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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 Regis's Predictability Rank provided by GuruFocus.com. Please click on the following links to see related term pages.
Nancy Cunningham Benacci | director | PO BOX 145496, CINCINNATI OH 45250 |
Devore Michelle St. Lawrence | officer: SVP, Marketing | 6119 BRANDEIS LANE, DALLAS TX 75214 |
Andra Jean Terrell | officer: SVP, General Counsel | 4922 MARLOS DRIVE NE, MARIETTA GA 30066 |
James Raymon Suarez | officer: SVP Merchandising & Education | 9043 VICTORIA DRIVE, EDEN PRAIRIE MN 55347 |
Michael Joseph Mansbach | director | 4051 BROAD STREET, SUITE 220, SAN LUIS OBISPO CA 93401 |
Lockie Andrews | director | 3701 WAYZATA BLVD, MINNEAPOLIS MN 55416 |
John C. Davi | officer: EVP, Chief Technology Officer | 3701 WAYZATA BLVD, MINNEAPOLIS MN 55416 |
Springhill Investments Llc | 10 percent owner | ONE TOWNE SQUARE, SUITE 1600, SOUTHFIELD MI 48076 |
James Grosfeld | 10 percent owner | C/O MERRILL LYNCH ASSET MANAGEMENT, 800 SCUDDERS MILL RD LEGAL ADVISORY 2-B, PLAINSBORO NJ 08536 |
James Grosfeld Trust | 10 percent owner | ONE TOWNE SQUARE, SUITE 1600, SOUTHFIELD MI 48076 |
New Walnut Gp Llc | 10 percent owner | 655 MADISON AVENUE, 11TH FLOOR, NEW YORK NY 10065 |
Torch Brc, Lp | 10 percent owner | 405 LEXINGTON AVENUE, SUITE 839, SUITE 2215, NEW YORK NY 10174 |
Walnut Brc, L.p. | 10 percent owner | 655 MADISON AVENUE, 11TH FLOOR, NEW YORK NY 10065 |
Jim Brian Lain | officer: EVP & Chief Operating Officer | 7201 METRO BOULEVARD, MINNEAPOLIS MN 55439 |
Michael Heath Ferranti | officer: SVP, People and Culture | 16011 RANCHITA DRIVE, DALLAS TX 75252 |
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