Introduction

There is the old adage: “you can’t teach an old dog new tricks. ”Well, I have been a “card-carrying” and fully committed value investor for more than 45 years now.I think that qualifies me as an “old” value investing dog. But more to the point, I have been consistently following and practicing the value investing principles as I was originally taught without exception for more than four decades.

As I have shared in the past, my initial introduction into value investing was inspired by my economics professor in college. When teaching us how to value a stock (publicly traded or private) he used to literally pound his desk with his fist as he shouted: “earnings determine market price.”Importantly, he had research and supporting data to back up his statement. Consequently, I was so smitten with his logical-and-common-sense-based-lesson that I eventually named the money management firm I founded after graduation – EDMP, Inc. This was a simple acronym reminding me of his important lesson-Earnings Determine Market Price.

So. here I am more than 40 years later and after examining the longer-term relationship of price and earnings on literally tens of thousands of companies, I remain totally confident that the relationship between earnings and stock price over the long run is both profound and real. On the other hand, my experience has also taught me that there are exceptions to every rule. As it relates to valuation there is more than one way to ascertain the fair value of a company. Earnings remain a critical metric in this value investor’s tool chest; however, earnings are not the only metric I consider.Valuation is essentially a puzzle.Like all puzzles, it takes all the pieces placed in the right order to make the beautiful picture.

Therefore, as time passed, and as my knowledge, education and experience grew and evolved, I expanded my valuation analytics to include other important fundamental metrics. Most prominently I began to evaluate cash flows in conjunction with earnings. This allows me the opportunity to segue into my title thesis as to whether or not Jeff Bezos (the vaunted founder of Amazon) actually taught this old value dog a new trick or not.

In truth, he did not, because I have now been studying the relationship between a business’ value and its various cash flow generating capabilities for many years. So I won’t be giving Jeff Bezos credit for my expanded understanding of valuation. However, he did provide me a perspective that I had not fully considered or perhaps even understood before. Therefore, I will give him credit for providing me a new and fresh perspective on valuation.

Here is an excerpt of what Jeff Bezos said in his (Amazon’s) 2004 letter to shareholders that inspired me to broaden my perspectives on valuation. The complete 2004 letter also included a republishing of their 1997 (original shareholder letter) and can be found here:

“To our shareholders:

Our ultimate financial measure, and the one we most want to drive over the long-term, is free cash flow per share.

Why not focus first and foremost, as many do, on earnings, earnings per share or earnings growth? The simple answer is that earnings don’t directly translate into cash flows, and shares are worth only the present value of their future cash flows, not the present value of their future earnings. Future earnings are a component—but not the only important component—of future cash flow per share. Working capital and capital expenditures are also important, as is future share dilution.”

Later in the video portion of this article I will provide clear and undeniable evidence that Jeff Bezos more than accomplished his goal of driving free cash flow over the long term. And, to his credit, he has created quite a little business for himself and his shareholders as a result. But what I personally admire most about Jeff Bezos is that he and I both love and admire Frank Sinatra.

You see, both Jeff and I share the same favorite song Frank Sinatra’s “My Way.”Jeff Bezos is an out-of-the-box thinker who is not afraid of going against the crowd. Honestly, I don’t know if Jeff Bezos actually likes Frank Sinatra or not. However, if you study Jeff’s life and business practices at all, I think you will find the song “My Way” summarizes it nicely. Here are the lyrics; enjoy:

“And now, the end is near
And so I face the final curtain
My friend, I’ll say it clear
I’ll state my case, of which I’m certain

I’ve lived a life that’s full
I’ve traveled each and every highway
But more, much more than this
I did it my way

Regrets, I’ve had a few
But then again, too few to mention
I did what I had to do
And saw it through without exemption

I planned each charted course
Each careful step along the byway
And more, much more than this
I did it my way

Yes, there were times, I’m sure you knew
When I bit off more than I could chew
But through it all, when there was doubt
I ate it up and spit it out
I faced it all and I stood tall
And did it my way

I’ve loved, I’ve laughed and cried
I’ve had my fill my share of losing
And now, as tears subside
I find it all so amusing

To think I did all that
And may I say – not in a shy way
Oh no, oh no, not me
I did it my way

For what is a man, what has he got
If not himself, then he has naught
To say the things he truly feels
And not the words of one who kneels
The record shows I took the blows
And did it my way

Yes, it was my way”