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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 Amyris's Predictability Rank provided by GuruFocus.com. Please click on the following links to see related term pages.
J. Scott White | director | 100 ABBOTT PARK ROAD, ABBOTT PARK IL 60064 |
Philip J. Gund | officer: Chief Restructuring Officer | C/O SUNEDISON, INC., 13736 RIVERPORT DR., MARYLAND HEIGHTS MO 63043 |
M. Freddie Reiss | director | 2951 28TH STREET, SUITE 1000, SANTA MONICA CA 90405 |
Hermanus Kieftenbeld | officer: Chief Financial Officer | 259 PROSPECT PLAINS RD., BLDG A, CRANBURY NJ 08512 |
Eduardo Alvarez | officer: Chief Operating Officer | AMYRIS, INC., 5885 HOLLIS STREET, SUITE 100, EMERYVILLE CA 94608 |
Elizabeth E. Dreyer | officer: CHIEF ACCOUNTING OFFICER | EDGEWELL PERSONAL CARE, 1350 TIMBERLAKE MANOR PARKWAY, CHESTERFIELD MO 63017 |
Frank Kung | director | C/O VIVO CAPITAL, 505, PALO ALTO CA 94301 |
Nicole Kelsey | officer: General Counsel and Secretary | AMYRIS, INC., 5885 HOLLIS STREET, SUITE 100, EMERYVILLE CA 94608 |
John Melo | director, officer: President and CEO | C/O AMYRIS, INC., 5885 HOLLIS ST., SUITE 100, EMERYVILLE CA 94608 |
Anthony Hughes | officer: Chief Accounting Officer | 5885 HOLLIS STREET, SUITE 100, EMERYVILLE CA 94608 |
Ana Dutra | director | C/O KORN/FERRY INTERNATIONAL, 1900 AVENUE OF THE STARS, SUITE 2600, LOS ANGELES CA 90067 |
James F Mccann | director | ONE OLD COUNTRY ROAD, SUITE 500, CARLE PLACE NY 11514 |
Ryan Panchadsaram | director | 5885 HOLLIS ST., SUITE 100, EMERYVILLE CA 94608 |
L John Doerr | director, 10 percent owner | C/O KLEINER PERKINS CAUFIELD & BYERS, 2750 SAND HILL ROAD, MENLO PARK CA 94025 |
Julie Washington | director | C/O JAMBA, INC., 6475 CHRISTIE AVENUE, NO. 150, EMERYVILLE CA 94608 |
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