In February, I dropped some Berkshire Hathaway in favor of Amazon. When the market crashed in March due to COVID-19, I moved most of my money into cash. Then as I gained confidence, I bought more. Amazon is where most of my cash is invested.

If you read my 2014 article Lazy Investing, you might say I am contradicting myself. Actually, that article was an example of confirmation bias. (I have that tendency, and perhaps this article should poke more holes in my conclusion.) It took me five years to realize that. I have to thank many lunch time conversations with Janis and Evan for challenging my convictions. I also have to thank Warren Buffet for saying “You have to learn how to value businesses and know the ones that are within your circle of competence and the ones that are outside.”

The Richest Invested in One Company

In 2009, I wrote, “nine guys made all their money from a single company.” These nine people were in top 25 on the Forbes Billionaires list. Buffet, Helu, Alsaud, and Ka-shing were also in the top 25. And, the other twelve inherited their wealth so I joked the “easiest path to wealth is to inherit it.” I concluded that I should invest with Buffet, because he was the best money manager. That is, I assumed I needed a money manager. Fatal flaw.

A better approach would have been to dig deeper. The people who inherited their wealth also made their money from a single company. Even in the article, I noted that four of the top 25 were Waltons, but I did not dig deeper. I should have.

The 2009 Forbes list:

  1. William Gates III - Microsoft
  2. Warren Buffett - Berkshire
  3. Carlos Slim Helu - Grupo Carso
  4. Lawrence Ellison - Oracle
  5. Ingvar Kamprad - IKEA
  6. Karl Albrecht - Aldi
  7. Mukesh Ambani - Reliance
  8. Lakshmi Mittal - ArcelorMittal
  9. Theo Albrecht - Aldi
  10. Amancio Ortega - Inditex
  11. Jim Walton - Walmart
  12. Alice Walton - Walmart
  13. Christy Walton - Walmart
  14. S Robson Walton - Walmart
  15. Bernard Arnault - Christian Dior & Le Bon Marche
  16. Li Ka-shing Hong Kong - CK
  17. Michael Bloomberg - Bloomberg
  18. Stefan Persson - H&M
  19. Charles Koch - Koch
  20. David Koch - Koch
  21. Liliane Bettencourt - L’Oreal
  22. Prince Alwaleed Bin Talal Alsaud - Kingdom Establishment
  23. Michael Otto - Otto
  24. David Thomson - Thomson-Reuters
  25. Michael Dell - Dell

Every single one of these people got their wealth from companies founded in the 20th century. No Rockefellers, Carnegies, or older wealth is in the list. All the heirs are second generation, and many went on to make the companies even bigger.

The list in 2020 contains even more first generation wealth from a single company:

  1. Jeff Bezos - Amazon
  2. William Gates III - Microsoft
  3. Bernard Arnault - Christian Dior & Le Bon Marche
  4. Warren Buffett - Berkshire
  5. Lawrence Ellison - Oracle
  6. Amancio Ortega - Inditex
  7. Mark Zuckerberg - Facebook
  8. Jim Walton - Walmart
  9. Alice Walton - Walmart
  10. Rob Walton - Walmart
  11. Steve Ballmer - Microsoft
  12. Carlos Slim Helu - Grupo Carso
  13. Larry Page - Google
  14. Sergey Brin - Google
  15. Liliane Bettencourt - L’Oreal
  16. Michael Bloomberg - Bloomberg
  17. Jack Ma - Alibaba
  18. Charles Koch - Koch
  19. Julia Koch - Koch
  20. Ma Huateng - Tencent
  21. Mukesh Ambani - Reliance
  22. MacKenzie Bezos - Amazon
  23. Karl Albrecht - Aldi
  24. David Thomson - Thomson-Reuters
  25. Phil Knight - Nike

Fun fact: about half the companies are retail and the other half technology. Berkshire, Koch, and Gruppo Carso are outliers.

Technology Meets Retail

Amazon used technology to sell retail, better. That’s one reason Amazon is the best bet. Retail is a huge industry: worldwide retail sales are $24 trillion per year. People need to eat and to clothe themselves. World income is rising, and along with it, consumerism. (I’m not saying this is a good thing, but it is a hard fact.)

Retail is a fickle business. I would not want to run a retail business. You have to move with the trends. Amazon moves with the trends. We are in the middle of the COVID-19 Pandemic, and Amazon stopped all deliveries of non-essential goods to its warehouses. That’s because at Amazon, it is always Day 1.

Eat Your Own Dog Food

Technology is key to Amazon’s success. Companies like Google and Facebook, also became successful through technology. However, technology at Amazon grew up around a problem: selling things. Then, it grew into a thing on its own: Amazon Web Services. Neither Facebook nor Google eats their own dog food like Amazon does. It’s funny, when I searched for this Wikipedia page I typed “Eat your own dog food” and the first completion on Google was “Eat your own dog food Amazon”.

Dogfooding is important. Google Compute Cloud is not used in internally at Google whereas Amazon Web Services (AWS) is. If AWS is down, services at amazon.com might be broken. I have used a number of cloud providers, and none of the big ones work as well as AWS. (I do like Linode.com, but they are a niche provider.)

My Circle of Competence

Unlike Warren Buffet, I am a technologist. I understand why Amazon made the decisions they made in their technology. I have friends who have work(ed) at Amazon. I have started many different companies, and I get what it takes to be a success. Dogfooding and Day 1 are key concepts that I try to employ.

I interact with Amazon on a daily basis. I read on my Kindle every day. I often watch Prime Video. I buy things for my home and businesses on Amazon. I use Amazon Web Services. I listen to Amazon Music, which I start by talking to Alexa via my Echo. I listen to audio books on Audible. Buffet knows Dairy Queen and Coca-Cola, I know Amazon. I’ve been a customer since 1998 when I moved back to the US.

But it’s not just me: Amazon trucks past by my quiet street multiple times a day. Amazon is an integral part of my society. And, more importantly, we share the same progressive values while still believing in capitalism.

What About Diversification?

In 2008, Warren Buffet made a ten year bet that the S&P 500 would beat a hedge fund and the hedge fund manager conceded two years early. Buffet says that non-professional investors should invest in low-cost index funds. This is solid wisdom, and John C. Boggle made a fortune creating that industry.

But right now, five companies make up more than 20% of the market capitalization of the S&P 500. This is a problem for diversification. The five are: Amazon, Apple, Facebook, Google, Microsoft. So even if you invest in VOO or SPY, you are into tech, big time.

Thinking about it differently, if you are 100% invested in the VOO, you are 5% invested in Microsoft, 5% invested in Apple, etc. Those are big investment decisions to make. If you are looking for diversification, 5% is a big number. Moreover, Berkshire (number 6) holds about 5% of Apple, which makes up 40% of its holdings right now and growing.

I use Apple products, but I am not a fan of Apple as an investment. They do sell retail, but they are focused on a narrow range of products. It is hard for them to be agile. That’s why I am not betting on Apple, and why I didn’t want +5% of my portfolio in Apple.

Diversification is thought to be safe, but it leads to owning a lot of Day 2 companies. There are 500 companies in the S&P 500, and I would not buy a single share of most of them. Why would do I think “in aggregate” that the S&P 500 is a good bet? I don’t, any more.

Betting on America

Yes, I keep on bringing up Buffet. He’s a brilliant investor, and he has lived a long life with many ups and downs. Buffet says “Never, ever bet against America.” I agree.

That’s why I am betting on Amazon. It is a quintessential American company. The vast majority of its sales are in the US. Yet, they are open for business in the world. Jeff Bezos is the richest man in America. If America does well in the coming decade so will Amazon.

One Horse Race

Walmart has been trying to compete with Amazon for a decade or more. I have bought stuff from Walmart both on and offline. Walmart’s revenues ($514B) are still bigger than Amazon ($280B). The difference is that Walmart’s growth has been under 10% for the last decade, and Amazon’s has been over 20%. Last quarter it grew by 34%.

There are other big companies, e.g. Apple, which are growing almost that fast, Amazon is growing faster. It surpassed Apple this year, and it is on track to surpassing Walmart in a couple of years.

Amazon’s growth is diversified. It isn’t just selling retail. AWS is growing by over 30%, and it, too, is becoming more diversified. The range of options on AWS is so mind boggling that a whole industry as formed to help you manage AWS.

While this is, of course, confirmation bias, I have hard time seeing where Amazon will falter. Perhaps you can enlighten me. Until them, I’m betting on Amazon.