The Value of Our Business
In 2021 the value of our business increased 33%.
- We believe that over the course of the next five years, we have a reasonable chance to increase our earnings by 5% per year. We believe this based on actual plans we already have in progress and our conservative estimates of the profits they will bring us.
- After five years, even though we have big dreams, we do not feel we can predict the future. Therefore, we assume (the unlikely) event that all earnings growth will stop forever
- We also assume (Here is an even less likely event) that the government will create a risk-free investment that pays 8% per year forever.
Our long-goal is to increase both our operating income and our earnings from investees by 15% per year.
This has been complicated by the Covid Pandemic. We have so far been able to achieve this goal, but mostly thanks to the heavy lifting of the companies we have invested in.
These companies (the companies of the S&P 500) have, as a whole, done an outstanding job of growing their earnings, even with the pandemic in full swing.
Taking a look at our favorite site for S&P data, multpl.com, we can see this story unfold. At the end of 2019, each share of the S&P 500 was earning an inflation-adjusted $161.
But then the pandemic happened and earnings took a nose dive as the world went into lockdown. By the end of 2020 earnings were barely above $100 per share.
Now, this temporarily reduced our intrinsic value because we include these earnings in our look-through calculation.
But…
It also reduced the price of the S&P Index.
***Watch closely now, because our reaction to this is what makes us different and set us up for great success in 2021***
Many people would have panicked at the sudden decline of their investment portfolio. Many people sold their holdings.
And it is true that our net worth fell. And our intrinsic value fell.
But we are not focused on those things. We are focused on look-through earnings.
This means that while others were panicking, we saw an opportunity.
We had the chance to buy way more earnings than we had seen in ages. We knew that earnings would return to normal after the lockdowns ended. Everyone knew that.
The only question was “when?”
Only… we don’t care about when. Our time horizon is longer than most.
So we bought a lot. For most of 2021, we were able to buy shares at a price that gave us a higher return on investment than our storefront inventory.
So for 2021, we did not expand our product line or our inventory. We actually let it shrink to free up capital for more investments.
And by the end of 2021, the earnings of the S&P 500 had almost doubled from their 2020 lows (from about $100 in 2020 to about $200 in 2021).
This lifted our look-through earnings, which in turn lifted our intrinsic value.
Outlook for the Future
We still have a goal of growing our look-through earnings by 15% per year.
But we also believe that earnings growth from the storefront will be slow as Covid recovery continues.
We still think the most likely course is that 3MM will continue to grow at a rate comparable to the US economy as a whole (about 5% per year) for the foreseeable future.
We expect most of our gains to come from the investment portfolio and we believe there will be more growth opportunities there than in the storefront.
Look-Through Earnings
Our goal for 2020 was to grow our look-through earnings to $31,000.
We exceeded our goal! Our look-through earnings grew in 2021 to $36,000.
Using the Discounted Cashflow Method and the criteria from the beginning of this post, we calculate our intrinsic value to be about: $556,000.
By this time next year, we hope for our look-through earnings to grow to $41,000 and our intrinsic value to grow to at least $639,000.
Wish us luck!
