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.
GuruFocus conducted a back test study of Warren Buffett's strategy of "buying good companies at fair prices" for the years from 1998-2008.
Resource America Predictability Rank Calculation
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.
Correlation Between Business Predictability and Investment Returns
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.
Resource America Predictability Rank Related Terms
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Resource America (Resource America) Business Description
Resource America Inc is Delaware Corporation. It is an asset management company that uses industry specific expertise to evaluate, originate, service and manage investment opportunities through its real estate, commercial finance and financial fund management subsidiaries. As a specialized asset manager, it develops investment funds for outside investors for which the Company provides asset management services, typically under long-term management arrangements either through a contract with, or as the manager or general partner of, its sponsored investment funds. In its real estate segment, it focuses on acquiring and managing a diversified portfolio of commercial real estate and real estate related debt that has been significantly discounted due to the effects of current economic conditions and high levels of leverage. In its financial fund management segment, it focuses on the he sponsorship and management of issuers of collateralized loan and debt obligations. The Company has operations in New York, Philadelphia, Los Angeles, London, Singapore and Sydney. In its real estate operations, the Company concentrates on the ownership, operation and management of multifamily and commercial real estate and real estate mortgage loans including whole mortgage loans, first priority interests in commercial mortgage loans, known as A notes, subordinated interests in first mortgage loans, known as B notes, mezzanine loans, investments in discounted and distressed real estate loans and investments in value-added properties. The Company faces competition from other asset holding companies in various areas.
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