Methods of Prosperity

Last week on Methods of Prosperity:

Ray Dalio started investing in the stock market at age 12. He began dollar-cost-averaging (DCA) in 1966. He predicted a worse depression than that of the 1930s. His predictions started to come true when Mexico defaulted on its debts in August 1982. In November 1982, he announced that the economy was on the brink of failure. He was wrong. That erroneous prophecy cost him his reputation and livelihood for many years.

Over time, he re-built his failed hedge fund, Bridgewater Associates. Which he founded in 1975. He and his team built systems. They used computerized decision making to run along with human decision making. By late 1983, demand was growing for their research. By 1995, they proved that a few guys with the right systems and processes can beat the major players.

Pain + Reflection = Progress

Pain is nature’s reminder that there is something else to learn. Satisfaction doesn’t come from success, it comes from struggling well. The purpose of our struggle is to help us evolve. These are principles which Ray Dalio is passing on to future generations. Good principles are effective ways of dealing with reality.

I highly recommend Ray Dalio’s book, Principles: Life and Work.

The following is Methods of Prosperity newsletter number 26. It was originally deployed December 14, 2023. As of August 22, 2024, original subscribers have received up to issue number 62: Donald Trump.

Part 26.

TL;DR

In 1964, Jeff Bezos was born in Albuquerque, New Mexico. His 17 year-old mother was still in high school. Space exploration fascinated him. He invented electronics to prank his siblings. Jeff went to Princeton to study physics. He decided to change his major to electrical engineering and computer science. He worked at the hedge fund D.E. Shaw & Co. and stumbled upon the idea of starting an internet business in 1994, based upon its 2,300% growth. He named the company Cadabra and soon changed it to Amazon.com. 

Key lessons:

• Recognize if you’re not the best at something.

• Play long-term games with long-term people.

• Minimize regret for yourself at 80 years old.

• Ring the bell when you make a sale.

• Pay attention to cash flow.

• Focus on the customer.

• Don’t be afraid to fail.

We’re improving quality of life at scale for hard working families.

Inveresta Holdings LLC is seeking capital partners, brokers, and motivated sellers. You’re invited to secure your place on our waitlist now. You’ll receive details about our investment strategy. This is not an offer, solicitation of an offer, for anything at this time. All investments have risk. Past performance is not indicative of future results. Always do your own research.

Recently, a friend referred to this newsletter as “the billionaire letters”. So, why write about billionaires?

It’s my belief, based upon the influence of Ray Dalio’s wisdom, that it pays to learn from history. The danger would be relying on anecdotal evidence. What works for one person may not work for another. With that in mind, notice the patterns. The important factor is the cumulative, compounding effect of studying what billionaires do.

Via negativa (the inverse) is also true. You can do the opposite of poor people to avoid calamity.

As long as a thing is not prevented by physical laws, it is not impossible.

Anyone can be rich, but not everyone will be rich. There is a certain required way of being. That is, if you intend to become rich. It’s not your fault if you were born into poverty. It is your fault if, by the end of your life, you fail to become rich.

For example, there are only a certain number of billionaires on Earth. Many of them started from nothing. John D. Rockefeller, Cornelius Vanderbilt, Andrew Carnegie, Henry Ford, and Jeff Bezos.

This week, let’s study Jeff Bezos.

To be a pregnant seventeen year old girl in Albuquerque, New Mexico, 1964, was not considered “cool”. Her high school almost kicked her out for fear that a pregnant student might be a bad influence. Did they think pregnancy was contagious? Jeff Bezos’ teenage mother, Jackie, stayed in school, but not without a fight. Her father negotiated a deal with the principal that allowed her to finish high school. The school did not allow her to have a locker.

Jeff’s biological father worked at a bicycle shop and performed in a unicycle troop. When Jeff was four years old, his mother remarried. Her second husband was a better match. Miguel Bezos, known as Mike, was a refugee from Fidel Castro’s Cuba. Mike came to the United States on his own at age sixteen. He wore a jacket that his mother sewed for him out of household rags. After he married Jackie, Mike adopted Jeff, who took his last name and considered him his real father.

Obsessed with Star Trek and Radio Shack, little Jeff dreamed of space exploration. He discovered how to play the Star Trek video game on his school’s mainframe computer. He invented various electronics and booby traps around the house. It was exciting to prank his siblings. Jeff’s heroes were Thomas Edison and Walt Disney.

As valedictorian of his high school in Miami, he gave a speech about space exploration. He explained how to colonize other planets and save ours by manufacturing off-planet. He went to Princeton to study physics. The reality was that he was not great at quantum physics. Jeff realized that he wold not be a good theoretical physicist. He changed his major to electrical engineering and computer science.

After graduation, he went to work at the hedge fund D.E. Shaw & Co. from 1990 to 1994, where he became senior vice president. While working at Shaw in 1994, he stumbled upon a statistic. This new world wide web thing had been growing by 2,300 percent each year. What if there was a way to sell products online? Sort of like a Sears catalogue for the digital age?

He told his boss, David Shaw, that he wanted to leave the hedge fund to pursue this idea. Shaw took him on a two hour walk through central park.

“You know what, Jeff?” his boss advised, “This is a really good idea. I think you’re onto a good idea here, but” he continued, “this would be a better idea for someone who didn’t already have a good job.”

He convinced Bezos to think about it for a couple of days before making a decision. To make this decision, Bezos used a mental exercise. He refers to this exercise as his “regret minimization framework”. He imagines what he would feel about it at 80 years old and thinks back to the decision.

“I knew when I was 80, I was not going to regret having tried this.” If he tried and failed, Jeff Bezos would not regret that. He continues, “I knew the one thing I might regret is not ever having tried. I knew that would haunt me every day.”

It’s important to notice what Jeff Bezos started selling first. He chose books. Books don’t have an expiration date. Essentially a commodity, they can easily be bought, sold, and shipped. There’s no shortage of books. There were only two, big, wholesale distributors.

Bezos would choose Seattle because it was home to Microsoft and there would be a lot of engineers to pick from. It was also near a book distribution company. Incorporating right away, he named the company Cadabra (as in abracadabra). He soon changed the name to Amazon.com that same year, in 1994.

Jeff and his wife invested $100,000 at first, then more. The initial startup capital came from Jeff’s parents. They invested a large part of their life savings in their son’s startup. His mother and Mike Bezos didn’t understand the business, but they bet on Jeff. There was a 70 percent chance they would lose their investment. Jeff warned them about these odds. Realistic odds of one entrepreneur’s startup failing is 90 percent. His parents would own 6 percent of Amazon. By which they became very wealthy philanthropists.

Jeff and his wife (at the time) MacKenzie set up shop out of the two bedroom home they rented near Seattle. They converted the garage into a workspace. Extension cords powered three workstations. To save money, Bezos went to Home Depot. He bought three wooden doors, angle brackets and two-by-fours. He hammered them together to make three desks at a cost of $60 each.

Amazon.com went live on July 16, 1995. Bezos and his small team rang a bell whenever a sale came in. In the first month, with no marketing plan, sales came in from all 50 states and 45 countries. In the early days Jeff, MacKenzie and a few employees handled everything. They were packing orders on their hands and knees on a concrete floor.

One day, the pain on Jeff’s knees and back from packing orders on the concrete floor of his garage was too much. “You know what we need?” He asked one of his employees, “We need knee pads.” His employee looked back at him like he was stupid and replied, “What we need are packing tables.” Jeff Bezos recalled later that he thought that was the best idea he had ever heard.

The internet bubble collapse in 1999 hit Amazon hard. Its stock was at $106 per share in December 1999, when Jeff Bezos made the cover of Time Magazine’s Person of the Year. One month later, it was down 40 percent. Within two years, it had fallen to $6 per share. In the annual shareholder letter that year, Bezos opened with one word: “Ouch.”

Be aware that a company’s stock price is not the company. Amazon was operating on strong fundamentals. That’s why they survived. Jeff Bezos is a long-game player who understands cash flow. He’s in the customer service business. It makes more mathematical sense to raise prices, Amazon lowers them. This is counterintuitive. On the surface, it seems like by lowering prices, that equates to adding more value. That’s not at all how the mechanics of Amazon’s business model works.

Sure, low prices can increase market share, but Amazon does more than that. Amazon provides value not only by lowering prices. Amazon increases the perceived likelihood of getting what you want fast. That’s with minimal effort or sacrifice for the customer.

Amazon Prime, AWS, Alexa, Whole Foods, Washington Post, Blue Origin (reusable rockets). Failed experiments including the Fire Phone. These are all examples of shots Jeff Bezos has taken after starting out selling books. “It’s all about the long-term”, he stated in his first shareholder letter in 1997. Focusing on the long term decisions always takes priority over short-term profitability. That’s both for customers and shareholders. At his Texas ranch, Bezos has installed a 10,000 year clock in the mountain. It’s titled, Clock of the Long Now, by Danny Hillis, a computer scientist and entrepreneur. The project is being built by the Long Now Foundation. It’s a non-profit organization dedicated to encouraging long-term thinking and responsibility.

“We intend to build the world’s most customer-centric company.” That’s what Jeff Bezos stated in his 1998 annual letter. While most businesses worry about their competition, Amazon worries about their customers. Bezos continued in his letter with the following. “I constantly remind our employees to be afraid, to wake up every morning terrified, not of our competition, but of our customers.”

Customers are always dissatisfied. They always want more. Negativity is a good thing. When Amazon started letting customers post negative product reviews, it was revolutionary. Their job isn’t to sell products online. Their job is to help customers make the right buying decision.

Focus on the big decisions. Jeff Bezos limits his decisions to only the big ones. He separates the reversible ones from the non-reversible ones.

As of August 2024, Jeff Bezos’ net worth is approximately $185 billion. Next week’s newsletter will be a continuation of Jeff Bezos. His example provides evidence that anyone can become a billionaire.

To be continued...

I like you,

– Sean Allen Fenn

Methods of Prosperity newsletter is intended to share ideas and build relationships. To become a billionaire, one must first be conditioned to think like a billionaire. To that agenda, this newsletter studies remarkable people in history who demonstrated what to do (and what not to do). Your feedback is welcome. For more information about the author, please visit seanallenfenn.com/faq.