged developers to become part of the Amazon constituency. Today AWS is in the business of selling basic computer infrastructure of storage, databases, and raw computing power to major companies like Netflix as well as U.S. government entities like NASA and the CIA. Revenues from AWS in 2024 are projected to reach $107 billion and represent slightly more than 50% of Amazon’s operating income. It is estimated that AWS has a market share of more than one-third of the global cloud computing market.

Amazon initially did not see advertising as a significant revenue stream. A senior executive from Unilever, a consumer giant with a huge advertising budget, came to Seattle in 2013, and Bezos refused to take the meeting. A few years later, as Amazon began to see the promise of advertising, the company set such rigorous standards about display advertising and worried about compromising customers’ trust in Amazon, that the company was seen as stubborn and arrogant by many advertisers. As Amazon became more sophisticated about advertising, revenue took off. In 2017, advertising revenue was $4.7 billion; in 2024, it is projected to hit $58 billion.

Not every innovative product or service was a success, however. One of Amazon’s greatest failed products was the Fire Phone. In 2010, Bezos asked his technology team to develop a 3D smart phone to compete with the iPhone. A great deal of effort and money went into its development, and Bezos himself was the so-called “uber” product manager, obsessively monitoring the development of the product. Bezos introduced the Fire Phone in 2014 in Seattle at a press conference. There was very little demand for it, and Amazon dropped its price repeatedly. It was discontinued in 2015 — a major flop. But one of Bezos’s cardinal principles was that failure was to be tolerated. When making bold innovative decisions, he knew it was natural to fail from time to time, and no leader or employee at Amazon should be fearful of failure. So, no heads rolled over this signature failure.

Another major failure was Amazon’s efforts in China. In 2004, Bezos paid $75 million to acquire Joyo.com, an online Chinese seller of books. Using that acquisition as a bridgehead, Amazon attempted to become a major player in China. However, it met formidable competition in Alibaba and JD.com. For more than a decade, Amazon poured money into its China operation in an attempt to build significant market share and become profitable. It spent billions of dollars opening 15 fulfillment centers and went head-to-head with Alibaba and JD.com. Having remarkably little success, Amazon closed its Marketplace operations in 2019, but nevertheless continued to offer its cross-border e-commerce operations and AWS in China. On the other hand, Amazon has not abandoned its efforts to penetrate India, which it believes will be an important market in the future. Currently, it has annual revenues of approximately $3 billion in India.

Another initiative which has bedeviled Amazon is its efforts to develop market share in the retail grocery business. The $700 billion grocery market is dominated by companies like Walmart and Kroger. Starting 15 years ago, Bezos wanted Amazon to develop ways to become a market leader in this space. He had his teams develop Amazon Go stores in major cities, where customers would be able to avoid waiting in checkout lines thanks to sophisticated checkout technology called “Just Walk Out.” But the idea never really caught on. Another initiative, called Amazon Fresh, was launched in 2007. With only 22 locations across the country currently, this is another idea that has never really caught on. But Bezos believes in trial and error. In 2017, Amazon purchased Whole Foods for $13.7 billion. Whole Foods, founded by John Mackey, is the grocery chain that helped to mainstream organic foods in this country. In addition to becoming more of a player in the grocery business, Amazon increased its ecosystem, as Amazon customers can take their return items for mailing to Whole Foods and Amazon Fresh locations and also do online grocery shopping. It is clear that Amazon has not given up on making its mark in the grocery business.

Earlier in this commentary, we described some of Bezos’s key leadership principles and his operating philosophies. How did these translate into day-to-day operations at Amazon? When Bezos was CEO, things would start with the “S-team,” which comprised around 15 to 20 of the senior leaders of Amazon, who usually met weekly. Bezos would kick off the annual goal-setting process in September with each member of the S-team preparing a six-page operating plan document (abbreviated as OP1). Bezos loathed PowerPoint presentations; hence the mandatory six-page document in which each member would describe their plans, actions steps, resource requirements, and outcomes for their department or division. OP1 meetings began with total silence as the members of the S-team read each of the various six-page documents. A well-written, compelling OP1 usually meant greater resources spent on a given initiative, while a poor OP1 could mean a team or initiative was dissolved. Six months later, the S-team would meet again for a semi-annual review, and a six-page OP2 document was expected from each member of the S‑team. In the Amazon lexicon, there was also a term known as “PR/FAQ.” When a new product or service was discussed, the team would produce a Press Release/Frequently Asked Questions document. This was a key document in the product discovery process of working backward from the customer’s needs, ensuring that all stakeholders had a common understanding of the initiative.

There was often major disagreement at the S-team meetings, and Bezos was known to say, “If I have to choose between agreement and conflict, I’ll take conflict every time. It always yields a better result.” In most OP1 and OP2 sessions, Bezos spoke last, not wanting to sway the group with his incisive and powerful opinion. He often would tell members of the S-team that they should not come to him with a specific level of investment. They should rather tell him how to win and then what it costs. He would say, “Go big and take risks. Make it happen. We have your backs.” He was also known for telling his subordinates to shoot first and aim later. Otherwise, one could aim forever and not act boldly. Amazon built a skyscraper in Seattle which they called Day 1 after the statement Bezos wrote in his shareholder letter in Amazon’s first Annual Report: “This is Day 1 for the Internet, and if we execute well, for Amazon.com.” Similarly, Bezos would press his subordinates not to allow Amazon to become a Day 2 company. He wrote “Day 2 is stasis, followed by irrelevance, followed by excruciating painful decline, followed by death. And that is why, at Amazon, it always Day 1.” He was also known to have said: “Amazon is not too big to fail. In fact, I predict one day Amazon will fail. Amazon will go bankrupt. If you look at large companies, their lifespan is 30-plus years, not a hundred-plus years.” Bezos has always used these words as a rallying cry for innovation and to always stay ahead of the curve. It has been these sorts of exhortations that have led to bold actions at Amazon, which have driven its incredible growth.

As Amazon continued to grow at a rapid pace, some politicians in Seattle began to push back against the allegedly negative social effects of this growth. In 2014, Kshama Sawant, an Indian American economist, was elected to the Seattle City Council. An avowed Marxist socialist, she and other progressive members of the Council began to push for various taxes to make Amazon pay a price for the rapid growth that was causing so-called social dislocation. In 2017, Sawant co‑sponsored a bill proposing a 2.25% increase on income tax for individuals making more than $250,000, which passed the Council unanimously but was later successfully challenged in court. Then in 2018, the Council unanimously passed a bill that imposed an annual $275 per-employee head tax (reduced from the originally proposed $500 per person tax). As these progressive policies grew, Bezos announced in September 2017 that Amazon would seek additional headquarters for Amazon in an initiative known as HQ2. Sparking a media frenzy, dozens of cities around the country threw their hats in the ring, offering tax incentives, thereby hoping to entice Amazon. In January 2018, Amazon announced twenty finalist cities. After a lengthy process, Amazon decided on two locations: Long Island City, Queens, New York, and Northern Virginia outside of Washington D.C. Arlington County, Virginia was thrilled over their victory, but in the borough of Queens, there was an outpouring of dissent. Progressive politicians, including the newly-elected charismatic Alexandria Ocasio-Cortez (AOC), pushed back on the tax breaks which Amazon had negotiated. There was a hearing in December 2018, and it was a disaster for Amazon. At one point, Amazon was asked if it would remain neutral if its NYC workers wanted to unionize. Amazon’s official at the meeting answered: “No, we would not agree to that.” From its earliest days, Amazon was fiercely anti-union, as Bezos believed that unions negatively affected the relationship between the company and the all-important customer. Amazon released a statement at the time, “We are proud to be Earth’s most customer-centric company.” But this did not placate those against Amazon coming to Queens, who proclaimed that New York City was a union town. With that, Amazon pulled out of Long Island City to the dismay of both Governor Cuomo and Mayor de Blasio, who had supported the move.

Like Elon Musk and Steve Jobs, Jeff Bezos is larger than life. He is a genius. He is highly intelligent and has that rare ability to both grasp the big picture and to focus with great passion and intensity on the demanding details. He is relentlessly optimistic and infectiously enthusiastic, which helps him overcome his lack of empathy and at times off-putting intensity. He has that rare ability to make bold decisions that will only pay off, if at all, many years in the future. And perhaps more than any of the legendary Silicon Valley founders, he has a fanatical passion for serving customers well. He also has wide-ranging interests shown by founding and chairing Blue Origin, his private space flight company, and his ownership of The Washington Post. And he was a family man who often spoke warmly about the great importance of his marriage and his four children.

So, what a shock it was for associates, employees, and shareholders to wake up in February 2019 to the astonishing news that Bezos, then the richest man in the world, was romantically involved with a married former TV reporter and helicopter pilot named Lauren Sanchez and getting divorced from his wife of 25 years. Moreover, the sensational National Enquirer had published a salacious and prurient spread about his extramarital relationship — all this from a CEO who had always demanded that his associates at Amazon conduct themselves with discretion and good judgment. The entire episode was remarkably uncharacteristic of a man who extolled the virtues of his wife and family for decades. It appeared as if all the wealth and fame had gone to his head.

No longer the self-confessed geeky nerd of years gone by, Bezos seems determined to enjoy all the trappings of his huge fortune. This includes hobnobbing with Hollywood stars whom he has met since Amazon Prime became such a big player in movies and TV-streaming, and leading politicians whom he has met over the years and through his ownership in The Washington Post. (Without getting into the details of his extramarital relationship with Sanchez, the whole episode — every detail of which the National Enquirer learned about from Michael Sanchez, who sold the information about his sister and Bezos — was tawdry beyond mention.) The question for investors is: will this transmogrification cause a meaningful change in the trajectory of Amazon?

The onset of the COVID-19 pandemic in March 2020 caused Amazon’s stock to sell off approximately 15%, but then, as investors realized the impact of the lockdown, the stock doubled in value from around $90 to over $185 in July 2021. Its market capitalization neared $2 trillion three years ago. This was around the time that Bezos handed over the CEO reins to long-time Amazon executive, Andy Jassey, while Bezos remained Executive Chairman. Over the next 15 months, the stock plunged more than 50%, as revenue growth slowed post-COVID, and the enormous expansion of the fulfillment center network caused a huge increase in expenses. Since then, Amazon has reined in expenses, and its operating margin has almost doubled to 10%. This has caused operating income to explode with projections of over $60 billion in 2024. AWS revenue, after a slowdown in 2021 and 2022, is projected to increase over 17% in 2024 to approximately $107 billion, while advertising sales are expected to come in at $58 billion. Accordingly, Amazon’s stock has retraced its steps, hitting an all‑time high several weeks ago. Some analysts are projecting 2025 earnings per share of over $8, translating into a P/E on next year’s earnings of less than 24. This is from a company which has usually had very strong cash flow but modest earnings per share, so that Amazon’s valuation on earnings has frequently been over 40. Amazon is the kind of aggressive growth stock that still has great potential but significant downside risk as well — especially if the EU regulators and Lina Kahn at the FTC go after Amazon for its alleged harm to its competitors. But despite the regulatory risk, it certainly appears as if Bezos has created a company that can prosper well into the future.