1 Key Criterion Warren Buffett Looks For In His Investments

Warren Buffett’s track record makes him one of the investing community’s all-time greats. From 1965 to 2016, he generated an incredible annual return of 19%. In Buffett’s 1989 letter to his shareholders, he shared his key considerations when evaluating a company as an acquisition opportunity.

Given his accomplishments, it would be useful for any investor to learn from Buffett. (Since Buffett looks at stocks as a piece of a business, stock market investors can still benefit from understanding how Buffett thinks through whole acquisitions.) There are six criteria in Buffett’s checklist. In this article, let’s run through the first criterion:

“Large purchases (at least US$10 million of after-tax earnings)”

The first thing to note is that Buffett’s definition of a “large purchase” has changed over time. In his 2014 shareholders’ letter, Buffett defined a large purchase as one that generates “at least US$75 million of pre-tax earnings.”

Why is a large purchase important for Buffett? An important reason is that Buffett’s company is huge, so it needs companies of a certain size if it wants to deploy sufficient capital to make meaningful returns.

Another important reason is that large companies usually come with an established market position and a long history. This means that Buffett doesn’t have to worry about whether there is a market for the company’s product as its sales and earnings are evidence that there is a sizeable market. Buffett can also use the long financial history of the company to better evaluate and understand its economics. Apart from the financials, Buffett can also look at how the company’s management team has handled business affairs over a long period of time.

If you enjoyed this, stay tuned for more on Buffett’s acquisition criteria in the coming weeks! [Editor’s note: Articles on Buffett’s second, third, fourth, fifth, and sixth criteria have been published. They can be found herehere, herehere, and here.]

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