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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 Okta's Predictability Rank provided by GuruFocus.com. Please click on the following links to see related term pages.
Todd Mckinnon | director, 10 percent owner, officer: Chief Executive Officer | C/O OKTA, INC., 301 BRANNAN STREET 1ST FLOOR, SAN FRANCISCO CA 94107 |
Larissa Schwartz | officer: See Remarks | C/O OKTA, INC., 100 FIRST STREET, SUITE 600, SAN FRANCISCO CA 94105 |
Jacques Frederic Kerrest | director, officer: Chief Operating Officer | C/O OKTA, INC., 301 BRANNAN STREET 1ST FLOOR, SAN FRANCISCO CA 94107 |
Shibu Ninan | officer: Chief Accounting Officer | C/O OKTA, INC., 100 FIRST STREET, SUITE 600, SAN FRANCISCO CA 94105 |
Shellye L Archambeau | director | 1095 AVENUE OF THE AMERICAS, 8TH FLOOR, NEW YORK NY 10036 |
Brett Tighe | officer: See Remarks | C/O OKTA, INC., 100 FIRST STREET, SUITE 600, SAN FRANCISCO CA 94105 |
Jonathan T Runyan | officer: General Counsel and Secretary | C/O OKTA, INC., 301 BRANNAN STREET 1ST FLOOR, SAN FRANCISCO CA 94107 |
Ledger Susan St. | officer: See Remarks | C/O OKTA, INC., 100 FIRST STREET, SUITE 600, SAN FRANCISCO CA 94105 |
Dixon Robert L Jr | director | 120 MONUMENT CIRCLE, INDIANAPOLIS IN 46204 |
Emilie Choi | director | C/O COINBASE GLOBAL, INC., 100 PINE STREET, SUITE 1250, SAN FRANCISCO CA 94111 |
Christopher K Kramer | officer: Chief Accounting Officer | C/O OKTA, INC., 100 FIRST STREET, SUITE 600, SAN FRANCISCO CA 94105 |
Benjamin A Horowitz | director, 10 percent owner | 2865 SAND HILL ROAD #101, MENLO PARK CA 94025 |
Jeff Epstein | director | C/O PRICELINE COM INC, 800 CONNECTICUT AVENUE, NORWALK CT 06854 |
Michael R Kourey | director | |
William E Losch | officer: Chief Financial Officer | DREAMWORKS ANIMATION SKG, INC., 1000 FLOWER STREET, GLENDALE CA 91201 |
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