My favourite bit in “The Everything Store”, Brad Stone’s fine book about Jeff Bezos and the rise of Amazon, happens early on in the story.
In the early 1990s Bezos was working at a secretive Wall Street hedge fund called DE Shaw. DE Shaw was one of the first “quant” hedge funds, using high-powered computers to scour the markets for moneymaking opportunities.
It was founded by David Shaw, a Columbia University computer scientist. Shaw was a technology visionary. He was a computer science genius at a time when computers were suddenly getting much faster, cheaper, and more useful. And he was always spotting new ways to put them to work.
The rest of the Wall Street didn’t know what to make of this guy. All they knew was that this computer science expert, who knew nothing much about economics or the market, was suddenly making billions and billions of dollars. Fortune magazine called him “the most intriguing and mysterious force on Wall Street”.
From The Everything Store:
“In David Shaw’s estimation, [D.E. Shaw] wasn’t really a hedge fund but a versatile technology laboratory full of innovators and talented engineers who could apply computer science to a variety of different problems. Investing was only the first domain where it would apply its skills.”
In the same way that, in the 80’s, Shaw could see computers were going to take over the financial markets; in the early 1990s he could see the internet was about to take over all of commerce. So he asked the young Jeff Bezos to come up with ways DE Shaw could make money from it.
Bezos had a few useful ideas: a free, ad-supported email service; a platform for retail investors to sell stocks and bonds online. Both of those ideas were later spun out and sold off at a big profit.
But Bezos kept coming back to one idea. An idea that was far too big, even, for DE Shaw. He called it “The Everything Store”.
Playing the long, long, long game
You can fill in the rest of the story from here: Bezos gets obsessed with The Everything Store, leaves DE Shaw, drives across the country in a station wagon typing up the business plan on the dashboard. Twenty four years later he’s worth $80bn.
But what I find amazing about this story is how clearly Bezos saw today’s Amazon in 1993. Looking at the company he founded the following year, which sold books out of a Seattle garage, you’d never have guessed where it was going.
24 years later, bit by bit, Bezos has built his everything store.
From the book:
“The idea of the everything store was simple: an internet company that served as the intermediary between customer and manufacturers and sold nearly every type of product, all over the world… Shaw himself confirmed the Internet-store concept when he told the New York Times Magazine in 1999, “The idea was always that someone wold be allowed to make a profit as an intermediary. The key question is: Who will get to be that middleman?”
The likes of Google and Facebook were big ideas, worth hundreds of billions of pounds. But they were invented overnight and they got big within a year or two.
Amazon is the product of 24 years of slow, steady progress towards a goal. And it’s not even there yet. Bezos isn’t “the middleman”, skimming a couple of percent off every transaction on the internet.
Amazon may be the world’s fourth biggest company, but it’s still only halfway to its target. The scary thing is that there’s so much left for it to do.
So does that mean you should you rush out and buy Amazon stock right now?
You can buy a single share in Amazon for £750… that’s 84,000% more than the same share cost in 1997.
To be honest, at £750, that Amazon share is still probably a worthwhile investment. Morgan Stanley investment bank reckons Amazon is going to grow by 16% a year for the next few years.
But the thing is, I’ve found a better way to play it.
You see, even Amazon can’t do it all by itself. Amazon relies on a couple of tiny companies, which own important IP and infrastructure. Those companies are in a very nice place indeed.
I’ll reveal the full details on Thursday.