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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 Calpine's Predictability Rank provided by GuruFocus.com. Please click on the following links to see related term pages.
David C Merritt | director | CHARTER COMMUNICATIONS INC, 12405 POWERSCOURT DRIVE, ST LOUIS MO 63131 |
W. Thaddeus Miller | officer: EVP, CLO and Secretary | 717 TEXAS AVENUE, SUITE 1000, HOUSTON TX 77002 |
Jack A Fusco | director | C/O FOSTER WHEELER LTD., PERRYVILLE CORPORATE PARK, CLINTON NJ 08809 |
Frank Cassidy | director | |
Thad Hill | director, officer: President & CEO | 717 TEXAS AVENUE, SUITE 1000, HOUSTON TX 77002 |
Mosbacher Robert A Jr | director | 333 W. SHERIDAN AVE, OKLAHOMA CITY OK 73102 |
W Benjamin Moreland | director | C/O CLEAR CHANNEL OUTDOOR HOLDINGS, INC., 4830 NORTH LOOP 1604W, SUITE 111, SAN ANTONIO TX 78249 |
Laurie Brlas | director | C/O ALBEMARLE CORPORATION, 4250 CONGRESS ST STE 900, CHARLOTTE NC 28209 |
Denise M Oleary | director | MEDTRONIC INC, 710 MEDTRONIC PKWY, MS LC310, MINNEAPOLIS MN 55432-5604 |
San Francisco Partners Lp | 10 percent owner | PO BOX 2722, C/O SPO PARTNERS & CO, SAN ANSELMO CA 94979 |
Spo Advisory Corp | 10 percent owner | PO BOX 2722, C/O SPO PARTNERS & CO, SAN ANSELMO CA 94979 |
Sf Advisory Partners Lp | 10 percent owner | 591 REDWOOD HIGHWAY STE 3215, C/O SPO PARTNERS & CO, MILL VALLEY CA 94941 |
Spo Partners Ii Lp | 10 percent owner | PO BOX 2722, C/O SPO PARTNERS & CO, SAN ANSELMO CA 94979 |
John H Scully | 10 percent owner | 591 REDWOOD HIGHWAY, SUITE 3215, MILL VALLEY CA 94941 |
Spo Advisory Partners Lp | 10 percent owner | 591 REDWOOD HIGHWAY, STE 3215, MILL VALLEY CA 94941 |
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