Warren Buffett
Quality Compounder
Warren Buffett evolved Graham's value framework to focus on business quality over statistical cheapness. He seeks companies with durable competitive advantages ("moats"), consistent earnings power, and shareholder-oriented management. Buffett uses a discounted cash flow model based on "owner earnings" and requires a margin of safety to the resulting intrinsic value.
Methodology fidelity
Faithful adaptationSources reviewed 2026-08-24Berkshire publishes durable principles—not a nine-point stock screen or universal numeric cutoffs. Consistent earning power, high returns with little debt, understandable businesses, capable management, owner earnings, and price versus value are source-backed. Criterion 2 applies a simple arithmetic mean over up to five valid ROE observations; it is not an every-year consistency test, and its 15% cutoff is an app rule rather than a Buffett-published minimum. The 10% ROIC, 0.5 debt/equity, 5x coverage, 25% margin-of-safety, 7-of-9 verdict, and DCF horizon/rates are also transparent app assumptions.
Valuation Method
Owner Earnings DCF
App modelDiscounted cash flow using an SEC-data proxy for owner earnings. Total capital expenditure stands in for Buffett's harder-to-observe maintenance-capex concept; the forecast horizon and rates are app assumptions, not Buffett-published constants.
Screening implementation (9 criteria)
| # | Criterion | Metric | Threshold | Data Source |
|---|---|---|---|---|
| 1 | Consistent Earnings | Net Income Positive | Every year for 10+ years | Income Statement: Net Income |
| 2 | Return on Equity | ROE arithmetic mean | > 15% over up to 5 years (app rule) | Net Income / Shareholders' Equity |
| 3 | Return on Invested Capital | ROIC | > 10% trailing 3-5 yr avg | NOPAT / (Total Debt + Equity - Excess Cash) |
| 4 | ROIC vs. WACC Spread | ROIC - WACC | Positive and stable or growing | Derived: ROIC minus calculated WACC |
| 5 | Profit Margin Stability | Operating Margin | Stable or rising over 10 years | Income Statement: Operating Income / Revenue |
| 6 | Owner Earnings | FCF Proxy | Positive and growing | Net Income + Depreciation - Maintenance CapEx |
| 7 | Low Leverage | Debt/Equity | < 0.5; Interest Coverage > 5x | Balance Sheet: Total Debt / Equity; EBIT / Interest Expense |
| 8 | Earnings Predictability | Earnings Variance | Low coefficient of variation over 10 years | Std dev of EPS / Mean EPS |
| 9 | Capital Allocation | Retained Earnings Effectiveness | $1 retained creates > $1 market value | Change in Market Cap vs. Cumulative Retained Earnings over 5 years |
Intrinsic Value Method
Owner Earnings DCF
App modelSum of [Owner Earnings * (1+g)^t / (1+r)^t] for t=1..10 + Terminal Value / (1+r)^10An app DCF built around Buffett's 1986 owner-earnings concept. The source defines owner earnings; it does not prescribe this app's ten-year forecast, growth rule, discount rate, terminal rate, or 25% margin-of-safety cutoff.
Verdict Logic
BUY if >= 7/9 criteria pass AND price is >= 25% below Owner Earnings DCF intrinsic value. NEUTRAL if >= 7/9 criteria pass but margin of safety < 25%. FAIL if fewer than 7/9 criteria pass.
What Would Warren Buffett Buy Today?
Sources
Berkshire Hathaway Annual Letters
primary1977-2024Warren Buffett
Buffett's annual letters to shareholders are the primary source for his investment philosophy. They detail his criteria for evaluating businesses, including the importance of owner earnings, return on equity, and competitive moats.
View source →The Warren Buffett Way
secondary1994 (3rd ed. 2013)Robert G. Hagstrom
A systematic breakdown of Buffett's investment tenets organized into business, management, financial, and market categories. Provides the framework for quantifying Buffett's qualitative principles.
View source →