Everyone just wonder if there are any filtering rules from Buffett. This post is for it.
Origin of this article
Original message from blog reader
A reader of this blog once said, “The 2004 Berkshire Hathaway annual report wrote relatively specific literal criteria for mergers and acquisitions, but it did not mention a formula.”
My reply
Buffett’s acquision standards for companies
This reminds me that regarding Buffett’s corporate merger and acquisition standards, he mentioned it “countless times” in his official documents and there are several different versions, including the 2004 Berkshire Hathaway annual report you mentioned. My personal opinion is that the differences between these versions are very small, mostly due to differences in text and rhetoric, and the core principles are the same.
For details about these different versions in different periods, please refer to my previous post “”Buffett’s Acquisition Criteria” for a complete list of various versions of Buffett’s corporate M&A standards.
Buffett’s criteria for acquiring companies
As far as I can remember, Buffett has never emphasized the “formula” in acquiring companies. Please note that he will not say “formula” again. But there are rules of thumb, or his generalizations and suggestions.
This is because “Investing has no formulas, but there are ways to invest successfully“
Buffett’s teacher Graham does have what readers call a “formula” for acquiring companies; this aspect has been mentioned in Graham’s books and will not be repeated here.
Next, we will introduce the two sets of digital screening and filtering stock selection rules of thumb mentioned by Buffett. Again, this is not a formula, but just his many years of investment experience, comprehensive findings, and investment rules of thumb that he has summarized and researched, which are suggestions that investors can refer to.
Two filtering rules of thumb by Buffett
Buffett’s first find
Source
This find was published in the “1987 Berkshire Hathaway Shareholder Letter“.
Filter rules
- The average return on equity (ROE) over the past 10 years has been greater than 20%
- No single year has an ROE less than 15%
Buffett’s thoughts on this Find
- Only 25 out of 1,000 companies fully meet these two conditions
- Between 1977 and 1986, 24 out of 25 companies outperformed the S&P 500
Buffett’s second find
Source
This finding was published in the “2002 Berkshire Hathaway Shareholder Letter“.
Filter rules
- Pre-tax return 10% (note: a price-to-earnings ratio of about 10 times)
- After-tax returns range from 6.5% to 7% (note: approximately P/E ratio 14.3 to 15.4, corporate tax rate for US companies is 30% to 35%)
Buffett’s thoughts on this find
Please note that Buffett specifically said when mentioning this find: “In my 61 years of investing, approximately 50 years have provided such opportunities, and there will be years like this. However, unless we see these conditions hold true.”
When he was talking about this find. In the context of that era, the after-tax return on short-term funds was less than 1%, so he had such an opinion.
Applied two Buffett’s top holdings
The following table is the result of applying the above two math filtering rule of Buffett to his top ten holdings for your reference.
| Buffett Case Study | Year | ROE Average | ROE Missed | Pre-tax acquired cost |
| Apple | 2016 | 20%+ | 0 | 8.8 |
| Coco Cola | 1989 | 20%+ | 0 | 10.1 |
| IBM | 2011 | 20%+ | 0 | 9.8 |
| American Express | 1995 | 20%+ | 2 | 7.67 |
| Kraft Heinz | 2007 | 11.10% | 10 | 13.62 |
| McDonald | 1996 | 20.80% | 0 | 14 |
| Wells Fargo | 1990 | 14.41% | 20 | 3 |
| 2015 | 20 | 8.02 | ||
| BNSF | 2007 | 13.40% | 20 | 9.6 |
| Precision Castparts | 2015 | 20.77% | 1 | 13.21 |
Related articles
- “Investing has no formulas, but there are ways to invest successfully“
- ““Benjamin Graham on Value Investing”, Graham’s bio book“
- “Buffett’s Acquisition Criteria“
- “The commonalities of Buffett portfolio – cheap, fixed income, repurchase“
- “Possibility of long-term holdings, Deep dive on Buffett’s case“
- “People believe successful investors are survivorship bias cannot succeed“
- “Why Buffett deserves further study?“
- “What helps Buffett to get his investment idea?“
- “Why most mergers and acquisitions end in failure?“
- “Why Buffett prefers minority stake to entire company?“
- “Institutional imperative – the good, bad, and ugly“
- “Berkshire’s acquisition model“
- “Advantages of controlled business“
- “Buffett’s 2025 Berkshire Shareholder Letter“
- “Buffett’s 2024 Annual Shareholder Letter“
- “Buffett’s 2023 Annual Shareholder Letter“
- “2024 Berkshire shareholders meeting transcript and video“
- “2023 Berkshire shareholders meeting transcript and video“
- “Charlie Munger speaks at 2023 Daily Journal Shareholders Meeting“
- “Buffett’s first TV interview“
- “Full transcript of Buffett’s interview with CNBC’s Squawk Box“
- “Outsiders, one of the greatest investment books for management team“
- “Dear Shareholder“
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