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.

This lesson has served me and my clients well over the years because in truth, and in the longer run, it is earnings and the rate of change of earnings growth that drives long-term price movement. However, I didn’t simply take my professor’s word for it. Instead, I developed the FAST Graphs fundamentals analyzer software tool that empowered me to evaluate the long-term functional relationship between earnings and stock price over the long run on thousands of US and Canadian-based companies.

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.