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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 Meta Materials's Predictability Rank provided by GuruFocus.com. Please click on the following links to see related term pages.
Jennifer K. Cheraso | officer: Chief Human Resources Officer | C/O ARRAY TECHNOLOGIES, INC., 3901 MIDWAY PLACE NE, ALBUQUERQUE NM 87109 |
James Macmillan Fusaro | director, officer: Chief Executive Officer | 1900 S. PRICE ROAD, CHANDLER AZ 85248 |
Philippe Morali | director | 400 N. MCCARTHY BLVD., MILPITAS CA 94089 |
Georgios Palikaras | director, 10 percent owner, officer: See Remarks | C/O META MATERIALS INC., 1 RESEARCH DRIVE, DARTMOUTH A5 BY2 4M9 |
David Daniel Eaton | officer: Chief Legal Officer | 1706 PASEO DE PERALTA, SANTA FE NM 87501 |
Uzi Sasson | officer: See Remarks | 2041 LANDINGS DRIVE, MOUNTAIN VIEW CA 94043 |
Vyomesh Joshi | director | 17343 VIA DEL CAMPO, SAN DIEGO CA 92127 |
Eugenia Corrales | director | C/O SHORETEL, INC., 960 STEWART DRIVE, SUNNYVALE CA 94085 |
Jonathan Waldern | officer: Chief Technical Officer | C/O META MATERIALS INC., 1 RESEARCH DRIVE, DARTMOUTH A5 B2Y 4M9 |
Rice Kenneth L Jr | officer: See Remarks | C/O 85 MAIN STREET, HOPKINTON MA 01748 |
Thomas Gordon Welch | 10 percent owner | 47 PLEASANT STREET, PO BOX 40, CHESTER A5 B0J 1J0 |
John R Harding | director | C/O MARIMBA INC, 440 CLYDE AVENUE, MOUNTAINVIEW CA 94043 |
Steen Karsbo | director | C/O META MATERIALS INC., 1 RESEARCH DRIVE, DARTMOUTH A5 B2Y 4M9 |
Michael James Graves | director | 5700 PLANO PARKWAY, SUITE 3600, PLANO TX 75093 |
Anne Barber Lambert | 10 percent owner | 47 PLEASANT STREET, PO BOX 40, CHESTER A5 B0J 1J0 |
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