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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 SanDisk's Predictability Rank provided by GuruFocus.com. Please click on the following links to see related term pages.
Judy Bruner | officer: Exec. VP, Administration, CFO | C/O SANDISK CORPORATION, 601 MCCARTHY BLVD., MILPITAS CA 95035 |
Mark David Brazeal | officer: SVP, Chief Legal Officer & IP | 1320 RIDDER PARK DRIVE, SAN JOSE CA 95131 |
Eddy W Hartenstein | director | |
Chenming Hu | director | 2060 PEBBLE DRIVE, ALAMO CA 94507 |
Catherine P Lego | director | C/O GUIDEWIRE SOFTWARE, INC., 970 PARK PL, SUITE 200, SAN MATEO CA 94403 |
Michael E Marks | director | |
Steven J Gomo | director | 495 E. JAVA DRIVE, SUNNYVALE CA 94089 |
Sanjay Mehrotra | director, officer: President/CEO | C/O WESTERN DIGITAL CORPORATION, 3355 MICHELSON DRIVE, SUITE 100, IRVINE CA 92612 |
Robertson Donald F Jr | officer: VP & Chief Accounting Officer | C/O NVIDIA CORPORATION, 2788 SAN TOMAS EXPRESSWAY, SANTA CLARA CA 95051 |
Srinivasan Sivaram | officer: EVP, Memory Technology | C/O WESTERN DIGITAL CORPORATION, 5601 GREAT OAKS PARKWAY, SAN JOSE CA 95119 |
Irwin Federman | director | 2735 SAND HILL ROAD, MENLO PARK CA 94025 |
Sumit Sadana | officer: EVP, CSO & GM Enterprise | 47544 AVALON HEIGHTS TERRACE, FREMONT CA 94539 |
Eric S Whitaker | officer: SVP & Senior Legal Officer | |
Kevin A Denuccio | director | 300 HOLGER WAY, SAN JOSE CA 95134 |
Randhir Thakur | officer: EVP,Technology & Worldwide Ops | C/O APPLIED MATERIALS, INC., 3050 BOWERS AVENUE, P.O. BOX 58039, SANTA CLARA CA 95052-8039 |
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