Investing in wonderful companies popularized by Warren Buffett is becoming more and more common. Successfully doing it is less common because they’re still hard to find without hindsight.

Henrik Bessembinder followed up his research on the greatest companies to see what characteristics made them great. He looked at the best 200 companies in two buckets — by greatest wealth creation and highest excess return by decade.

The difference between the two is like comparing a small $1 million market cap company that grows to $100 million versus a larger $10 billion company that grows to $100 billion. The small company produces a significantly higher return while the other creates more total wealth for shareholders.

The top 200 companies in each bucket had a few characteristics that stood out during their best decade of performance: Continue Reading…

The stocks of great companies are not immune to deep drawdowns. In fact, it’s practically guaranteed to happen more than once.

Hendrik Bessembinder followed up on previous research with a deep dive into the greatest companies ever. His first conclusion shouldn’t be too surprising.

The most successful company investments in terms of wealth created for shareholders at the decade horizon also involved very substantial peak-to-trough drawdowns. Even those investments that are the most successful at long horizons typically involve painful losses over shorter horizons.

Bessembinder looked at the top 100 companies based on shareholder wealth creation by decade since 1950. He then measured the largest drawdown shareholders faced in that decade.

Investors in the greatest companies faced a drawdown of 32.5%, on average, despite being one of the greatest decades of performance ever. That was just the largest drawdown, on average. It says nothing of the second, third, and so on drawdowns during the same decade. Continue Reading…

Warren Buffett turned 90 last weekend and many tributes have come out since highlighting his track record. Why wouldn’t they? It’s the best long term track record ever.

It starts with the 31.6% annual return during his partnership days from 1957 to an almost perfectly timed closure in 1968.

He followed that up with a stint at Berkshire Hathaway. Since he took control in 1965, its stock has achieved a 20% annual return…so far.

The chart below shows what a $10,000 investment in Berkshire in 1965 looks like. Continue Reading…

Growth stocks were in vogue by the end of 1972. The five most popular companies had a market cap of $100 billion on earnings of $2.2 billion.

$100 billion is nothing by today’s standards, but those five companies — IBM, Minnesota Mining (3M), American Home Products, Xerox, and Eastman Kodak — accounted for 15% of the total market cap of every company listed on the NYSE. They had an average P/E of around 40. The general view was their growth made them “safe.”

Therein lies a problem. Equating high multiples with “growth” is a common mistake made by investors. But making the leap from “growth” to safety compounds the error.

The skill is in separating growing companies from high multiple stocks that are rising in price. Because one meets certain characteristics that drive earnings growth over time. The other has only to do with price action. Continue Reading…