Financial Engines (Financial Engines) Predictability Rank

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What is Financial Engines Predictability Rank?

Not Rated

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.

Financial Engines Predictability Rank Calculation

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.

Correlation Between Business Predictability and Investment Returns

	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

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Financial Engines (Financial Engines) Business Description

Industry

GURUFOCUS.COM » STOCK LIST » Financial Services » Asset Management » Financial Engines Inc (NAS:FNGN) » Definitions » Predictability Rank

Comparable Companies

Traded in Other Exchanges

N/A

Address

Website

http://www.FinancialEngines.com

Financial Engines Inc is a provider of technology-enabled portfolio management services, investment advice, and retirement income services. The company offers its host of services to participants in employer-sponsored defined-contribution plans, plan sponsors, and plan providers. Plan participants are offered discretionary management of their plan assets, in addition to investment-decision-making on behalf of the plan participant. A similar service is offered to plan sponsors, where the sponsor enlists the company as a subadvisor to carry out managerial duties for plan participants. Financial Engines also provides investment recommendations for participants choosing to manage their own portfolio, in addition to retirement-readiness assessments and guidance for claiming social security.

Executives

John B Shoven	director
Robert A Huret	director	130 MERCHANT ST 22ND FLR, HONOLULU HI 96813
David B Yoffie	director	2200 MISSION COLLEGE BLVD, RNB 4-151, SANTA CLARA CA 95054
Michael E. Martin	director	C/O WARBURG PINCUS LLC, 450 LEXINGTON AVENUE, NEW YORK NY 10017
Craig L Foster	officer: EVP & CFO	2580 ORCHARD PARKWAY, SAN JOSE CA 95131
Heidi Fields	director	5301 STEVENS CREEK BLVD, MS 1A-LC, SANTA CLARA CA 95051
Blake R. Grossman	director	BLACKROCK, INC., 40 EAST 52ND STREET, NEW YORK NY 10022
Joseph Grundfest	director	STANFORD LAW SCHOOL, 559 NATHAN ABBOTT WAY, STANFORD CA 94305
John Bunch	officer: EVP, COO & Pres FE Advisors	6940 COLUMBIA GATEWAY DR. SUITE 200 COLUMBIA MD 21046
Warburg Pincus & Co.	director	450 LEXINGTON AVENUE, NEW YORK, NY NY 100173147
Warburg Pincus X Partners, L.p.	director	C/O WARBURG PINCUS LLC, 450 LEXINGTON AVENUE, NEW YORK NY 10017
Warburg Pincus Private Equity X, L.p.	director	C/O WARBURG PINCUS LLC, 450 LEXINGTON AVENUE, NEW YORK NY 10017
Warburg Pincus X Gp L.p.	director	C/O WARBURG PINCUS LLC, 450 LEXINGTON AVENUE, NEW YORK NY 10017
Warburg Pincus X, L.p.	director	C/O WARBURG PINCUS LLC, 450 LEXINGTON AVENUE, NEW YORK NY 10017
Wpp Gp Llc	director	C/O WARBURG PINCUS LLC, 450 LEXINGTON AVE, NEW YORK NY 10017