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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 DA32 Life Science Tech Acquisition's Predictability Rank provided by GuruFocus.com. Please click on the following links to see related term pages.
Da32 Sponsor Llc | 10 percent owner | 345 PARK AVENUE SOUTH, 12TH FLOOR, NEW YORK NY 10010 |
Deerfield Management Company, L.p. (series C) | director, 10 percent owner, other: Director by deputization | 345 PARK AVENUE SOUTH, 12TH FLOOR, NEW YORK NY 10010 |
Arch Venture Fund Xi, L.p. | 10 percent owner | 8755 W. HIGGINS ROAD, SUITE 1025, CHICAGO IL 60631 |
Section 32 Fund 3, Lp | 10 percent owner, other: Director by Deputization | 169 UNIVERSITY AVE., PALO ALTO CA 94301 |
Keith Crandell | director, 10 percent owner | 8755 W. HIGGINS ROAD, SUITE 1025, CHICAGO IL 60631 |
William J Maris | 10 percent owner, other: Director by Deputization | 2033 SAN ELIJO AVE., #565, CARDIFF-BY-THE-SEA CA 92007 |
Angela Lai | director | 345 PARK AVENUE SOUTH, 12TH FLOOR, NEW YORK NY 10010 |
Arch Venture Partners Xi, Llc | 10 percent owner | 8755 W HIGGINS ROAD, SUITE 1025, CHICAGO IL 60631 |
Arch Venture Partners Xi, L.p. | 10 percent owner | 8755 W HIGGINS RD., SUITE 1025, CHICAGO IL 60631 |
Section 32 Gp 3, Llc | 10 percent owner, other: Director by Deputization | 171 MAIN STREET, #671, LOS ALTOS CA 94022 |
Steven J. Kafka | director, officer: Chief Executive Officer | C/O FOUNDATION MEDICINE, INC., ONE KENDALL SQUARE, SUITE B3501, CAMBRIDGE MA 02139 |
Andrew Elbardissi | director | 2210 FARADAY AVE #100, CARLSBAD CA 92008 |
Chris Wolfe | officer: Chief Financial Officer | 230 PARK AVENUE SOUTH, 11TH FLOOR, C/O CAPITAL Z PARTNERS, NEW YORK NY 10003 |
Kristina Burow | 10 percent owner | 8755 W. HIGGINS ROAD, SUITE 1025, CHICAGO IL 60631 |
Mara G. Aspinall | director | 7381 NORTH MOON SPIRIT LANE, TUCSON AZ 85718 |
From GuruFocus
By Business Wire Business Wire • 07-30-2021
By GuruFocus Research • 08-02-2023
By Business Wire • 07-21-2023
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