Two Questions That Reveal a Company's True Worth

If you look at Alphabet (Google's parent company) and Amazon, you might assume Alphabet is the better business. It's mostly software-based and doesn't require a lot of physical assets to run—a model of a modern, efficient company. Amazon, on the other hand, has old-school bones. It has poured billions into building out a massive physical network for its e-commerce business and has done the same for its cloud computing arm, Amazon Web Services.

All things being equal, Alphabet should come out on top. But it hasn't. So, what explains Amazon's superior performance? The answer is management.

Both companies are incredibly ambitious, but Amazon’s spending is far more targeted and financially smart. While Alphabet funds dozens of speculative “moonshot” projects that lose billions annually, Amazon founder Jeff Bezos keeps his space venture, Blue Origin, separate from the company and funds it with his own money. This disciplined, data-driven approach is fundamental to successfully. Bezos himself wrote back in 2005, “Many of the important decisions we make at Amazon.com can be made with data… math tells us which is which.” Every year, he promises shareholders to analytically measure investments, cut programs that don’t provide acceptable returns, and double down on what works. For those just getting into , this level of clarity is a huge green flag.

So how do we, as investors, find leaders with that same long-term discipline? What signs tell us a management team is actually working for shareholders? After studying many successful companies, I've found that the evaluation boils down to two key questions.

Unlike business models and pricing, the qualities of great management haven't changed with the digital age. These two questions would be just as relevant for evaluating the manager of an ancient Sumerian wheat farm as they are for a modern tech . Superior management teams will always outperform mediocre ones, and as an investor, you'll be rewarded for spotting the difference.

Question 1: Do They Think and Act Like Owners?

Good managers run a business as if it were their own. This might sound obvious, but it’s surprisingly rare on Wall Street. Most executives act more like caretakers of a massive estate whose owners are away—they run the show primarily for their own benefit.

This often happens because a CEO at a large company usually gets the top job after decades of climbing the ladder, often in their fifties, with an average tenure of about a decade. With a limited window, their incentive is to keep things steady, avoid trouble, and get personally rich. They aren't the managers we're looking for. We want leaders who prioritize long-term stewardship over their own self-interest, treating the company with the focus of someone who sees it as more than just a security.

Question 2: Do They Understand What Drives Business Value?

Being obsessed with your business is a good start, but it’s not enough. What separates competent executives from truly great ones is a deep understanding of the key metrics that create long-term wealth. For anyone , this is a critical distinction.

When I worked at a large mutual fund, I used to test the financial savvy of visiting CEOs with a simple question: “Which is more important for you to focus on: growth in sales and profits, or return on capital?” The correct answer is return on capital. Anyone can grow sales and profits if you throw enough money at it; what truly matters is the return you get on that investment. Roughly 80% of the CEOs got this wrong.

I noticed that the CEOs most eager to visit our offices were often running the most mediocre companies. Their talent was in schmoozing, not performance. The truly great managers were too busy running their businesses to make the rounds. When they did visit, they came alone, not with a huge entourage. The size of a CEO's team was often inversely correlated with the company's stock performance.

The Gold Standard: Tom Murphy

Sometimes the best way to evaluate management is to look at people you know from your own industry. A bartender who worked corporate events in the 1970s once bought stock in a company after observing its executive team at a retreat. He noticed a relaxed culture where people seemed empowered, not fearful. As he put it, “Capital Cities was the only company where you couldn’t tell who the bosses were.”

That company was run by Tom Murphy, a manager Warren Buffett deeply admired. What Buffett prized most was that Murphy, despite never owning more than 1% of the company, always acted like an owner. He was famously frugal, once painting only the two street-facing sides of a run-down station headquarters to save money. Yet he wasn't cheap. When it came to where it mattered, nobody spent more.

Murphy understood that the local TV station that dominated the evening news would dominate the entire night's advertising revenue. So, he spent lavishly on newsroom talent and top-notch sets. While his newsroom costs were the highest in the industry, so were his profit margins—double the industry average.

Understanding Return on Capital

Great managers have a clear, almost mathematical understanding of value creation. Their main business is the business of generating cash flow. They focus on a metric called return on capital. You don’t need to be an expert, but you should understand the concept.

Imagine your kids set up a lemonade stand with a $25 investment from you. That $25 is their “capital.” If they make a $1 profit, that's a 4% return—poor. A $2.50 profit is a 10% return—average. But a $5 profit is a 20% return, which is excellent. The secret the best managers understand is that generating the most profit from the least amount of assets over time is the key to a successful business.

Murphy lived this. He rarely used company stock to buy other companies, as it dilutes shareholders. Instead, he used borrowed money and paid it back with cash flow. When he couldn't find a good acquisition, he'd buy back his own company's stock, especially when it was on sale. He also kept stock option grants for employees low, knowing that every share given away dilutes existing owners.

Jeff Bezos: Applying Old-School Wisdom to a New World

Tom Murphy’s story is from a different era, but his principles are alive and well in a few leaders of today’s top companies. Jeff Bezos is a prime example.

What sets Bezos apart from most tech founders is his background. He started his career at a hedge fund, which means he understood financial principles like return on capital before he even started Amazon. He combined that old-school financial discipline with a deep understanding of online commerce.

His first letter to shareholders is a masterclass in management quality. In it, he laid out his core principles:

• : He wanted every employee to think and act like an owner.
• : He committed to a lean, cost-conscious culture.
• : He prioritized growth to achieve scale, understanding that market leadership would lead to stronger returns on invested capital.
• : He made it clear that decisions would be based on long-term market leadership, not short-term Wall Street reactions.

Bezos has lived up to these promises. He compensates himself modestly and has never taken a single stock option grant, figuring his 10% stake in the company is incentive enough. While his annual salary has barely changed in 25 years, the Amazon shares he owns have compounded at 38% per year. He knows how to create shareholder value because he’s focused on the same timeless principles that made managers like Tom Murphy legendary.