🎯 The 7 Buffett Criteria to Buy a Stock

2026 method — the condensed checklist from 1977-2024 Berkshire letters. If a stock checks 6/7, serious candidate. 7/7 = fat pitch, swing big.

🏰 Criterion 1 — Durable competitive advantage (moat)

The moat is the barrier preventing competitors from eating the company's margins over 10-20 years. 5 recognized types:

• Brand (Coca, Apple, Hermès) — cultural pricing power
• Switching costs (Microsoft Office, SAP, Oracle) — users can't leave
• Network effect (Visa, Meta, Booking) — each new user makes it better
• Cost advantage (Costco, GEICO, BNSF) — produce cheaper than anyone
• Intangible assets (Moody's rating, pharma patents) — regulatory or IP barrier

Practical test: "If I gave $1B to a competitor, could they replicate this business in 5 years?" If no, there's a moat.

📈 Criterion 2 — ROIC > 15% over 10 years

Return on Invested Capital measures how much cash the company generates per dollar of capital employed. Below 10% it destroys value after cost of capital. Above 15% over 10 years it's a compounder reinvesting earnings at high returns.

2025 examples: Apple ~58%, Visa ~31%, Mastercard ~36%, Microsoft ~28%, Google ~26%. All Buffett stocks or former Berkshire positions.

💡 Tip — ROIC is auto-computed in Alpha's Quick Analysis module with 10-year average and sector comparison.

💳 Criterion 3 — Controlled debt

Buffett hates excessive leverage:

• Net debt / EBITDA < 2× — beyond 4× = fragile in recession
• Interest coverage > 5× — EBIT must cover interest 5 times
• Cash ≥ short-term debt — no 12-month liquidity risk

Exception: financials (banks, insurance) where the balance sheet is by nature leveraged. Buffett only plays the best (BAC, Amex, GEICO).

👤 Criterion 4 — Quality management

3 questions to ask:

1. Past capital allocation — buybacks at market lows? accretive acquisitions? sane dividends? Check 10-year track record.
2. Skin in the game — does the CEO own > 5× annual salary in stock bought (not granted via SBC)?
3. Communication — clear annual letters (no corporate jargon), error acknowledgment, no fake guidance.

Buffett: "We look for managers we'd love to have as a son-in-law."

📊 Criterion 5 — Stable or rising margins

An eroding gross margin = competition biting or pricing power loss. Conversely, stable or rising gross margin over 10 years = active moat.

Examples (10-year average gross margin): Apple 40-46%, Coca 60%, Moody's 70%, LVMH 65%, Visa 80%. Check the variance, not just the average. 60% ± 2% beats 65% ± 15%.

🚀 Criterion 6 — Real organic growth

Revenue growth > 5% per year, ex-acquisitions and ex-FX. M&A can mask organic stagnation (IBM 2010-2020).

Calculation: Revenue N − FX-adjusted Revenue N-1 − acquisition contribution = organic growth. Source: 10-K MD&A section.

💰 Criterion 7 — Reasonable price

Buffett became more price-tolerant than Graham. Modern rule: P/FCF < 25 for top quality, < 15 for average quality. Above all: margin of safety > 25% vs DCF (see complete DCF method).

Key quote: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." But "fair" ≠ anything: at 50× FCF, even Apple becomes a bad deal.

🎯 Score for 3 popular stocks (2026)

Buffett loaded Apple in 2016 when the score was 7/7. He trimmed in 2024 when price pushed criterion 7 to orange. Consistent with the grid.

❓ FAQ