Amazon was founded in 1994 and went public in 1997.
In 2015, Jeff Bezos opened his annual Letter to Shareholders by revealing that Amazon had not only reached $100 billion in sales, but done so faster than any company in history. Furthermore, their burgeoning Amazon Web Services (“AWS”) had eclipsed $10 billion in sales, growing at a pace even faster than Amazon itself.
Later in his note, Bezos writes:
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.
Bezos would go on to expand on three such “experiments” that turned out to be big winners, AWS being one of them.
In his recently published Letter to Shareholders, Bezos’ successor, Andy Jassy, reported that during 2024 Amazon’s revenue grew 11%, from $575 billion to $638 billion. Revenue from AWS grew 19% from $91 billion to $108 billion.
Amazon generated roughly $69 billion in operating income in 2024. Approximately $40 billion came from AWS.
Almost a decade after Bezos’ 2015 reflection, another one of the world’s richest individuals and most successful businessmen would also write a shareholder letter expressing a similar theme.
In Berkshire Hathaway’s 2024 shareholder letter (or, “report”), Warren Buffett recalls his first meeting with Pete Liegl in 2005. Pete was the founder of an RV manufacturer called “Forest River” and he was interested in selling the company to Berkshire Hathaway. After a dinner with Pete and his family, Buffett and Liegl agreed to terms. Buffett went on to write:
During the next 19 years, Pete shot the lights out. No competitor came close to his performance.
Every company doesn’t have an easy-to-understand business and there are very few owners or managers like Pete. And, of course, I expect to make my share of mistakes about the businesses Berkshire buys and sometimes err in evaluating the sort of person with whom I’m dealing.
But I’ve also had many pleasant surprises in both the potential of the business as well as the ability and fidelity of the manager. And our experience is that a single winning decision can make a breathtaking difference over time. (Think GEICO as a business decision, Ajit Jain as a managerial decision and my luck in finding Charlie Munger as a one-of-a-kind partner, personal advisor and steadfast friend.) Mistakes fade away; winners can forever blossom.
Perhaps unsurprisingly, financial markets have rhymed with these reflections from Bezos and Buffett: the exceptional few carry the weight.
Hendrik Bessembinder is a professor in the Department of Finance at Arizona State University. In February 2020 he published Wealth Creation in the U.S. Public Stock Markets from 1926 to 2019 wherein he researched all of the 26,168 publicly traded firms that existed in the United States between 1926 and 2019. The purpose of his research was to find: How much wealth has been created from the stock market as a whole in that 94-year period? What companies were responsible for that wealth creation? How much of the burden did those companies carry? He found that:
- US shareholder wealth grew (in excess of US Treasury Bill returns) by a staggering $47.4 trillion between 1926 and 2019.
- The majority of these companies not only failed to contribute, but hindered growth; 57.8% of stocks – 15,132 firms – reduced shareholder wealth versus the US Treasury Bill benchmark.
- Throughout that 94-year timeframe, 83 firms accounted for half of the total shareholder wealth creation. Said differently: 0.32% of all companies pulled 50% of the weight.
As Bessembinder succinctly wrote, “the majority of individual stock investments led to decreased rather than increased wealth in the long run. Aggregate shareholder wealth creation is concentrated in a relatively few high performing stocks.”
Many financial researchers have approached this topic from different avenues and reached similar conclusions. In a 2019 paper titled, How to increase the odds of owning the few stocks that drive returns, researchers at Vanguard also explored the question of “How many companies are sharing the load?” by examining the contributions of the companies in the Russell 3000 index between 1987 and 2017.
They found that over that 31-year timeframe, while 47% of stocks were unprofitable and approximately 30% lost more than half their value, about 7% of companies delivered cumulative returns over 1,000%. In summary, “The high-magnitude returns of a smaller number of stocks outweighs the lower—or even negative—returns of a larger number of stocks.”
Whether an idea at Amazon or publicly traded stock, statistically speaking: failure is more common than success. And because failure to perform – or even pure demise – is so much more common, it’s easy to forget that game-changing successes occur, too.
Not only do they occur, they’re vital. And abandoning optimism can be catastrophic.
AWS now represents nearly 58% of Amazon’s $69 billion of operating income. It’s hard – impossible, really – to reasonably hypothesize what Amazon would look like without AWS today. But it’s surely harder to make the case that the company would have achieved success anywhere near the levels it has reached today without AWS.
Bessembinder’s work makes that counterfactual a bit easier in financial markets. Without those 83 companies (and assuming competitors wouldn’t have filled their shoes – an important caveat), shareholder wealth created since 1926 would be half of the level at which we entered the 2020’s. That’s $23.7 trillion, gone.
Holding on to the optimism that these “winners” will always find a way to exist is essential for those that want to experience long-term investment success.
Let’s be clear: “optimism” is not the same as “blind, ignorant hope”. Risk taken should be a thoughtful reflection of tolerance and capacity for risk. Concentrated exposures should not be justified simply because “it’s possible”. Trees can’t grow to the sky; valuations can’t live exponentially above peers forever. Diversification and hedging have a well-deserved place in portfolio construction decisions.
That said: investors must never forget the colossal risk in abandoning optimism.
It’s important to reserve a space for the unprecedented, and appreciate the tremendous risk inherent in failing to do so. After all, history is quite clear: optimism is warranted.
Amazon, 2015 Letter to Shareholders
Amazon, 2024 Letter to Shareholders
Berkshire Hathaway 2024 Report
Wealth Creation in the U.S. Public Stock Markets from 1926 to 2019
How to increase the odds of owning the few stocks that drive returns
