How Warren Buffett Picks Stocks: 12 Principles
Buffett's twelve questions reject almost every listed company before he opens the accounts. The FTSE 100 thins out fast under them. Most ISA portfolios fail the first three.
Buffett's twelve principles, grouped
| Bucket | Principle | Question it asks |
|---|---|---|
| Business | Simple, consistent, favourable prospects | Can you explain it in two sentences? |
| Management | Rational, candid, independent | Would they treat you as a partner? |
| Financial | High ROE, owner earnings, margins, $1 retained creates $1 | Are the numbers actually good? |
| Value | Intrinsic value, margin of safety | Is the price low enough? |
From Robert Hagstrom, The Warren Buffett Way. All four must pass.
Key takeaways
Warren Buffett picks stocks using four sets of filters: business, management, financial and value tests.
The famous twelve principles come from Robert Hagstrom's The Warren Buffett Way, distilled from decades of Berkshire Hathaway annual letters.
UK investors can apply the framework on the LSE, but the FTSE 100 is a shallower pool of Buffett-style businesses than the S&P 500.
If running this yourself sounds like hard work, just buy Berkshire Hathaway B-shares inside an ISA, or hold a global tracker and stop reading.