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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 AYRO's Predictability Rank provided by GuruFocus.com. Please click on the following links to see related term pages.
Joshua Silverman | director | IROQUOIS CAPITAL MANAGEMENT LLC, 205 EAST 42ND ST - 20TH FL., NEW YORK NY 10017 |
Zvi Joseph | director | C/O DROPCAR, INC., 1412 BROADWAY, SUITE 2105, NEW YORK NY 10018 |
Gregory T Schiffman | director | 1030 NW JOHNSON ST, UNIT 608, PORTLAND OR 97209 |
Sebastian Giordano | director | ONE EAST UWCHLAN AVENUE, SUITE 301, EXTON PA 19341 |
George Devlin | director | COMPAQ COMPUTER CORP, P O BOX 692000 MC: 110701, HOUSTON TX 77269 |
Wayne Remell Walker | director | 1515 MARKET STREET, SUITE 1720, PHILADELPHIA PA 19103 |
Thomas Michael Wittenschlaeger | officer: Chief Executive Officer | RAPTOR NETWORKS TECHNOLOGY, 65 ENTERPRISE RD., ALISO VIEJO CA 92656 |
David E. Hollingsworth | officer: Interim CFO | 319 FLAT ROCK DR., HUTTO TX 78634 |
Keller Rodney C. Jr. | director, officer: Chief Executive Officer | 900 E. OLD SETTLERS BLVD., SUITE 100, ROUND ROCK TX 78664 |
Richard Perley | officer: Chief Marketing Officer | 900 E. OLD SETTLERS BLVD., SUITE 100, ROUND ROCK TX 78664 |
Curtis Ellis Smith | officer: Chief Financial Officer | 900 E. OLD SETTLERS BLVD., SUITE 100, ROUND ROCK TX 78664 |
Brian Ray Groh | officer: Chief of Business Development | 825 WEST DRUMFRIES ROAD N., PARIS A6 N3L 3E2 |
Mark Adams | director, 10 percent owner | 12130 HIGHWAY 3, BUILDING 1, WEBSTER TX 77598 |
Victoria C Pasquale | officer: Chief Human Resources Officer | C/O DROPCAR, INC., 1412 BROADWAY, SUITE 2105, NEW YORK NY 1008 |
Capital Anstalt Alpha | 10 percent owner | LETTSTRASSE 32, FL-9490, VADUZ N2 00000 |
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