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My stocks’ true earnings

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Finweek investment expert Simon Brown
Finweek investment expert Simon Brown

Another metric to gauge a share portfolio.


I have for some time been trying to figure out how to measure my portfolio’s success (or failure) using a metric other than just the price.

Sure, price is what we can sell for and as such a useful metric, and higher prices are what we strive for and it makes me feel smart when it realises.

I also measure my portfolio’s return against the overall market. But price is manic and more a reflection of the market’s mood and not actually any reflection of value of my portfolio.

Reading the latest annual letter to shareholders from Warren Buffett in which he refers to real earnings got me thinking about using real earnings. In South Africa’s case, earnings would be the headline earnings per share (HEPS).

This is an IFRS definition so it will be standardised across the different stocks I own even if some are banks while others are miners or retailers. These different sectors do have different metrics, such as head grade for miners, cost-to-income for banks and the operating margin for retailers.

At the end of the day, though, HEPS tells us how much profit each share made for each shareholder.

So, I am taking my portfolio and as financial results are released, I am calculating what the HEPS for each stock was over the last year. For full-year results, I just use the full-year number. When it is interim results, I use the interim figure and then go back and calculate the second-half HEPS for the previous financial year by taking the full-year HEPS and subtracting the previous interim figure.

This gives me the actual profit per share that I hold. I then multiply that by the number of shares and having done the same for all the different shares I hold, I add them together. Now I have a real view of what profit my portfolio made in 2020 rather than just the manic price movement.

The idea here is that while share prices are manic, profits are steady, notwithstanding the earnings and price collapses from the 2020 pandemic, and a key reflection of the quality of the investment.

Early data covering the last three years is volatile due to the 2020 pandemic, but 2018 and 2019 were going along nicely, seeing an increase in overall earnings. In short, what I am seeing already is a much more steady and less volatile graph that is showing increasing earnings growth ahead of inflation and this is what we want from an investment portfolio.

I am going to do the same work on the dividends I received. Earnings are real but dividends are cash which I can spend or invest.

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This article originally appeared in the 8 April edition of finweek. You can buy and download the magazine here.

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