5 Key Criteria 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 previous articles, I’ve looked at the first, second, third, and fourth criteria. They can be found here, here, here, and here. In this article, let’s study the fifth criterion:

“Simple businesses (if there’s a lot of technology we won’t understand it)”

Buffett prefers to invest in simple businesses. In the same annual report, Buffett mentioned that he and his long-term business partner, Charlie Munger, had learnt that solving difficult business problems is well, difficult.

Although it may seem unfair that Buffett only wants to invest in simple business, he has a good reason for doing so. He wrote:

“In both business and investments it is usually far more profitable to simply stick with the easy and obvious than it is to resolve the difficult”.

From a stock market investor’s vantage point, simple businesses provide an advantage when it comes to assessing their true value. It is easy to understand what a simple business does, and thus it is also easy to have a feel for the future evolution of the level of demand for this business’s services or products. This in turn allows investors to value the business more accurately.

If you enjoyed this, stay tuned for more on Buffett’s acquisition criteria in the coming days! [Editor’s note: An article on Buffett’s sixth criterion has been published. It can be found here.]

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