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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 Galecto's Predictability Rank provided by GuruFocus.com. Please click on the following links to see related term pages.
Orbimed Advisors Llc | director, 10 percent owner | 601 LEXINGTON AVENUE, 54TH FLOOR, NEW YORK NY 10022 |
Bertil Lindmark | officer: Chief Medical Officer | C/O GALECTO, INC., OLE MAALOES VEJ 3, COPENHAGEN N G7 DK-2200 |
Hans T. Schambye | director, officer: Chief Executive Officer | C/O GALECTO, INC., OLE MAALOES VEJ 3, COPENHAGEN N G7 DK-2200 |
Stephanie Oestreich | officer: Chief Business Officer | 75 STATE STREET, SUITE 100, BOSTON MA 02109 |
Jonathan Freve | officer: Chief Financial Officer | C/O SPRING BANK PHARMACEUTICALS, INC., 113 CEDAR STREET, STE S-7, MILFORD MA 01757 |
Garrett Winslow | officer: General Counsel | 35 PARKWOOD DRIVE, C/O SPRING BANK PHARMACEUTICALS, INC., HOPKINTON MA 01748 |
Anne Prener | director | C/O RUBIUS THERAPEUTICS, 399 BINNEY STREET SUITE 300, CAMBRIDGE MA 02139 |
Dallas Jayson Donald Alexander | director | AIMMUNE THERAPEUTICS, INC., 8000 MARINA BOULEVARD, SUITE 300, BRISBANE CA 94005 |
Novo Holdings A/s | 10 percent owner | TUBORG HAVNEVEJ 19, HELLERUP G7 2900 |
Chau Quang Khuong | director, 10 percent owner | C/O ORBIMED ADVISORS, 601 LEXINGTON AVENUE, 54TH FLOOR, NEW YORK NY 10022 |
Stephan Christgau | director | C/O CASTLE & MORGAN HOLDINGS, INC., 425 MARKET STREET, SUITE 2230, SAN FRANCISCO CA 94105 |
Soren Moller | director | C/O NOVO HOLDINGS A/S, TUBORG HAVNEVEJ 19, HELLERUP G7 2900 |
Anders Pedersen | officer: Chief Operating Officer | C/O GALECTO, INC., OLE MAALOES VEJ 3, COPENHAGEN N G7 DK-2200 |
Orbimed Advisors Israel Ii Ltd | director, 10 percent owner | 601 LEXINGTON AVENUE, 54TH FLOOR, NEW YORK NY 10022 |
Orbimed Israel Gp Ii, L.p. | director, 10 percent owner | 601 LEXINGTON AVENUE, 54TH FLOOR, NEW YORK NY 10022 |
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