VPG has been removed from your Stock Email Alerts list.
Please enter Portfolio Name for new portfolio.
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.
|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|
|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%|
|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 Valuations
Disclaimers: GuruFocus.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on GuruFocus.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The gurus may buy and sell securities before and after any particular article and report and information herein is published, with respect to the securities discussed in any article and report posted herein. In no event shall GuruFocus.com be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on GuruFocus.com, or relating to the use of, or inability to use, GuruFocus.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. The gurus listed in this website are not affiliated with GuruFocus.com, LLC. Stock quotes provided by InterActive Data. Fundamental company data provided by Morningstar, updated daily.