Miscellaneous Notes 4.14.16

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Source: Amazon 2015 Annual Report

Amazon (AMZN) CEO Jeff Bezos says their success due in part to both luck and their differentiated culture

“This year, Amazon became the fastest company ever to reach $100 billion in annual sales. Luck plays an outsized role in every endeavor, and I can assure you we’ve had a bountiful supply. But beyond that, there is a connection between these two businesses. Under the surface, the two are not so different after all. They share a distinctive organizational culture that cares deeply about and acts with conviction on a small number of principles. I’m talking about customer obsession rather than competitor obsession, eagerness to invent and pioneer, willingness to fail, the patience to think long-term, and the taking of professional pride in operational excellence.”

Amazon (AMZN) CEO Jeff Bezos says cultures take years to reinforce

“A word about corporate cultures: for better or for worse, they are enduring, stable, hard to change. They can be a source of advantage or disadvantage. You can write down your corporate culture, but when you do so, you’re discovering it, uncovering it – not creating it. It is created slowly over time by the people and by events – by the stories of past success and failure that become a deep part of the company lore. If it’s a distinctive culture, it will fit certain people like a custom-made glove. The reason cultures are so stable in time is because people self-select. Someone energized by competitive zeal may select and be happy in one culture, while someone who loves to pioneer and invent may choose another. The world, thankfully, is full of many high-performing, highly distinctive corporate cultures. We never claim that our approach is the right one – just that it’s ours – and over the last two decades, we’ve collected a large group of like-minded people. Folks who find our approach energizing and meaningful.”

Amazon culture embraces failure

“One area where I think we are especially distinctive is failure. I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment. Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.”

Amazon getting into the finance business

“We also created the Amazon Lending program to help sellers grow. Since the program launched, we’ve provided aggregate funding of over $1.5 billion to micro, small and medium businesses across the U.S., U.K. and Japan through short-term loans, with a total outstanding loan balance of about $400 million. Click-to-cash access to capital helps these small enterprises grow, benefits customers with greater selection, and benefits Amazon since our marketplace revenue grows along with the sellers’ sales. We hope to expand Amazon Lending and are now working on ways to partner with banks so they can use their expertise to take and manage the bulk of the credit risk.”


Source: New York Times Interview https://www.youtube.com/watch?v=ru995JyegDc

Dupont (DD) Former CEO Ellen Kulman

“The world is a more competitive place, it is getting more competitive not less competitive. So what that means is that you have to be really clear about what you’re doing,where you’re going, and how you’re going to get there.”


Source: CSX 2015 Annual Report

CSX CEO Michael Ward emphasized cost reduction in his annual report, much like many of the other Fortune 500 CEO’s

“Over the past decade, CSX has consistently delivered significant gains in productivity, even during the tough years of the most recent recession. 2015 was no different, with efficiency initiatives and cost reductions driving more than $180 million in productivity despite declines in some of the most profitable markets. The initiatives behind those savings are designed to create sustainable changes such as improving fuel efficiency and increasing the use of technology automation. What’s more, CSX delivered a total cost reduction of nearly $375 million, which includes savings from right- sizing resources to match demand. We have demonstrated repeatedly that we can aggressively manage costs in what is often considered a high fixed-cost business.”

Doesn’t expect coal markets to recover anytime soon

“The baseline coal market, which generated $3.7 billion in revenue in 2011, declined to $2.3 billion in 2015, and will continue to decline in 2016 and beyond. While this market remains important, it has given way to more consumer-oriented markets that demand premium, and ever more cost-effective, service. In an era in which the $1.4 billion in coal revenue declines over the past five years will continue to accelerate, the status quo is no longer an option.”


Source: Schwab 2015 Annual Report

Schwab (SCHW) CEO Walt Bettinger tries to be as candid as possible in his annual letter to shareholders about the state of the business

“Each year it is an honor to sit down and craft a letter to share my thoughts on Schwab with you, our valued stockholders. I strive to write this letter with a minimum of jargon, corporate speak and trendy business buzzwords. It isn’t written to compete with the latest bestseller on business strategy or how to be a better leader in changing times; it is written with the goal of simply discussing the current state of our company and the future we face together. The litmus test for this letter is: “Does it read as if I were corresponding with a business partner who has been out of touch for the past year?” As always, my hope is that you will share with me your feedback on whether this goal has been achieved.”

Schwab (SCHW) CEO Walt Bettinger said humans will continue to seek a human relationship in some form when seeking investment or financial advice

“One of the most over-hyped aspects of investing in the past year is the concept of “robo-advice.” A “robo-advisor” offers a user-friendly website and mobile experience where an investor can answer a few questions, have a complete investment portfolio built, and receive ongoing management with rebalancing and, in some cases, tax-loss harvesting. Now, I say over-hyped because the press has speculated that growth in “robo-advice” could jeopardize the desire for investors to want an in-person relationship–a suggestion that we see as folly. That said, there are real benefits to the concept of automated investment advice if it is combined with the availability of live professionals by phone, chat or in person.”

Schwab (SCHW) CEO Walt Bettinger says they are disrupting themselves in order to create a better client experience

“Today, despite what you might hear in the press about “Silicon Valley disruptors” and “fintech,” Schwab remains the consummate challenger in the investment industry. Each day we ask ourselves a question consistent with our “Through Clients’ Eyes” strategy: “How can we use our deep knowledge of investing to help our clients be better investors, to deliver services to clients at a lower cost, and to ultimately help them achieve better outcomes and take ownership of their financial futures?”

Federal Reserve’s low interest rate policy is hurting their business results

“Punishing. There is no other way to describe the financial impact on our company from the unprecedented experiments taken by the Federal Reserve since 2008. While the Fed experimented with zero interest rates and printing money under the guise of a fancy term–quantitative easing–savers suffered, responsible people who had avoided large debt suffered, and our company suffered as well. In 2008, when client assets at Schwab were slightly in excess of $1 trillion, we generated revenue of just over $5 billion. In 2015, when client assets were in excess of $2.5 trillion, we generated revenue of just over $6 billion. Put more succinctly, during that period total client assets grew by about 120% while revenues grew just 24%. Punishing. And you can attribute virtually this entire scenario to the interest rate policies of the Fed.”

Schwab (SCHW) CFO Joe Martinetto said they are assuming one Federal Reserve rate hike this year for their internal budgeting

“With that crucial first Fed rate move behind us, the path forward could be a bit brighter. As we finalized our annual planning at the beginning of 2016, the forward rate curve implied that, despite some global market jitters, the U.S. economy was strong enough to support expectations for at least one more Fed move in 2016, and we developed our baseline scenario with that in mind. Our baseline scenario also includes relatively flat long-term rates and a 6.5% improvement in the S&P 500 Index relative to year-end 2015, as well as a potential decline in revenue trades as average portfolio turnover continues to slow.”


Source: October 2015 Stanford Interview https://www.youtube.com/watch?v=hcRxFRgNpns&list=PLnsTB8Q5VgnVzh1S-VMCXiuwJglk5AV–&index=8

Alphabet (GOOGL) Chairman Eric Schmidt

“The ideal business is the Microsoft business. A monopoly software business with hardware competitors who are competing for good treatment by you in a global and growing industry. Let’s use Uber as an example. Uber spends an awful lot of time saying that the drivers don’t work for them and they don’t own the cars. There’s a reason and it’s not legal or liability reasons. It’s because if you think of them as a software infrastructure company that helps assemble this thing, they have very different economics. In that sense, it’s the modern version of a franchisee. Why do people own McDonald’s franchises rather than McDonald’s owning them? Well, it’s because McDonald’s couldn’t get the capital to own them all themselves.”


Source: November 2015 Stanford Interview https://www.youtube.com/watch?v=jYhP08uuffs&index=16&list=PLnsTB8Q5VgnVzh1S-VMCXiuwJglk5AV–

Netflix (NFLX) CEO Reed Hastings says you can never know anything for sure

“Maintaining a reservoir of doubt is extremely important.
“We often do an exercise, every year or so, what would be different at Netflix if you were CEO? It’s a way for me to gather all the different strategies. Would you change the pricing? Would we be in the ad business? And I really try to think through all the different methods, We call it farming for dissent. You can never be confident of anything, you always have to be curious. Yet you have to be executing really firmly. Simultaneously, knowing there is no certainty yet working really hard to know what you think.”

They don’t do company acquisitions

“In 17 years, we’ve never done an acquisition. People have tried to acquire us, but it never worked.”


Source: McCormick 2015 Annual Report

McCormick (MKC) CEO Alan Wilson said they are accelerating their shift to digital advertising

“Across all of our markets, we increased brand marketing support by 6% in 2015. Increasingly, we are shifting toward digital marketing, which comprised 38% of our advertising, up from 11% in 2011. Digital marketing creates a direct connection to consumers, including Millennials, who view the McCormick brand positively. As an example, our mccormick.com site has become a top 50 most visited food/lifestyle site.”


Source: Morningstar 2015 Annual Report

Morningstar (MORN) CEO Joe Mansueto says the company benefits from key tailwinds

“We benefit from some important industrywide trends, such as outsourced investment management, the convergence of the advisor and workplace/retirement spaces, the shift to passive investing and strategic- beta strategies, and growing market acceptance of new credit-ratings entrants.

Morningstar (MORN) CEO Joe Mansueto says asset management clients remain cautious about spending

“Low interest rates and the industrywide shift to passive investment manage- ment continued to put pressure on spending for many of our asset management clients.”