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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 Aravive's Predictability Rank provided by GuruFocus.com. Please click on the following links to see related term pages.
Maria Carolina Petrini | officer: Chief Commercial Officer | RIVER OAKS TOWER, 3730 KIRBY DRIVE, SUITE 1200, HOUSTON TX 77098 |
Robert B. Geller | officer: Chief Medical Officer | RIVER OAKS TOWER, 3730 KIRBY DRIVE, SUITE 1200, HOUSTON TX 77098 |
Rudy Howard | officer: Chief Financial Officer | 322 WINDCHASE LANE, WILMINGTON NC 28409 |
Leonard Scott Dove | officer: Chief Operating Officer | RIVER OAKS TOWER, 3730 KIRBY DRIVE, SUITE 1200, HOUSTON TX 77098 |
Amato Giaccia | director, 10 percent owner | C/O VERSARTIS, INC., 1020 MARSH ROAD, MENLO PARK CA 94025 |
Gail Frances Mcintyre | officer: Chief Scientific Officer | C/O FURIEX PHARMACEUTICALS, INC., 3900 PARAMOUNT PARKWAY, SUITE 150, MORRISVILLE NC 27560 |
John Hohneker | director | C/O DIMENSION THERAPEUTICS, INC., 840 MEMORIAL DRIVE 4TH FLOOR, CAMBRIDGE MA 02139 |
Sigurd Kirk | director | 225 SUMMIT AVENUE, MONTVALE NJ 07645 |
Peter Tai-ching Ho | director | C/O EPIZYME, INC., 400 TECHNOLOGY SQUARE, 4TH FLOOR, CAMBRIDGE MA 02139 |
Vinay Shah | officer: Chief Financial Officer | C/O VERSARTIS, INC., 1020 MARSH ROAD, MENLO PARK CA 94025 |
Reshma Rangwala | officer: Chief Medical Officer | RIVER OAKS TOWER, 3730 KIRBY DRIVE, SUITE 1200, HOUSTON TX 77098 |
Michael W Rogers | director | C/O KERYX BIOPHARMACEUTICALS INC, ONE MARINA PARK DRIVE, BOSTON MA 02210 |
Eshelman Ventures, Llc | director | 319 N. 3RD STREET, SUITE 301, WILMINGTON NC 28401 |
Fredric N Eshelman | director | PPD INC, 929 NORTH FRONT STREET, WILMINGTON NC 28401 |
Rekha Hemrajani | director, officer: President and CEO | 3928 POINT EDEN WAY, HAYWARD CA 94545 |
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