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In Praise of Amazon Speculators

Posted: June 17, 2014

Author: Jonathan Hoenig

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Can you remember buying a book in 1992?

After circling the block looking for parking, you’d dig for quarters, feed the meter and walk into a chronically disorganized “Super Store” which often doubled as a clubhouse for teens and rest stop for vagrants.

Books plucked out of one section would be carelessly deposited in another, and endless shelves meant literally having to manually scan hundreds of titles looking for an errantly placed copy. Many books were mangled or stained with coffee.

Major Bookstore Super Store, early 1990s


Even in large stores, selection was limited. The finance section would have the 50 or 100 major current titles, but none of the out-of-print or hard to find items that, now thanks to Amazon, are no longer hard to find.

Indeed, in just one generation, you now browse a literally limitless selection of everything. Books, movies, games, groceries, a smart phone, the songs to go on that smart phone, not to mention a mattress, ladybugs, an LED-studded showerhead or a gourmet whole rabbit  — all ordered from your palm and delivered to your door.

You’re offered personalized suggestions about other products you’ll find of interest. Amazon has made us smarter consumers, able to more easily compare brands and pursue our interests. Think about the real-time reviews Amazon offers from consumers all over the world. In the old days, it was a few lines in the print version of Consumer Reports – at best.

That feels like the Stone Age today. Indeed, Amazon didn’t change bookselling; it changed the world.

Along the way, it’s traded with literally hundreds of millions of people. Amazon directly employs over 88,000 people. Hundreds of thousands of business, large and small, not to mention enterprising entrepreneurs, profit selling to, selling through and buying from Amazon. The wealth it has created for its customers, employees, executives, business partners and investors is incalculable.

This week, the company is slated to unveil its latest smartphone innovation. It’s as if every month Amazon announces new miracles that in earlier times only came around every few World’s Fairs.

What might be surprising is that, after 20 years, Amazon has razor thin margins and, as mega-cap businesses go, has never made any real profits. How is that possible?

How has Amazon been able to revolutionize shopping and trade worldwide, build a complex logistics and distribution network, invest in innovative businesses like Zappos, pay tens of thousands of trading partners, truck drivers, contractors, vendors, programmers, salespeople, truck drivers, caterers, etc… without making any real profits?

One word: Speculators.

Speculators, ranging from current shareholders to the 22 private individuals who backed the company in the early 1990s deserve the credit.  Founder Jeff Bezos raised $1 million from a handful of speculators, roughly $50,000 each, giving the nascent company a chance to hire more employees and begin to expand.

Speculators also funded the company’s 1997 IPO, investing $54 million more in Amazon’s growth and productive efforts.  (A $1,000 purchase of Amazon’s IPO would be worth roughly $240,000 today.)

Speculators bought $1.25 billion of the company’s bonds in 1999, providing additional capital.  They lent the company $3 billion more in 2012 as expansion into new areas, such as devices and content soared.

Just this week the Pope voiced loud disproval for “greedy” speculators in financial markets. But in reality, speculation is just a slur term for thinking. Speculators find, finance and facilitate a better life on Earth, Amazon is just one example. Hasn’t his Holiness tried Amazon Prime yet?

At some point, Amazon’s growth trajectory will likely slow.  Its managers will misstep, new competition will emerge, or for whatever reason, investors will no longer value the company at such rich multiples. The stock might fall. Who cares?

Those who lose money from a decline in Amazon’s stock are those who have chosen to buy it and, every day, voluntarily choose to hold it.

And even if the company goes bankrupt, such as once-leading Polaroid did in 2001, the innovation wrought from speculative activity, in this case, the Polaroid camera and over 533 patents, has improved all human’s lives, even those who’ve never paid the company a dime. And in a free society, there are always new Amazons, new innovators, new advances funded by the same profit-seeking speculators that each gave Amazon $50,000 back in 1994.

Wealth does not grow on trees. It’s produced by innovative individuals but financed speculators. Amazon, and the rest of the industrialized world would not exist without them.

As you give Amazon your business, consider giving its speculators your praise.

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