The current Ultimate Worldwide Rule Breaker Champion (tm), Amazon.com (Nasdaq: AMZN), continued to break rules and continued to do so with an element of surprise. We ended 1998 with a column about that very element -- surprise! -- and how it -- surprise! -- is an integral part of any Rule Breaker company. We stated that the companies with business moves that continue to surprise us most, in a positive nature, should continue to lead as Rule Breakers and probably as stocks, too.
Amazon has excelled in both. The company has surprised to varying degrees this year by adding auctions in March, electronics and toys in July, and now, today, zShops, a new service that allows anyone (company or person) to sell anything through Amazon's site. There are several potential big benefits of Amazon's new business:
1) It increases Amazon's inventory possibilities a thousand times over without adding inventory cost.
2) It creates new, eventually high-margin revenue streams in the form of a monthly fee paid to Amazon for listing items on its site, and in the form of a transaction fee paid to Amazon whenever a listed item is sold.
3) If successful, zShops could increase the number of customer visits on Amazon severalfold.
4) zShops will provide another means for Amazon to cross-promote items over numerous product lines, creating tangential sales.
5) zShops should only strengthen the Amazon community because members are able to rate all outside sellers and their products.
Amazon's stock surged on today's news because (we don't need to tell you) -- surprise! -- this business was not anticipated by most, if not all, investors. On Wall Street, analysts are throwing away their old financial models for Amazon and beginning to build anew. Today's news lays to waste any Amazon valuation model that doesn't include the possibility for significant transaction revenue two to three years from now. Today's news lays to waste any model that didn't take into account that Amazon owns an incredibly valuable piece of online real estate not only for itself, but for other vendors -- and Amazon can charge rent for this real estate.
Since our Amazon purchase in September 1997 -- when Amazon only sold books -- our investment thesis centered on possibility. If Amazon had been named "Books.com," despite that we're common idiots, we probably would have perceived management's flat ambition and waved off the investment. However, Amazon was arguably about e-commerce and community much more than it was about books from the start. The most valuable asset that Amazon offered shareholders was not the book business that it had created, but the brand name it had built and the traffic that this name generated. Persistent traffic is an online site's greatest asset. How so? A strong online company can leverage its consistent traffic again and again until it finally creates -- forms by hand, if you will, like clay -- a business model that favors it financially.
Amazon may not have perceived auctions as a lucrative potential in 1996. But once it did, the site already had the key ingredient -- traffic -- to add auctions and meet with success. Jeff Bezos may have had a giant shopping network such as zShops and the idea of renting Amazon's real estate in mind from day one, but whether he did or not, the idea could not succeed without offering sellers a critical mass of customers. Sellers won't pay to sell on a slow site. They will pay to sell on the most-trafficked e-commerce site in the world -- and by doing so, sellers strengthen the leading site's competitive and financial position that much further.
Once you're in the lead, boys and girls, you have all the advantages.
In conjunction with its goal to help you find and buy anything on the Internet, Amazon will launch a shopping search portal this week. If Amazon doesn't have what you want, and if Amazon's numerous partners -- including Drugstore.com, HomeGrocer, Gear.com, and Pets.com (great commercials on television, by the way) -- don't carry what you want, and finally, if Amazon's zShops vendors don't sell what you seek, Amazon's search portal will find it for you elsewhere. Just click and go.
As with America Online (NYSE: AOL) and eBay (Nasdaq: EBAY), we look forward to continued surprises from Amazon, and we don't expect these three chug-along trains to reach the end of any track. At leading companies, the journey is the destination. (For more on Amazon's news, including the transaction fee rates for the new service, please see Brian Graney's Fool Plate Special column.)
Excite@Home (Nasdaq: ATHM) saw action today as well. Speculation is swirling that the Internet cable-access leader and AT&T (NYSE: T) will form a partnership with AOL. Excite@Home has stated that cable deals will not be conducted between AT&T and other Internet service providers without its involvement. A current belief is that AOL will partner with Excite@Home to provide broadband cable content, while AT&T will provide the cable access with Excite@Home's approval. Theoretically, everyone gains. This plays right into my thinking on Excite@Home's Rule Breaker status as shared last week. I posted more thoughts last night on Excite@Home's message board. Since today's "news" is only speculation now, we'll note it, but we won't bank on it.
Now, if you're in any way upset because you have considered buying a winning stock (such as Amazon the past two years), but you haven't purchased it, the remainder of today's column by David Gardner may help. The remainder of today's column is an edited version of David's April 22 Rule Breaker column, in which David addressed what a Fool should consider when contemplating investing. There are three key things that you should know as you start to invest.
David G. is in the house. Take it away, David....
Tonight, I want to focus on a question frequently asked in our Rule Breaker Portfolio Strategies message board, namely, "I'm just starting out and would like to buy a Rule Breaker -- which one would that be?"
Right away, there is no single answer to that question.
But here's how I go about answering it. Begin by asking yourself this crucial question:
Which of these companies (or a Rule Breaker outside this silly portfolio) do I really know?
You see, three key characteristics define Foolish investing:
- Know thyself. As it was writ on the Greek oracle at Delphi, so too is it true for your investing and your life in general. In this context, you must understand what distinguishes you as a person. Do you really like to take risk? How do you react when things don't go your way? Are you an independent thinker? All of these things are critical to your decisions about how to invest.
- Know thy timeframe. This was actually graffiti scrawled on the oracle of the Oonky-Boonky people, an early civilization that was too myopic in its thinking. The Oonky-Boonkies had become convinced that no tool would ever be developed that enhanced humanity's ability to fight, and thus they never tried to develop one. Because the Oonky-Boonkies were physically larger and stronger than their nearby rivals the Peeky-Peekies, they thought that if they continued simply to breed within their culture, they would remain dominant. Well, a few generations came and went, and if you saw the opening to 2001: A Space Odyssey, you saw the documented historical result of where their short-term thinking eventually led them. In the context of investing, we encourage you to think long-term, which means being patient, putting your money only in the best companies you know, trading as infrequently as you can manage, and paying no mind to the short-term noise generated by financial TV, the money rags, etc.
- Know thy companies. While this is third on the list, that doesn't mean it's any less important -- or even, urgent. Make sure that in the context of knowing yourself and knowing your timeframe that you understand clearly what you're investing in. Are you a customer of the product or service? I consider that very important -- at the very least you should have a friend or acquaintance who is. Do you know the business model? That's not complicated. It starts with asking a simple question: "How do they make money?" And: "How do they make more money than that?" In other words, what is the company's business model, and what is its incentive? Does the company have a mission statement clearly identified, that you respect and agree with? Does the company appear to be fulfilling that statement? Who's running this company? Do you respect the management team?
And always remember the fate of the Oonky-Boonkies. That graffiti that desecrated their oracle, by the way, was scrawled shortly after their demise by their Peeky-Peeky conquerors.