How Bezos' Long-Term Vision Turned 'Overpriced' into 'Undervalued'

Let's turn back the clock to 2002. Amazon's stock was trading at around $17 per share, a far cry from its dot-com bubble high of $107 in 1999. Many investors and analysts were skeptical about the company's future. After all, Amazon had yet to turn a profit, and its price-to-earnings ratio was, well, nonexistent. By traditional valuation metrics, Amazon appeared grossly overvalued.

Enter Bill Miller, the legendary value investor who managed the Legg Mason Value Trust. While others saw an overpriced tech stock, Miller saw a company with extraordinary growth potential. He began accumulating Amazon shares, much to the bewilderment of his peers. His reasoning? Amazon's true value lay not in its current earnings, but in its potential for future growth.

Miller's decision to invest in Amazon wasn't just a lucky guess. It was based on a deep understanding of the company's business model and its visionary leader, Jeff Bezos. Bezos had a clear plan: reinvest all profits back into the business to fuel growth and gain market share. This strategy meant sacrificing short-term profits for long-term dominance.

Now, you might be thinking, "Sure, hindsight is 20/20. Anyone can look back and say Amazon was a good investment." But that's precisely the point. At the time, investing in Amazon required the kind of foresight that Philip Fisher championed. It required looking beyond the current price tag and focusing on the company's growth trajectory.

Think of it this way: Imagine you're house hunting, and you come across a small, somewhat overpriced starter home in an up-and-coming neighborhood. The house itself might seem a bit expensive for its current size, but you see potential. You know that in a few years, as the neighborhood develops, that small house could be expanded into a much larger, more valuable property. Would you pass up on that opportunity just because the current price seems a bit high?

That's essentially what Bill Miller saw in Amazon. He wasn't just buying the company as it existed in 2002; he was buying into its potential to become the e-commerce powerhouse it is today.

And boy, did that potential materialize. By 2012, ten years after Miller's initial investment, Amazon's stock price had indeed quadrupled, trading at around $68 per share. But the growth didn't stop there. As of 2023, Amazon's stock price has soared to over $3,000 per share (accounting for stock splits), representing a return of more than 17,000% from 2002.

Now, let's dig deeper into the philosophy behind Fisher's quote and Miller's investment. It's all about the power of compound growth. When a company is growing rapidly, the effects of compounding can be astounding. A 35% overvaluation today can seem trivial if the company's value doubles, triples, or quadruples in the coming years.

Consider this analogy: You're planting a tree. You have two options: a fully grown tree that's a bit overpriced, or a sapling that seems reasonably priced. The sapling might not look like much now, but if it's a fast-growing species in fertile soil, it could outgrow the mature tree in just a few years. That's what investing in high-growth companies is like. You're not buying what the company is today; you're buying what it could become tomorrow.

But here's the catch: This approach requires patience and conviction. It's not for the faint of heart. When Miller was buying Amazon stock, he faced criticism and skepticism. The stock price continued to fluctuate, and there were moments when it looked like the skeptics might be right. But Miller held firm, understanding that short-term price movements are often noise that distracts from the long-term signal of a company's growth.

This patience is crucial because high-growth companies often appear overvalued by traditional metrics. They're reinvesting heavily in their business, which can depress current earnings. But if you wait for these companies to look "cheap" by conventional standards, you might miss out on the bulk of their growth.

The Amazon case also highlights another key aspect of Fisher's philosophy: the importance of qualitative factors. Fisher believed in thoroughly understanding a company's business model, management quality, and competitive advantages. Amazon had all of these in spades: a visionary leader in Bezos, a robust and scalable business model, and a growing moat in the form of its distribution network and customer base.

In the end, the wisdom of Fisher's quote, as demonstrated by Amazon's incredible journey, is this: When you find a truly exceptional company with strong growth prospects, don't let concerns about short-term valuation hold you back. The power of compound growth can turn today's "overvalued" stock into tomorrow's bargain.

So the next time you come across a promising company that seems a bit pricey, ask yourself: Am I looking at a sapling that could grow into a mighty oak? If the answer is yes, a little overvaluation today might be a small price to pay for the forest of returns tomorrow.