Warren Buffet is one of the most successful investors in history. His investment checklist has been seen as a blueprint for success by many business owners and entrepreneurs. Here are Warren Buffett’s 19 investment checklists that you can refer to when buying a stock or investing in other businesses. The simple guide you can see here.
Table of Contents
- 1. Is the business understandable?
- 2. How does the company make money?
- 3. Does the business have a consistent operating history?
- 4. Is the return on equity (ROE) adequate?
- 5. Is Cash flow higher than net income?
- 6. Is the company profit sustainable?
- 7. Can current profit be maintained without too much needing to be spent?
- 8. Is there a big moat around the business (a high threshold of entry)?
- 9. Does the company have favorable long term prospects?
- 10. Is the management trustworthy?
- 11. Is the product or service unique?
- 12. Is the company free to adjust prices to inflation?
- 13. Have you read the annual reports of the main competitors?
- 14. Has the management demonstrated a high degree of integrity (honesty) and candid with shareholders?
- 15. Has the management demonstrated a high degree of intelligence and energy?
- 16. Is management rational?
- 17. Has management resisted the temptation to grow quickly by merger?
- 18. Has management the strength not to follow the institutional imperatives ( avoid following current business and sector fads)?
- 19. Has the company had a track record of earnings growth in most years above the stock market average?
- Final Thought
1. Is the business understandable?
Warren Buffet invests in businesses that he can understand. He prefers to buy stocks of companies that he can read the annual report and understand how it makes money. He does not invest in businesses such as commodity or derivative trading because they are too complex to understand.
2. How does the company make money?
Knowing the products or services the company is making money from is very important in Warren Buffett’s investment philosophy. He is an advocate of investing in companies that make products or provide services you yourself use.
If Warren Buffet can’t understand what the company does, he doesn’t invest his money with them either because it is very hard to figure out how your business makes money if you don’t know what they produce.
3. Does the business have a consistent operating history?
A company with a long history will add scores to Warren Buffet’s investment checklist. He believes that companies with a long history can be trusted more than newer, fresher businesses because they have already proven themselves to the market and their customers.
Warren Buffet values consistency in business operations as he knows it is crucial for building trust among customers.
4. Is the return on equity (ROE) adequate?
ROE is the average net income over the last 12 months/shareholders equity. Warren Buffett invests in a company whose ROE is at least 15%.
Warren Buffet looks for companies with a high return on Equity (ROE) because he knows they are able to create more value for their shareholders and can use this extra money to grow or pay back debtors.
5. Is Cash flow higher than net income?
Cash flow is more important than net income because it represents how much real money the company is actually making.
Warren Buffett invests only in companies whose cash flow is higher than or nearly to net income because he knows they are financially healthy and more stable over time. Especially in the tough time, such as 2008 financial crisis, when Lehman Brothers went bankrupt due to lack of cash.
6. Is the company profit sustainable?
A sustainable profit or cash flow can secure your investment because as an investor you can estimate the profit the company makes next year, and you don’t need to care about the fluctuation of the stock price.
Warren Buffet invests in companies whose profit margin is constant or increasing over time because he believes they are financially healthy and can provide more value for their shareholders.
7. Can current profit be maintained without too much needing to be spent?
It is a good business to keep the same profit (cash flow) without spending too much in maintenance costs. Warren Buffett invests in companies which do not need much maintenance because he knows that money can be put to better use elsewhere without jeopardizing the business’s financial health and stability.
8. Is there a big moat around the business (a high threshold of entry)?
A big moat is a big barrier that prevents other competitors from entering the market and competing with your business. Warren Buffet likes moats around businesses as it makes them very resilient, stable companies to invest in.
9. Does the company have favorable long term prospects?
Warren Buffet invests in companies that have promising long term prospects because they are more stable and predictable than short-term investments. He wants his money invested where it will be safe for the next ten years, not just until tomorrow or next week.
10. Is the management trustworthy?
Warren Buffett invests in companies whose managers he can trust because they share his philosophies of running their business.
Warren Buffett focuses more on the integrity of business managers rather than their technical skills, believing that these are characteristics you cannot teach to people. He wants his investments with companies whose management is honest and ethical.
11. Is the product or service unique?
Warren Buffet’s investment philosophy stresses on investing in businesses where your company provides a unique product or service to the market.
Warren Buffet invests in companies whose products or services are unique because it is very hard for competitors to replicate them, therefore giving his investments more security and stability than others on the stock market.
12. Is the company free to adjust prices to inflation?
A good business can adjust its prices to inflation without too much trouble, and customers will accept it.
Warren Buffett invests in companies whose pricing system is not tied to the general market (inflation) because he knows that they are free from risk and can make their own decisions about how best to run their business, giving him more autonomy over his investments.
13. Have you read the annual reports of the main competitors?
Reading other competitors’ annual reports is a must to better understand the company business you want to invest in. You’ll know the difference between the company you would like to invest in and its competitors. Furthermore, you’ll learn the whole industry in this way.
Warren Buffett reads the annual reports of all his competitors to be able to compare their companies and understand them better. He invests in companies that have a good difference from other companies on the market, so he needs to study every company before making an investment decision.
Honesty is a must-needed character for the management as it represents the company can be trusted.
Warren Buffett invests in businesses where the managers share his philosophy and behave with integrity.
Warren Buffet looks for company management that has a track record of honesty and ethical behavior because he knows they make rational business decisions to keep their companies afloat over time without any risks involved.
15. Has the management demonstrated a high degree of intelligence and energy?
Warren Buffett invests in companies where the management has demonstrated intelligence and energy because he knows they have a high potential to create more value for their shareholders.
16. Is management rational?
Warren Buffett invests in companies where the management demonstrates rationality because his investments are always long-term.
Warren Buffet searches for company management that acts rationally, taking into account all their actions and decisions to be able to take the best possible approach towards business operations over time without any risks involved.
17. Has management resisted the temptation to grow quickly by merger?
The merger is a good idea to grow the business scale but there are many risks. Warren Buffett invests in a company whose management has demonstrated to resist the temptation of mergers.
Warren Buffet looks for companies with managers who have held back from buying other unfamiliar businesses because he knows they will make decisions that are best suited for their shareholders over time without any risks involved.
18. Has management the strength not to follow the institutional imperatives ( avoid following current business and sector fads)?
Management should be independent to make business decisions over time. Warren Buffett invests in companies whose management has demonstrated the strength not to follow institutional imperatives or current fads in their industry.
19. Has the company had a track record of earnings growth in most years above the stock market average?
An above-average consistent earnings growth rate shows the company is competitive on the market and has the potential to grow more in the future.
Warren Buffett invests only in companies that have demonstrated an above-average earnings growth rate over time because he knows they can produce even better results for their shareholders in the long run.
You can take this Warren Buffett’s 19 Investment Checklist into consideration when buying stocks or investing money. For me, I pay more attention to the above 5th, 6th and 7th rules when buying stock.
In this way, you can have an idea of how much profit the company can roughly earn, which can help you to calculate the company value and help you calm down when facing the fluctuation of the stock price as you know the true value of the company.