We Reinvest Almost Everything Into The Core Business

2019

Starting net worth: $87,000

Income:

Leslie: $30,000

Ben: $30,000

Both the online store and the website have provided serious opportunities for expansion this year. Because we can reasonably expect both of these businesses to earn a higher return on our investment than our usual VOO would bring, we decided to direct money that would have been going into the market into the businesses instead. This is why our ‘equities at cost’ section below grows less than it did in 2018 (and why our look-through earnings are lower).

We are still contributing at least $600 to VOO purchases, in accordance with our 3MM plan. Everything else is going into the businesses right now.

Most of the time, this relationship is flipped, where we can’t find ways to invest money into the businesses and reasonably expect to make more than investing directly in the market. During these times, all extra cash goes into VOO.

Maybe we need a different way to report these numbers….

Let’s try something new….

Warren Buffet is fond of reporting the unrealized earnings his stock holdings have earned for him. This is not how much the stock price has actually gone up or down (which is subject to the whims of the market) but what his share of the earnings (as a stockholder, he is a part owner) would be.

Because I own shares of a fund that tracks the S&P 500, I am a part owner of each of the 500 largest companies in the US. And thanks to data published by Standard and Poor’s and aggregated by multipl.com, I can calculate my share of the profits of these 500 companies.

Going forward, I will calculate this number and report that as part of our monthly reports.

Why do it this way? The fluctuations of the stock from month to month, even year to year are meaningless to me, but the earnings of these companies is very real money. I only get a portion of it in my pockets as a dividend, but the rest (the earnings ‘retained’ or held onto by the company) is actually more important to the growth of my wealth than the dividends are. Remember, I have to pay tax on dividends, but not on the retained earnings.

Passive Income

In 2019, our share of the earnings of the companies we partially own through equities was $2948.

This number is so much more than it looks. This year the S&P 500, because of its popularity and its economic strength, commanded a price around three times higher than the actual dollars retained. This means that every dollar that is retained (every dollar the S&P earns but does not pay out in dividends) was, on average, worth three dollars in market value.

So while my stocks earned me $2948 dollars in 2019. My actual market value increased, on average, ($2948 x 3) = $8,844.

That is tax-deferred, passive income. (This is also the only actually passive income I have ever found).

As a comparison (and so you can see why I don’t like dividends) let’s look at two dollars. One I earned through a normal dividend payment. The other came my way via retained earnings.

  1. The Dividend Dollar:
    • I get $1
    • I owe a 15% tax on that dollar
    • I walk away with $0.85
  2. The Retained Dollar
    • The companies I own retain $1 dollar for me
    • The net worth of those companies increases by $1
    • I owe no tax on that dollar.
    • Because of the financial strength of the companies I own, other people are willing to pay $3 for the one dollar the company retained.
    • My net worth increases by $3
    • I owe no tax on those three dollars until I sell my shares.

Look-Through Earnings

Our share of stock earnings (including dividends): $2,948

Total look-through earnings: $11,948

Assets

Equities @ Cost: $83,000

Cash/Equivalents: $12,000

Look-Through Earnings

As of December, our look-through earnings (remember, that is our operational earnings plus our share of earnings from the stocks we own) was around $12,000 for the year.

We believe this number to be well below what we can actually generate. This is because we have invested so heavily in the business (expanding inventory, equipment, etc.).

When we think of the operational portion of our look-through earnings, we only count the money that was free and clear to invest. You can think of it as our free cash flow.

It might have counted as ‘profit’, but if we need to spend it again on inventory to maintain our volume, then we don’t count it in our look-through earnings.

Maybe an even shorter way to explain it is this: Look-through earnings = Money we can invest + retained earnings of our investees.

Using the Discounted Cashflow Method and the above criteria, we calculate our intrinsic value to be about: $280,000.

(Remember, intrinsic values are always estimates and should never be calculated with exactitude).

That means that by this time next year we hope for our look-through earnings to grow to $13,800 and our intrinsic value to grow to just shy of $322,000.

(We actually expect this to be higher because we expect our expenses to be lower).

Wish us luck!

Closing Thoughts

We have big plans for 2021. Mostly, we are focusing on efficiency.

We believe (now more than ever) that it is possible to run a million-dollar business in less than three months per year.

I mean, we’ve already passed te one-quarter mark. and we see significant room to grow and many many ways to be more efficient.

To see a rundown of what we’ve learned, check out these guides.

For more details on how we structured our business, or fit the work of running an online store into our busy lives, check our guides:

We also publish unbiased reviews of business tools and software. To see some of our top review posts, Check out:

Or go on to the 2020 Annual Report

Or go back to Income Reports