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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 TechTarget's Predictability Rank provided by GuruFocus.com. Please click on the following links to see related term pages.
Rebecca Kitchens | officer: President | 7 APPLE ROCK RD, MILLIS MA 02054 |
Steven Niemiec | officer: Chief Operating Officer & CRO | 46 FARM STREET, DOVER MA 02030 |
Daniel T Noreck | officer: Chief Financial Officer | 75 HAMMOND STREET, WORCESTER MA 01610 |
Michael Cotoia | officer: Executive Vice President | C/O TECHTARGET, INC., 275 GROVE STREET, NEWTON MA 02466 |
Don Hawk | officer: President | C/O TECHTARGET, INC., 117 KENDRICK STREET, SUITE 800, NEEDHAM MA 02494 |
Perfecto Sanchez | director | 153 DIEHL ROAD, CALLICOON NY 12723 |
Roger M Marino | director | 115 ALKE STREET, SHERBORN MA 01770 |
Greg Strakosch | director, officer: Chief Executive Officer | C/O TECHTARGET, INC., 117 KENDRICK STREET, SUITE 800, NEEDHAM MA 02494 |
Bruce Levenson | director, 10 percent owner | C/O UNITED COMMUNICATIONS GROUP, 11300 ROCKVILLE PIKE, SUITE 1100, ROCKVILLE MD 20852 |
Houten Christina Van | director | C/O MIMECAST LTD., MIMECAST NA, INC., 191 SPRING STREET, LEXINGTON MA 02421 |
Kevin Beam | officer: Executive Vice President | C/O TECHTARGET, INC., 117 KENDRICK STREET, SUITE 800, NEEDHAM MA 02494 |
Leonard P Forman | director | C/O THE NEW YORK TIMES CO, 229 WEST 43RD ST, NEW YORK NY 10036 |
Nine Ten Partners Lp | 10 percent owner | 1603 ORRINGTON AVENUE, SUITE 1650, EVANSTON IL 60201 |
Russell Chad Mollen | 10 percent owner | 12600 HILL COUNTRY BLVD, SUITE R-230, AUSTIN TX 78738 |
James Shel Bradshaw | 10 percent owner | 12600 HILL COUNTRY BLVD, SUITE R-230, AUSTIN TX 78738 |
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