Beautifully summarized by the following “test” from Warren Buffet.
a test: Examine the record of, say, the 200 highest earning companies
from 1970 or 1980 and tabulate how many have increased per-share
earnings by 15% annually since those dates. You will find that only a
handful have. I would wager you a very significant sum that fewer than 10 of the 200 most profitable companies in 2000 will attain 15% annual
growth in earnings-per-share over the next 20 years.
I used the year 1990 Fortune 500 and the year 2013 Fortune 500 for my
criteria. (Yes, I used 23 years instead of 20 but don't think much
difference is made)
I manually sorted through the list for companies that were both in the
top 200 in 1990 as well as the top 86 in 2013. I found 28 that had over
13% revenue growth for the last twenty-three years or 14% of the 1990
How many of the 28 companies had over 15% annual E.P.S growth for the
last twenty years? Buffett’s wager was that fewer than 10 had done so. I
used net income as a proxy for E.P.S.
[Among the companies were]
Intel (INTC) was
another company with over 15% growth for the last 23 years, growing
from 391 Million net income in 1990 to 11 Billion in 2013. Intel managed
a 15.614% CAGR for the last 23 years.
Apple (AAPL) was one of four in the 20%+ club, growing from 454 Million 1990 net income to a phenomenal 41.733 Billion in 2013 or a 21.72% CAGR.
Berkshire Hathaway (BRK.A) (BRK.B)
is really no surprise here considering the CEO and team who are running
the place. Berkshire had 1990 net income of 447.5 Million and 2013 net
income of 14.824 Billion or a 23-year CAGR of 16.44%.
Looks like Buffett’s bet would have paid off with only 7 companies from
the 1990 Fortune 500 growing both revenue at 13%+ and net income at
So to get 15% or higher growth, the implicatons is that one must either invest in smaller companies, invest for a shorter term (than 20 years), or invest in undervalued stocks.