Warren Buffett’s Letter – 1991 (Part 1)
Dec 20th, 2006 by Martin Lee
Look Through Earnings
Previously, I talked about look through earnings as explained by Warren Buffett.
Briefly stated, the look through earnings of a company consists of:
(1) the reported operating earnings, plus ;
(2) the retained operating earnings of major investees that, under GAAP accounting, are not reflected in the profits, minus;
(3) an allowance for the tax that would be paid if these retained earnings of investees had instead been distributed.
Investors can also benefit by focusing on their own look-through earnings. This can be calculated by looking at the total underlying earnings attributable to the shares that you hold in your portfolio.
Your role should then be to create a portfolio (or “company”) that will produce the highest look through earnings a long time from now.
Using this approach will force you to look at the long term business prospects rather than the short term market movements. Future earnings will, at the end of the day, influence the prices.
“In investing, just as in baseball, to put runs on the scoreboard one must watch the playing field, not the scoreboard.”
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