Even though Buffett has written hundreds of pages on the stock market, it is in quite general terms. For example, he once said, “Rule No. 1 is never lose money” and “Rule No. 2. is never forget rule No. 1.” Or, “All we want is to be in businesses that we understand, run by people whom we like, and priced attractively relative to their future prospect.”

When it comes to specific details, Buffett is quite secretive. Good investment ideas are rare, valuable, and subject to competitive appropriation just as good product or business acquisitions are. Notwithstanding this secrecy and the general nature of most of his remarks, there are still clear guidelines to be gleaned from his writings. The following is a collection of some of these.

Invest in businesses “The basic ideas of investing are to look at stocks as businesses, use market fluctuations to your advantage and seek a margin of safety. That’s what Ben Graham taught us… A hundred years from now they will still be the cornerstones of investing.” (New York Society of Security Analysts, December 6, 1994.)

Circle of Competence “Draw a circle around the businesses you understand and then eliminate those that fail to qualify on the basis of value, good management, and limited exposure to hard times.”

Return on equity “The primary test of managerial economic performance is the achievement of high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc) and not the achievement of consistent gains in earnings per share.” (Berkshire Hathaway Annual Report 1979.)

Debt levels “We do not wish it only to be likely that we can meet our obligations; we wish that to be certain. Thus we adhere to policies—both in regard to debt and all other matters—that will allow us to achieve acceptable long-term results under extraordinary adverse conditions, rather than optimal results under a normal range of conditions.” (Berkshire Hathaway Annual Report 1987.)

Quality of management “We do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business. We’ve never succeeded in making a good deal with a bad person.” (Berkshire Hathaway Annual Report 1989.)

Be wary of formulas “It is better to be approximately right than precisely wrong.” (Berkshire Hathaway Annual Report 1989) “Read Ben Graham and Phil Fisher, read annual reports and
trade reports, but don’t do equations with Greek letters in them.” (Berkshire Hathaway Annual Report 1993.)

Return “We love owning common stocks – if they can be purchased at attractive prices. Unless, however, we see a very high probability of at least 10% pre-tax returns (which translate to 6˝-7% after corporate tax), we will sit on the sidelines. With short-term money returning less than 1% after-tax, sitting it out is no fun. But occasionally successful investing requires inactivity.” (Berkshire Hathaway Annual Report 2002.)

Margin of safety “You have to have the knowledge to enable you to make a very general estimate about the value of the underlying business. But you do not cut it close. That is what Ben Graham meant by having a margin of safety. You don’t try and buy businesses worth $83 million for $80 million. You leave your self an enormous margin.” (Buffett, 1984.)

Economic moat “Look for the durability of the franchise. The most important thing for me is figuring out how big a moat there is around a business. What I love, of course, is a big castle and a big moat with piranhas and crocodiles.”

Earnings forecasts “Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher, five, ten, and twenty years from now.” (Berkshire Hathaway Annual Report 1996.)

Conclusion:
Warren Buffett has applied a consistent methodology to the stock market for over 40 years. The results of his methods as measured first by his performance in the Buffett Partnerships and later by Berkshire Hathaway cannot be dismissed as a statistical anomaly. Finally, indications are that even a simple buy and hold strategy using hurdles based on Buffett’s ideas in the framework of Conscious Investor will generate portfolios that outperform the market.