I cannot believe it has been over 4 years since I read Warren Buffet’s annual letters for the first time. And that’s where I read the concept of Look Through Earnings. It is, in my opinion, one of the most important and effective KPI to focus on and gauge the performance of the portfolio.
Formula
Look through earnings = Earnings paid to you (dividends after tax) + your portion of earnings that company keeps with itself (EPS x # stocks you own)
How I use it
– I calculate total Look-Through Earnings of the portfolio by adding up Look-Through Earnings of all my individual investments.
– With some assumptions, I stage my portfolio in a way that my portfolio have much higher look-through earnings in the next 5/10 year period.
– I use the growth in Look-Through Earnings to gauge my portfolio performance. I compare the rate of growth in Look-Through earnings vs my expectations of the growth and also vs S&P 500’s Look-Through Earning.
– I focus more on long-term Look-Through Earnings of an investment to analyze its performance because it provides more rational, realistic and less volatile measure of portfolio performance rather than price quoted by the market.
2023 Look-Through Earnings Analysis
– Look-Through Earnings of my portfolio was ~$36K (Looks like we crossed our stated goal)
– Look-Through yield of the portfolio as of end of 2023 is ~7% vs 4.1% of S&P 500. This shows that even though my portfolio barely beat S&P returns this year, companies that I hold performed much better operationally. One of the main reasons for this relatively better performance is that all the companies that I hold have miniscule debt, if any and good cash balance. And therefore, they were not squeezed financially unlike many of their peers.
– Growth rate of Look-Through Earnings in 2023 compared to 2022 is 18%. Considering the interest rate environment, tech company squeeze and wars around the world, I was pleasantly surprised at first. However, on diving a bit deeper, I saw that most of the improvement was contributed by two holdings out of 7. Without the top 2, the Look-Through earnings growth would have been just 7%.
Final Comment
Overall, considering the market conditions, it was a decent year for my companies. Especially because even while our companies were operating well, Mr. Market provided ample opportunities to increase my stake in the existing companies. This helped to allocate more capital in the current businesses at reasonable valuations thereby increasing the probability of more look-through earnings in the future.
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