Amazon joined the smartphone industry two years ago with its Fire Phone. It was a mess from the start.
Reviews were poor. Sales were dismal. Price cuts didn't work. Amazon stopped selling the Fire Phone last fall and took a $170 million write-down, which was more money than it earned in the previous three years combined.
It was, by any measure, an abysmal failure.
Asked about the Fire Phone in a recent interview, Amazon CEO Jeff Bezos said:
"If you think that's a big failure, we're working on much bigger failures right now. I am not kidding. Some of them are going to make the Fire Phone look like a tiny little blip."
It is hard to exaggerate how amazing this quote is. It's rare for a CEO to speak so candidly, and it highlights why Amazon is so successful as a business.
Dilbert creator Scott Adams once wrote: "If you want success, figure out the price, then pay it. It sounds trivial and obvious, but if you unpack the idea it has extraordinary power."
The price of success in any competitive industry is the willingness to try something different. But trying something different means failing once in a while. And most businesses aren't willing to fail. They don't want the stigma, or the ego blow, or the short-term hit to returns. So they stick with the ordinary, which in a competitive marketplace will get you eaten alive by people like Bezos. This is why Bezos is the fourth-richest man alive while competitors who aren't willing to take the risk of trying something new — like Sears and J.C. Penney — have fallen so far behind.
I shared Bezos' comment on Twitter. Philip Tetlock, a psychologist who studies the science of predictions, responded: "Techies often embrace their mistakes whereas politicians almost always deny theirs."
That's so important here. Denying failure means missing lessons. Amazon's embrace of failure means it is constantly running experiments. Those experiments offer lessons that increase the odds of future successes. I imagine, for example, the company learned an enormous amount from the Fire Phone that will help create better Kindles and tablets in the future. Failure isn't just viewed as having a silver lining; it's nearly a goal, like a symbol that you're trying hard enough and taking the risks necessary to stay competitive.
There are so many investment takeaways from this mindset. The view that failure is inevitable, the most valuable learning experience, and a symbol of putting in enough effort is as applicable to investing as it is business.
There is a saying among mutual fund managers: "No one gets fired for owning IBM." Doing something everyone is familiar with means you'll never have to apologize for subpar performance. But it means never earning anything above subpar performance. What's left are active managers who are indistinguishable from index funds. And an active manager who's unwilling to take the risk of deviating from the index is a Honda Civic with a Ferrari price.
There's also the inevitability that a portion of any portfolio will do poorly over time. This is as true for Warren Buffett as it is for you or me. Forty percent of stocks in an index fund essentially lose all their value over time. Anyone managing a portfolio will become acutely aware of this, with the losses rubbed in your face rather than masked in an overall index. You can view these duds as errors, and become angry and disappointed when picks go awry. Or you can view it as absolutely inevitable for any investor over time, and learn from mistakes to minimize the odds of blundering in the same way again, which is how progress is made in an industry as competitive and uncertain as investing.
Masters at the art
Part of the reason Amazon stock has done so well despite failures like the Fire Phone is because the company has convinced investors that it has mastered the art of failing well.
Other companies can't get away with failures like the Fire Phone because they have, as Tetlock suggests, a history of denying and making excuses for their failures. Amazon's failures are small enough not to take the company down, and the company learns from each mistake in ways that amplifies both the frequency and magnitude of its future wins. That's something we can all aspire to.