Why Amazon Got Lucky With Jeff Bezos

1. BGBen Gilbert0:00

   I have to ask both because it's fresh on our minds given recent acquired activity, but also you write about it in the memo. What is the two of your journey been with Amazon? Did you discuss that? Was that part of this thinking about value and growth perhaps not being two different things?

2. AMAndrew Marks0:15

   I think it's also really interesting because a typical value investor, you sort of look just at the fundamentals of the business, and you look at the economics of the business. And Buffett is very famous for saying that you want a business that an idiot can run.

3. BGBen Gilbert0:30

   'Cause eventually someone will.

4. AMAndrew Marks0:32

   Yeah, exactly. And so he sort of talks about the primacy of business model over management. But I think Amazon's a great example of the opposite because, um, you could have never dreamed that, uh, if you owned Amazon when the story was about, uh, growing as a retailer, you could have never dreamed of AWS. That shows what happens when you bet on an amazing founder who can leverage their business to create value in really compelling other ways. And so I think it's a great business case study, but it's also a case study of, of putting faith in a management team and recognizing the, the optionality that comes with that.

5. BGBen Gilbert1:09

   Howard, did Amazon ever intersect with your investing career?

6. HMHoward Marks1:13

   No. I'm a recovered equity investor. I was in the equity research department of Citibank from sixty-nine to seventy-eight, and then I left. And in the credit field, where I've spent the last forty-four years, we historically have not had contact with what you would call a, a tech company.

7. BGBen Gilbert1:31

   Although they had some distressed debt at, uh, at, uh, one point in time after the tech bubble.

8. HMHoward Marks1:36

   Yeah. But again, remember, we put very heavy emphasis on predictability, and I think that, I think that for the most part, Oaktree does what Warren and Charlie do. They, they, they put it on the too hard pile.

9. AMAndrew Marks1:51

   I think, by the way, one other thing that I would add about Amazon that may be too wonky but also may be interesting is I think it's al-also an example of one of the things we sort of talk about in the memo, which is it's hard to just take a sort of knee-jerk thirty-thousand foot view, and, and you really have to sort of dive in and understand things. So, you know, what people said for the longest time was that Amazon was losing money and could never be profitable.

10. BGBen Gilbert2:15

    A charity run for the benefit of the American consumer.

11. AMAndrew Marks2:18

    Exactly. And that came from looking a lot at the income statement and recognizing that, that they were losing money, you know, partially because they were continuing to lower price to achieve scale. But I think what's interesting is they actually had a very favorable cash conversion cycle, so the business was much more sound from a free cash flow perspective much earlier than it was from an income state perspective.

12. BGBen Gilbert2:40

    Michael Mauboussin wrote the research note that was not as popular as amazon.bomb and amazon.toast, but he called it cashflow.com, and that's what it was.

13. AMAndrew Marks2:49

    Yeah. And so I think it's just another sign of the fact that you probably shouldn't come to a conclusion about something without really trying to understand it for yourself.

14. HMHoward Marks2:58

    Well, this captures two of our earliest points of discussion. Number one, uh, that the, the companies we're talking about are more complex than the simple profit earners of the, let's say, deep value era. And so you can't, as Andrew says, have a knee-jerk reaction to s-some superficial knowledge. You have to really get deep. And then the other concept was this idea of optional profitability. The value investor wants to maximize cash flow and profits, EPS, but the growth investor sees losses sometimes as the right thing in the interest of the future. So that's an very, very important divergence.

15. AMAndrew Marks3:44

    But also very often not. And so you can't just be in one camp, and you can't say, "Well, you know, I shouldn't care ever about losses," or, "I should just take for granted that all, all reinvestments in growth are, are good." But you also can't take the point of view that none of them are good.

16. HMHoward Marks3:59

    Right. Wasn't it Mark Twain who said, "All generalizations are flawed, including this one"?

17. BGBen Gilbert4:05

    [laughing]

18. HMHoward Marks4:05

    And by the way, when I say the value investor does this and the growth investor does that, probably the biggest single theme of the memo was that di- that dichotomy should not be so hardwired.

19. SPSpeaker4:17

    [upbeat music] Who got the truth? Is it you? Is it you? Is it you? Sit me down. Say it straight. Another story on the way. Who got the truth? Who got the truth now? Hmm

Episode duration: 4:38