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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 U.S. Gold's Predictability Rank provided by GuruFocus.com. Please click on the following links to see related term pages.
Ryan K Zinke | director | 409 W 2ND STREET, WHITEFISH MT 59932 |
Luke Anthony Norman | director | 1910 E. IDAHO STREET, SUITE 102-BOX 604, ELKO NV 89801 |
George M Bee | officer: President | 30 OLD MILL ROAD, SUITE 806, ETOBICOKE A6 M8X 0A5 |
Robert W Schafer | director | C/O U.S. GOLD CORP., 1910 EAST IDAHO STREET, SUITE 102-BOX 60, ELKO NV 89801 |
Michael N Waldkirch | director | C/O U.S. GOLD CORP., 1910 EAST IDAHO STREET, SUITE 102-BOX 60, ELKO NV 89801 |
Kevin A. Francis | officer: VP - Exploration | 553 SAGE CIRCLE, HIGHLANDS RANCH CO 80126 |
Eric Alexander | officer: CFO, Secretary | 1658 COLE BLVD., BLDG. 6, SUITE 210, LAKEWOOD CO 80401 |
Tara Gilfillan | director | C/O U.S. GOLD CORP., 1910 EAST IDAHO STREET, SUITE 102-BOX 60, ELKO NV 89801 |
Ted Riley Sharp | officer: Chief Financial Officer | 714 WHISPERWOOD COURT, NAMPA ID 83686 |
Edward M Karr | director | RAMPARTNERS, 19 BLVD GEORGES-FAVON, GENEVA V8 1204 |
Douglas J Newby | director | 120 BROADWAY, SUITE 1010, NEW YORK NY 10271 |
David C. Mathewson | officer: Vice President of Exploration | 1265 MESA DRIVE, FERNLEY NV 89408 |
David Rector | officer: COO U.S. Gold Corp. | |
Robert J Delaversano | officer: Principal Financial Officer | 217 W. MAIN STREET, SOMERVILLE NJ 08876 |
Andrew J Kaplan | director | SUITE 200 623 RIVER ROAD, FAIR HAVEN NJ 07704 |
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