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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 HomeAway's Predictability Rank provided by GuruFocus.com. Please click on the following links to see related term pages.
Simon J Breakwell | director | C/O EXPEDIA INC, 333 108TH AVENUE NE, BELLEVUE WA 98004 |
Thomas E Hale | officer: Chief Operating Officer | 600 TOWNSEND ST, SAN FRANCISCO CA 94103 |
Rebecca Lynn Atchison | officer: Chief Financial Officer | 10355 PECAN PARK BOULEVARD, AUSTIN TX 78729 |
Charles Baker | director | C/O MONSTER WORLDWIDE, INC., 622 THIRD AVENUE, NEW YORK NY 10017 |
Brian Sharples | director, officer: CEO, President and Chairman | 1250 CAPITAL OF TX HWY, BLDG 2, PLAZA 1, AUSTIN TX 78746 |
Christopher P Marshall | director | 250 MIDDLEFIELD RD, MENLO PARK CA 94025 |
Brent Bellm | officer: President & COO | 11305 FOUR POINTS DRIVE, BUILDING II, THIRD FLOOR, AUSTIN TX 78726 |
Robert Solomon | director | 600 WEST CHICAGO AVENUE, SUITE 620, CHICAGO IL 60654 |
Av Partners X, L.p. | 10 percent owner | 300 W. 6TH STREET, SUITE 2300, AUSTIN TX 78701 |
Av Partners X, L.l.c. | 10 percent owner | 300 W. 6TH STREET, SUITE 2300, AUSTIN TX 78701 |
Austin Ventures X Lp | 10 percent owner | 300 WEST 6TH STREET, SUITE 2300, AUSTIN TX 78701 |
Christopher A Pacitti | 10 percent owner | 300 WEST SIXTH STREET, SUITE 2300, AUSTIN TX 78701 |
John D Thornton | 10 percent owner | 300 WEST SIXTH ST., SUITE 2300, AUSTIN TX 78701 |
Kenneth P Deangelis | 10 percent owner | 300 WEST SIXTH ST STE 2300, AUSTIN TX 78701 |
Joseph C Aragona | 10 percent owner | C/O AUSTIN VENTURES, 300 W. SIXTH ST., STE. 2300, AUSTIN TX 78701 |
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