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Paulo Santos
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I am a Portuguese independent trader, analyst and algorithmic trading expert, having worked for both sell side (brokerage) and buy side (fund management) institutions. I've been trading professionally for about 19 years and also launched www.thinkfn.com in 2004. Thinkfn (Think Finance) carries... More
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  • In Jeff Bezos We Trust 8 comments
    Oct 10, 2013 4:54 PM | about stocks: AMZN

    As I read today's BusinessWeek excerpts from Jeff Bezos biography "Secret Amazon: An explosive new account will change everything you know about Jeff Bezos", something struck me. Amazon.com (NASDAQ:AMZN) has a large problem. A huge problem, in fact. The problem lies in the treatment of Jeff Bezos as a deity, to such an extent that it defies rationality. Perhaps it was to be expected in the sense that it has long seemed believing Amazon.com's valuation requires a big gulp of Kool Aid. But the extent to which this is obvious, and problematic, was never in such transparent display as with this biography.

    Having leaders being treated as unfailing deities is problematic in itself. Our society, and companies such as Amazon.com, relies intensely on specialization to achieve greatness. Deferring to the specialized knowledge in each area is paramount to make the best and most informed decisions. When the leader is a deity and everyone must follow him, it becomes hard to let power flow to those most able to wield it in each circumstance.

    What are the signs?

    It's obvious, throughout the BusinessWeek article, that Amazon.com has deified Jeff Bezos. Recall for instance the behavior asked of the Islamic faithful. They need to do as their Prophet, Muhammad, had done - this is the basis for the beards, the particular clothes, and many of the customs including the "up to 4 wives". Or the ever present "What would Jesus do?". In deifying someone, this is a common thread. But at one particular point it is shown just to what extremes this trend has gone. Take a look at the following pictures (Source: BusinessWeek article, under fair use to illustrate the point)

    (click to enlarge)

    The first photo pictures Jeff Bezos back in 1999. The second pictures a present-day desk at Amazon.com. Now, the first image shows a desk made out of a door to showcase how frugality was at the inception of Amazon.com. But the second picture, does it show the same? That desk is no longer made out of a whole door, yet the manner in which it was constructed goes to great lengths to imitate Jeff Bezos' original desk (take a look at how the hinges are exactly the same!). It turns out to be basically a higher-cost custom desk just to keep up with "doing how Jeff Bezos would have done"!

    Then there are consequences

    The article and book also present an example of Jeff Bezos brilliance. I quote:

    To the amazement and irritation of employees, Bezos's criticisms are almost always on target. Bruce Jones, a former Amazon supply chain vice president, describes leading a five-engineer team figuring out ways to make the movement of workers in fulfillment centers more efficient. The group spent nine months on the task, then presented their work to Bezos. "We had beautiful documents, and everyone was really prepared," Jones says. Bezos read the paper, said, "You're all wrong," stood up, and started writing on the whiteboard.

    "He had no background in control theory, no background in operating systems," Jones says. "He only had minimum experience in the distribution centers and never spent weeks and months out on the line." But Bezos laid out his argument on the whiteboard, and "every stinking thing he put down was correct and true," Jones says. "It would be easier to stomach if we could prove he was wrong, but we couldn't. That was a typical interaction with Jeff. He had this unbelievable ability to be incredibly intelligent about things he had nothing to do with, and he was totally ruthless about communicating it."

    This is shown as something positive, as if the all-seeing Bezos guides the uninformed towards better decisions. But is it? What if Bezos was all wrong - which is the most likely outcome when venturing outside his circle of competency versus highly-specialized workers? Who would have prevailed then? Obviously, it would have been Bezos.

    It's not rare for a leader to try and meddle in things he holds no specialized knowledge in. It's called micromanaging and the results aren't necessarily the best. Perhaps there can be exceptions, perhaps Steve Jobs was an exception - or was he? His biography and other books written on him seem to show a mercurial Steve Jobs, but one which commonly delegated to strong leaders in their areas, such as Jony Ive, Scott Forstall or Hartmut Esslinger.

    What comes across from Jeff Bezos' biography doesn't sound that way. What it does sound is like someone that's strong willed and able to override his specialists. The image that it puts across is not one of Steve Jobs guiding a company towards greatness. If Amazon.com's profits keep heading south, the image that it puts across is more likely to resemble that of Hitler in a bunker moving imaginary armies around to the befuddlement of his generals.

    Conclusion

    While the tone of Jeff Bezos' biography is entirely positive, there's an undertone that can't be missed. There's a treatment of Bezos as a deity which can't be ignored. It shows in little details like the imitation of Bezos' original desk - which originally might have served the purpose of frugality, but where such purpose can no longer be claimed on the present desks. It also shows in pictured events where Bezos has no qualms in overriding specialized knowledge within Amazon.com.

    The tone of the biography is positive, but the risk in this course of events should not be underestimated. As easily as Bezos overrides his staff in things where he might be right, he'll override them in things where he is sure to be wrong. And since we're dealing with specialized knowledge, outside of his circle of competency he'll be wrong more often than he's right (that is, after all, the very purpose of specialized knowledge - to be more right than wrong regarding very specific fields).

    In short, while the biography might be seen as positive and might well support the stock today, the long-term implications of treating Jeff Bezos as a God are deeply negative for Amazon.com.

    Disclosure: I am short AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

    Themes: short-ideas Stocks: AMZN
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Comments (8)
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  • Michael428
    , contributor
    Comments (811) | Send Message
     
    Paulo

     

    You might have done this also...but as you are not retired, you might not have had the time.

     

    I once took a quick look at Amazon's board. I was "struck" by it. Then I looked at Facebook's board. Then I had a little project for myself.

     

    I did a paper on both boards with their backgrounds and their "skin in the game". I like doing projects this way so I can formulate my thoughts by looking at a single document. I concluded the logic in choosing the board members may be consistent with the conclusions I reached from the BusinessWeek article.

     

    And finally, I wonder if Bezos uses the same "management style" he uses with his employees, in his dealings with Ernst & Young, the company's auditors?
    12 Oct 2013, 10:04 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (24957) | Send Message
     
    Author’s reply » I haven't looked. If you do, tell us the conclusions.
    12 Oct 2013, 10:11 AM Reply Like
  • krk
    , contributor
    Comments (836) | Send Message
     
    Michael-
    What do you make of the presence of Jamie Gorelick on the board?

     

    Wikipedia:Her involvement in many of the major tragedies and high-profile American scandals of the past two decades has led some in the press to dub her the "Mistress of Disaster."
    17 Oct 2013, 01:12 PM Reply Like
  • Ray Lopez
    , contributor
    Comments (1611) | Send Message
     
    The BusinessWeek blurb about how Bezos corrected control-theory engineers is absurd. It reminds me of stories about how dictators like Stalin or Kim or Mao or Hitler would overrule experts based on their intuition and be proved right. It's just PR. As for Amazon, like Walmart I expect them to continue to expand, but unlike Walmart their profit margins will be low. At some point the scheme will stall.
    15 Oct 2013, 02:53 AM Reply Like
  • Paulo Santos
    , contributor
    Comments (24957) | Send Message
     
    Author’s reply » That's what it reminded me as well. Hence the Hitler reference.
    15 Oct 2013, 04:24 AM Reply Like
  • Tirthraj Singh
    , contributor
    Comments (24) | Send Message
     
    All these authors write stuff like this as if a genius can just getup and make phd doctors look stupid with his intelligence. Have these authors ever read a PhD level math or physics paper? Even a Masters level student can barely comprehend it. Math and science has progressed so much in the past 50 years or so that even an Einstein or Newton cannot comprehend them without proper fundamental background let alone trump it!
    25 Jul 2014, 04:33 PM Reply Like
  • Paulo Santos
    , contributor
    Comments (24957) | Send Message
     
    Author’s reply » Yes another example:

     

    5. Bezos periodically goes haywire, insisting that Amazon stock everything.
    Stone describes one internal clash, when Bezos proposed spending $120 million to stock every child’s toy imaginable. Some of his lieutenants balked. The boss’s reply? “No! No! A hundred and twenty million!” Bezos yelled. “I want it all.” If some of the inventory turned out to be unsaleable, Bezos vowed, “I will drive it to the landfill myself.”

     

    http://onforb.es/19L6uYQ
    15 Oct 2013, 09:20 AM Reply Like
  • krk
    , contributor
    Comments (836) | Send Message
     
    And this is how back in 2009 Michael Lewis wrote about Bezos in:
    Panic: The Story of Modern Financial Insanity

     

    The emblematic character of the boom was not Ken Lay or Bernie Ebbers… it was Jeff Bezos…Bezos has become something like an antihero, one of those Internet hypesters who was given a lot more capital than he deserved to create an Internet business that still .. has made only very small profits. .. an off broadway stage play “21 Dog Years” in which a former Amazon employee named Mike Daisey takes full advantage of other people’s willingness to believe the stupidest clichés about the internet boom. … the excessive ambition of Amazon.com is: was it so completely unreasonable for Bezos – or, for that matter, any other internet entrepreneur – to behave as he did? .. The job of the entrepreneur isn’t to act prudently, to err on the side of caution. It is to err on the side of reckless ambition. ..The personality that allows you to be Bezos in the first place does not have a shutoff valve..

     

    http://bit.ly/15MkqR1
    17 Oct 2013, 05:00 PM Reply Like
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