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Undervalue Predictable Portfolio Doubled Since January 2009

February 22, 2012 | About:

The core philosophy of the value strategies on GuruFocus is to invest in predictable companies that can consistently grow their revenue and earnings through good times and bad. We developed this strategy following the advice of Warren Buffett and Charlie Munger on investing in good companies at reasonable prices.

We did an extensive backtesting study in 2008 and found indeed that the companies that have high predictability ranks outperformed the market averages by wide margins. This outperformance is achieved by reducing the probability of investing loss, instead of catching the top winners in the market. The details of the backtesting study can be found in GuruFocus research:

· What worked in the market from 1998-2008? Part I: Predictability Rank

· Part II: Role of Valuations, Under-Valued Predictable Companies and Buffett-Munger Screener

· Intrinsic Value, Discounted Cash Flow and Margin of Safety

Following the backtesting in 2008, we created two model portfolios of predictable companies at the beginning of 2009. The stock market was in great chaos, and the Dow seems to be sliding toward 1000. The market recovered, eventually. From Jan. 1, 2009, the S&P 500 index gained 50.7%. The numbers do not include dividends.

The two model portfolios of predictable companies we created on Jan. 1, 2009 are Undervalue Predictable Companies and Buffett-Munger Top 25. The model portfolio of undervalued predictable companies consists of the top 25 stocks that had the highest predictability rank, yet were the most undervalued as of January 1 of each year. The Buffett-Munger Top 25 Portfolio invests in companies that can grow business consistently, yet can maintain profit margins and keep debt levels low. All of the portfolios are rebalanced only once a year. The portfolio balances are calculated daily.

To our happiness, the portfolio of undervalued predictable companies has doubled. The gain of 100.3% since Jan. 1, 2009, itself doubled the gain of S&P 500 during the same period. At the same time, the Buffett-Munger Top 25 Portfolio gained 74%. Both outperformed the S&P 500 by wide margins.

We want to note that the outperformance is achieved by investing in good companies at undervalued or fair prices. Therefore, the outperformance is achieved without taking more risks, as they have shown quite consistent performance during the market ups and downs — especially the Buffett-Munger Top-25 portfolio, which invests in the highest quality companies and has outperformed the market every year. The undervalued predictable companies underperformed the S&P500 slightly in 2011. It was down 3.3%, while the market was flat.

The details of the annual performances can be found under the top menu value strategies.

We are not surprised by the outperformance of these strategies. The companies the portfolios invest in are of high quality and they can grow their revenues and profits consistently. These companies can maintain and even grow their profit margins over time. They have the “moat” that prevents others from entering their market. They incur little debt while growing business. They are usually at the low end of their historical valuations when we add them into the portfolio.

For each value strategy discussed above, GuruFocus has a corresponding screener page. These are the links: Buffett-Munger Screener, Undervalued Predictable Companies.

GuruFocus premium membership is needed to access the details of the portfolios and screeners. We also publish a monthly Buffett-Munger newsletter which features the picks from the Buffett-Munger Screener. If you are a premium member, you can download this for free. If you are not a Premium Member, we invite you for a 7-day Free Trial.

About the author:

Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.1/5 (14 votes)


Grlap - 5 years ago    Report SPAM
Really? The market has almost doubled since January 2009
Gurufocus premium member - 5 years ago
Please check the performance of S&p 500. From March 9, 2009, it doubled. But from Jan. 1, 2009, it gained 56%. Our undervalued predictable companies indeed doubled!
Superguru - 5 years ago    Report SPAM
Great job Gurufocus.

Last few years have been the best stock and bond bull market that I have seen. All these "sky is falling" people need treatment and me too for sometimes listening to them.
Gurufocus premium member - 5 years ago
Thank you Superguru! Hope you will comeback and join again.

You did pretty well yourself, too. There are many ways to succeed in investing. Being cautious is always good.
Glavacem - 5 years ago    Report SPAM
I took the free 7 days premium membership for a run and i was very impressed. I subscribe to many newsletters, and i am not impressed with any of the ones i currently have. I will eventyally sign up for the premium membership here, well worth the $ IMO.

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