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Warren Buffett said many times that the companies he likes are:
1. Simple businesses that he understands
2. that have predictable and proven earnings and
3. with economic moat
4. those can be bought at a reasonable price.
It is hard to quantify "simple businesses that he (Buffett) understands", so we will focus on the other three characteristics instead. In GuruFocus Research: What worked in the market from 1998-2008? Part I: Introduction of Predictability Rank, we will show that the businesses that have predictable and proven earnings are usually also simple businesses that an average person could understand.
GuruFocus conducted a back test study of Warren Buffett's strategy of "buying good companies at fair prices" for the years from 1998-2008.
In our database there are 2403 stocks that have been traded from Jan. 2, 1998 to Aug. 31, 2008. We have the complete 10-year financial data and trading prices of these companies for this period. We rank the predictability of these companies based on the consistency of their revenue per share and EBITDA (earning before interest, tax, depreciation and amortization) per share over the past ten fiscal years, and study the correlation between the stock performances and the predictability of the business.
Our study may be subject to these biases and assumptions:
Dividend yields are not counted for investment returns
Effects of price changes due to spin-offs may not be fully adjusted
Study is subjected to survivorship bias due to de-listing, bankruptcy, LBO, M&A, etc.
The correlation between business predictability and investment returns of a company is showed below.
Predictables | Non-Predictable | All stocks | |
---|---|---|---|
Total Number of stocks | 570 | 1833 | 2403 |
Total Lost Money | 61 | 830 | 891 |
Total Lost More Than 50% | 18 | 412 | 430 |
Total Lost More Than 90% | 4 | 86 | 90 |
Average Gain | 260.6% | 100.0% | 138.1% |
Median Gain | 150.0% | 13.0% | 39.0% |
Maximum Gain | 2852.0% | 11483.0% | 11483.0% |
Maximum Loss | -100.0% | -100.0% | -100.0% |
Annualized Average Gain | 12.7% | 6.7% | 8.4% |
Annualized Median Gain | 8.9% | 1.1% | 3.1% |
For the 570 predictable companies, we have seen strong correlation between the predictability of businesses and the stock performances over the past 10 years, regardless of the valuation of business at 1998. Accordingly, we have ranked the business predictability from 5-star to 1-star, as shown in this table.
Predictability Rank | 5-Star | 4.5-Star | 4-Star | 3.5-Star | 3-Star | 2.5-Star | 2-Star | 1-Star (non-predictable) | Average among all |
---|---|---|---|---|---|---|---|---|---|
% Out of All 2403 Stocks | 3.3% | 2.9% | 3.7% | 3.3% | 3.3% | 3.7% | 3.3% | 76.3% | 100% |
% that are in Loss (10y) | 3% | 10% | 8% | 9% | 11% | 18% | 16% | 45% | 37% |
Average Gain (10y) | 364.6% | 330.9% | 278.0% | 235.1% | 243.5% | 227.8% | 154.8% | 100.0% | 138.1% |
Median Gain (10y) | 238.5% | 193.5% | 171.0% | 159.0% | 132.5% | 113.5% | 87.0% | 13.0% | 39.0% |
Maximum Gainer | 2228.0% | 2547.0% | 2452.0% | 2852.0% | 2432.0% | 1892.0% | 1807.0% | 11483.0% | 11483.0% |
Maximum Loser | -82.0% | -53.0% | -67.0% | -100.0% | -83.0% | -100.0% | -78.0% | -100.0% | -100.0% |
Annualized Average Gain | 15.4% | 14.6% | 13.2% | 12.0% | 12.2% | 11.7% | 9.1% | 6.7% | 8.4% |
Annualized Median Gain | 12.1% | 10.6% | 9.8% | 9.3% | 8.2% | 7.3% | 6.0% | 1.1% | 3.1% |
For detailed information about each predictability rank, please go to GuruFocus Research: What worked in the market from 1998-2008? Part I: Introduction of Predictability Rank
Also read:
Part II: What worked in the market from 1998-2008? Part II: Role of ValuationsThank you for viewing the detailed overview of Autoliv's Predictability Rank provided by GuruFocus.com. Please click on the following links to see related term pages.
Leif Johansson | director | C/O AB VOLVO, SE 4050B, GOTEBORG, SWEDEN V7 4050B |
Jan Carlson | director, officer: President and CEO | C/O AUTOLIV, INC., KLARABERGSVIADUKTEN 70, SECTION B7, STOCKHOLM V7 SE-111 64 |
Fredrik Westin | officer: See Remarks | C/O AUTOLIV, INC. KLABERGSVIADUKTEN 70, SECTION B7, STOCKHOLM V7 11 64 |
Frithjof Oldorff | officer: President, Autoliv Europe | 21680 HAGGERTY ROAD, SUITE 101, NORTHVILLE MI 48167 |
Christian Swahn | officer: EVP, Supply Chain Management | C/O AUTOLIV, INC. KLARABERGSVIADUKTEN 70, SECTION B7, STOCKHOLM V7 111 64 |
Mikael Bratt | officer: President, Passive Safety | C/O AUTOLIV, INC., KLARABERGSVIADUKTEN 70, SECTION B7, STOCKHOLM V7 SE-111 64 |
Magnus Jarlegren | officer: EVP, Operations | C/O AUTOLIV, INC.,KLARABERGSVIADUKTEN 70, SECTION B7, STOCKHOLM V7 111 64 |
Jordi Lombarte | officer: Chief Technology Officer | C/O AUTOLIV, INC., BOX 70381, STOCKHOLM V7 SE 107 24 |
Naughton Colin | officer: President, Asia | C/O AUTOLIV, INC. KLARABERGSVIADUKTEN 70, STOCKHOLM V7 11164 |
Per Jonas Jademyr | officer: See Remarks | C/O AUTOLIV, INC. KLARABERGSVIADUKTEN 70, STOCKHOLM V7 11164 |
Svante Mogefors | officer: Group VP, Quality | C/O AUTOLIV, INC., KLARABERGSVIADUKTEN 70, SECTION B7, STOCKHOLM V7 SE-111 64 |
Cevian Capital Ii Gp Ltd | 10 percent owner | C/O HIGHVERN FUND ADMINISTRATORS LIMITED, WHITELEY CHAMBERS, DON STREET, St. Helier Y9 JE2 4TR |
Gustav Lundgren | director | RINGVAGEN 32, LIDINGO V7 181 51 |
Sng Yih | officer: President, Autoliv China | C/O AUTOLIV, INC. KLARABERGSVIADUKTEN 70, STOCKHOLM V7 11164 |
Martin Lundstedt | director | NORRSKOGSGATAN 14, STOCKHOLM V7 11264 |
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