Favorite Stockpicking Quotes form Warren Buffett

Below are the quotes from Warren Buffett that I think best describe his investing philosophy and stock-picking criteria. Based on the quotes, Warren Buffett tries to identify businesses that have sustainably high returns on invested capital (ROIC), high free cash flow (FCF) conversion, strong balance sheets with healthy interest coverage ratios, wide sustainable moats, and honest and capable leadership that excel at capital allocation, which using Buffett’s lens, often takes the form of share buybacks at a discount and growing dividends (because remember that Buffett is looking for companies that generate a lot of excess cash flow).

Of all the qualities that Buffett looks for in a business, it seems to me as though earnings predictability/forecastability ranks at the top of his check list. I think that all of the qualities mentioned above (such as a healthy balance sheet, high ROIC and FCF conversion, a wide durable moat, and quality management and effective capital allocation) simply serve to help Buffett identify businesses that he has high conviction will have higher earnings per share (EPS) five, ten or twenty years in the future. That is ultimately what Buffett is after…high confidence in higher per-share earnings years or decades into the future, and all of the criteria discussed in these quotes simply help him to narrow down that list of companies. In other words, the qualities he looks for (once again, high ROIC, high FCF, wide durable moats, and effective management) are the drivers of long-term EPS growth. And then, Buffett tries to buy stock in these companies when they are trading at low P/E multiples. It sounds simple, but it’s not, and he’s the best to ever do it.

I put a few of the quotes into multiple categories below because they fit into multiple categories. Those twelve categories are…

• Buffett on healthy balance sheets and interest coverage ratios
• Buffett on his expected batting average/accuracy ratio
• Buffett on high returns on capital (particularly returns on tangible capital)
• Buffett on free cash flow conversion
• Buffett on business models and competitive advantages
• Buffett on honest, capable, and shareholder-friendly management
• Buffett on predictability (forecastability)
• Buffett on capital allocation (when a business should reinvest and when it should return cash to shareholders)
• Buffett on welcoming falling stock prices
• Buffett on valuation and paying up a bit for quality
• Buffett on what he is ultimately after (high conviction in higher EPS five to 20 years into the future)
• Buffett on his ideal holding period

I only included quotes from Warren Buffett himself in this note. For example, in November 2022 Todd Combs revealed that Buffett looks for three main criteria when picking stocks, two of which have to do with earnings predictability/forecastability…which there is a lot on below. But the other criteria is that Buffett aims to buy these predictable, profitable growers at no more than 15x next twelve month (NTM) earnings. I did not include these quotes from Todd because they did not come from Warren himself.

I also provided the source to each quote so that you can dive in further or get more context if you want.

(Note: Bold is my own).

Buffett on healthy balance sheets and interest coverage ratios…

• “I spend more time looking at balance sheets than I do at income statements… I look at balance sheets over an 8 or 10-year period before I even look at the income statement.” – 2025 Berkshire Hathaway Annual Meeting
• “A key characteristic of both companies is their huge investment in very long-lived, regulated assets, with these partially funded by large amounts of long-term debt that is not guaranteed by Berkshire. Our credit is in fact not needed because each business has earning power that even under terrible conditions amply covers its interest requirements. In last year’s tepid economy, for example, BNSF’s interest coverage was 9.6x. (Our definition of coverage is pre-tax earnings/interest, not EBITDA/interest, a commonly-used measure we view as deeply flawed.)” – Buffett 2012 Letter

Buffett on his expected batting average/accuracy ratio…

• “In stocks, we expect every commitment to work out well because we concentrate on conservatively financed businesses with strong competitive strengths, run by able and honest people. If we buy into these companies at sensible prices, losses should be rare.” – Buffett 2002 Letter
• “The problem is not that what has worked in the past will cease to work in the future.  To the contrary, we believe that our formula – the purchase at sensible prices of businesses that have good underlying economics and are run by honest and able people – is certain to produce reasonable success.  We expect, therefore, to keep on doing well.” – Buffett 1994 Letter

Buffett on high returns on capital (particularly return on tangible capital)…

• “Most companies define ‘record’ earnings as a new high in earnings per share…Except for special cases (for example, companies with unusually high debt-equity ratios or those with important assets carried at unrealistic balance sheet values), we believe a more appropriate measure of managerial economic performance to be return on equity capital.” – Buffett 1977 Letter
• “The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share.” – Buffett 1979 Letter
• “Our preference would be to reach this goal by directly owning a diversified group of businesses that generate cash and consistently earn above-average returns on capital.” – Buffett 1983 Letter
• “Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.  The worst business to own is one that must, or will, do the opposite – that is, consistently employ ever-greater amounts of capital at very low rates of return.” – Buffett 1992 Letter
• “Truly great businesses, earning huge returns on tangible assets, can’t for any extended period reinvest a large portion of their earnings internally at high rates of return.” – Buffett 2007 Letter
• “A truly great business must have an enduring “moat” that protects excellent returns on invested capital.” – Buffett 2007 Letter
• “The best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow.” – Buffett 2009 Letter
• “In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price.” – Buffett 2017 Letter
• “What we see in our holdings, rather, is an assembly of companies that we partly own and that, on a weighted basis, are earning about 20% on the net tangible equity capital required to run their businesses. These companies, also, earn their profits without employing excessive levels of debt.” – Buffett 2018 Letter
• “We constantly seek to buy new businesses that meet three criteria. First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price.” – Buffett 2019 Letter
• “We own a small percentage of a dozen or so very large and highly profitable businesses with household names such as Apple, American Express, Coca-Cola and Moody’s. Many of these companies earn very high returns on the net tangible equity required for their operations.” – Buffett 2024 Letter
• “I believe I was right in concluding that PCC [Precision Cast Parts] would, over time, earn good returns on the net tangible assets deployed in its operations. I was wrong, however, in judging the average amount of future earnings and, consequently, wrong in my calculation of the proper price to pay for the business. PCC is far from my first error of that sort. But it’s a big one.” – Buffett 2020 Letter
• “To evaluate that [economic performance], we must know how much total capital – debt and equity – was needed to produce these earnings.” – 1987 Letter

Buffett on free cash flow conversion (or his preferred measure of owner earnings, which is similar to free cash flow)…

• “However attractive the earnings numbers, we remain leery of businesses that never seem able to convert such pretty numbers into no-strings-attached cash.” – Buffett 1980 Letter
• “…and those earnings all were translated into cash.” – Buffett 1980 Letter
• “Outstanding businesses by definition generate large amounts of excess cash.” – Buffett 1984 Letter
• “We consider the owner earnings figure, not the GAAP figure, to be the relevant item for valuation purposes – both for investors in buying stocks and for managers in buying entire businesses.” – Buffett 1986 Letter
• “Our preference would be to reach this goal by directly owning a diversified group of businesses that generate cash and consistently earn above-average returns on capital.” – Buffett 1983 Letter
• “Almost by definition, a really good business generates far more money (at least after its early years) than it can use internally.” – Buffett 1984 Letter

Buffett on business models (economic castles) and competitive advantages (moats)…

• “In business, I look for economic castles protected by unbreachable ‘moats.’” – Buffett 1995 Letter
• “A truly great business must have an enduring “moat” that protects excellent returns on invested capital.” – Buffett 2007 Letter
• “The most important thing to me is figuring out how big a moat there is around the business. What I love, of course, is a big castle and a big moat with piranhas and crocodiles.” – Warren Buffett Way, Robert Hagstrom
• “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.” – Warren Buffett, Fortune, 1999

Buffett on honest, capable, shareholder-friendly management…

• “When buying companies or common stocks, we look for first-class businesses accompanied by first-class managements.” – Buffett 1989 Letter
• “We continually search for large businesses with understandable, enduring and mouth-watering economics that are run by able and shareholder-oriented managements.” – Buffett 1991 Letter
• “Currently, we find values most easily obtained through the open-market purchase of fractional positions in companies with excellent business franchises and competent, honest managements.  We never expect to run these companies, but we do expect to profit from them. We expect that undistributed earnings from such companies will produce full value (subject to tax when realized) for Berkshire and its shareholders.  If they don’t, we have made mistakes as to either: (1) the management we have elected to join; (2) the future economics of the business; or (3) the price we have paid.” – Buffett 1981 Letter
• “We are quite content to hold any security indefinitely, so long as the prospective return on equity capital of the underlying business is satisfactory, management is competent and honest, and the market does not overvalue the business.” – Buffett 1987 Letter
• “Good jockeys will do well on good horses, but not on broken-down nags. Both Berkshire’s textile business and Hochschild, Kohn had able and honest people running them. The same managers employed in a business with good economic characteristics would have achieved fine records. But they were never going to make any progress while running in quicksand. I’ve said many times that when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” – Buffett 1989 Letter
• “The art of investing in public companies successfully is little different from the art of successfully acquiring subsidiaries.  In each case you simply want to acquire, at a sensible price, a business with excellent economics and able, honest management.  Thereafter, you need only monitor whether these qualities are being preserved.” – Buffett 1996 Letter
• “Aside from the economic factors that benefited us, we now enjoy a major and growing advantage in making acquisitions in that we are often the buyer of choice for the seller. That fact, of course, doesn’t assure a deal – sellers have to like our price, and we have to like their business and management – but it does help. We find it meaningful when an owner cares about whom he sells to. We like to do business with someone who loves his company, not just the money that a sale will bring him (though we certainly understand why he likes that as well). When this emotional attachment exists, it signals that important qualities will likely be found within the business: honest accounting, pride of product, respect for customers, and a loyal group of associates having a strong sense of direction. The reverse is apt to be true, also. When an owner auctions off his business, exhibiting a total lack of interest in what follows, you will frequently find that it has been dressed up for sale, particularly when the seller is a “financial owner.” And if owners behave with little regard for their business and its people, their conduct will often contaminate attitudes and practices throughout the company.” – Buffett 2000 Letter
• “In addition, we constantly seek to buy new businesses that meet three criteria. First, they must earn good returns on the net tangible capital required in their operation. Second, they must be run by able and honest managers. Finally, they must be available at a sensible price.” – Buffett 2019 Letter

Buffett on predictability (or forecastability)…

• “In studying the investments we have made in both subsidiary companies and common stocks, you will see that we favor businesses and industries unlikely to experience major change.  The reason for that is simple:  Making either type of purchase, we are searching for operations that we believe are virtually certain to possess enormous competitive strength ten or twenty years from now.  A fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek.” – Buffett 1996 Letter
• “When Charlie and I buy stocks – which we think of as small portions of businesses – our analysis is very similar to that which we use in buying entire businesses. We first have to decide whether we can sensibly estimate an earnings range for five years out, or more. If the answer is yes, we will buy the stock (or business) if it sells at a reasonable price in relation to the bottom boundary of our estimate. If, however, we lack the ability to estimate future earnings – which is usually the case – we simply move on to other prospects.” – Buffett 2013 Letter
• “Just because Charlie and I can clearly see dramatic growth ahead for an industry does not mean we can judge what its profit margins and returns on capital will be as a host of competitors battle for supremacy. At Berkshire we will stick with businesses whose profit picture for decades to come seems reasonably predictable.” – Buffett 2009 Letter
• “Long-term competitive advantage in a stable industry is what we seek in a business.” – Buffett 2007 Letter
• “Charlie and I admit that we feel confident in estimating intrinsic value for only a portion of traded equities and then only when we employ a range of values, rather than some pseudo-precise figure.” – Buffett 2009 Letter
• “Most investors, of course, have not made the study of business prospects a priority in their lives. If wise, they will conclude that they do not know enough about specific businesses to predict their future earning power.” – Buffett 2013 Letter
• “Though the mathematical calculations required to evaluate equities are not difficult, an analyst – even one who is experienced and intelligent – can easily go wrong in estimating future “coupons.”  At Berkshire, we attempt to deal with this problem in two ways.  First, we try to stick to businesses we believe we understand.  That means they must be relatively simple and stable in character.  If a business is complex or subject to constant change, we’re not smart enough to predict future cash flows.” – Buffett 1992 Letter
• “Business that must deal with fast-moving technology is not going to lend itself to reliable evaluations of its long-term economics.  Did we foresee thirty years ago what would transpire in the television-manufacturing or computer industries?  Of course not.  (Nor did most of the investors and corporate managers who enthusiastically entered those industries.) Why, then, should Charlie and I now think we can predict the future of other rapidly-evolving businesses?” – Buffett 1993 Letter
• “This explains, by the way, why we don’t own stocks of tech companies, even though we share the general view that our society will be transformed by their products and services. Our problem — which we can’t solve by studying up — is that we have no insights into which participants in the tech field possess a truly durable competitive advantage.” – Buffett 1999 Letter
• “At Berkshire, we make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises…Obviously, we can never precisely predict the timing of cash flows in and out of a business or their exact amount. We try, therefore, to keep our estimates conservative and to focus on industries where business surprises are unlikely to wreak havoc on owners.” – Buffett 2000 Letter
• “Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and continuous change. Though capitalism’s “creative destruction” is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all.” – Buffett 2007 Letter
• “But a business that constantly encounters major change also encounters many chances for major error.  Furthermore, economic terrain that is forever shifting violently is ground on which it is difficult to build a fortress-like business franchise.  Such a franchise is usually the key to sustained high returns.” – Buffett 1987 Letter

Buffett on capital allocation (when a business should reinvest and when it should return cash to shareholders)…

• “You should wish your earnings to be reinvested if they can be expected to earn high returns, and you should wish them paid to you if low returns are the likely outcome of reinvestment.” – Buffett 1984 Letter
• “Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.  The worst business to own is one that must, or will, do the opposite – that is, consistently employ ever-greater amounts of capital at very low rates of return.  Unfortunately, the first type of business is very hard to find:  Most high-return businesses need relatively little capital.  Shareholders of such a business usually will benefit if it pays out most of its earnings in dividends or makes significant stock repurchases.” – Buffett 1992 Letter
• “I knew that TV stations were See’s-like businesses that required virtually no capital investment and had excellent prospects for growth. They were simple to run and showered cash on their owners.” – Buffett 2007 Letter
• “Truly great businesses, earning huge returns on tangible assets, can’t for any extended period reinvest a large portion of their earnings internally at high rates of return.” – Buffett 2007 Letter
• “The best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow.” – Buffett 2009 Letter
• “We like increased dividends, and we love repurchases at appropriate prices.” – Buffett 2012 Letter
• “The obvious point involves basic arithmetic: major repurchases at prices well below per-share intrinsic business value immediately increase, in a highly significant way, that value.  When companies purchase their own stock, they often find it easy to get $2 of present value for $1.” – Buffett 1984 Letter
• “We like making money for continuing shareholders, and there is no surer way to do that than by buying an asset – our own stock – that we know to be worth at least x for less than that – for .9x, .8x or even lower. (As one of our directors says, it’s like shooting fish in a barrel, after the barrel has been drained and the fish have quit flopping.)” – Buffett 2011 Letter
• “Indeed, disciplined repurchases are the surest way to use funds intelligently: It’s hard to go wrong when you’re buying dollar bills for 80¢ or less.” – Buffett 2012 Letter

Buffett on welcoming falling stock prices…

• “The best thing that can happen from Berkshire’s standpoint is to have markets that go down a tremendous amount…What we fear is an irrational bull market that is sustained for some long period of time.” – Buffett at Annual Meeting 
• “The speed at which a business’s success is recognized, furthermore, is not that important as long as the company’s intrinsic value is increasing at a satisfactory rate.  In fact, delayed recognition can be an advantage: It may give us the chance to buy more of a good thing at a bargain price.” – Buffett 1987 Letter
• “When Berkshire buys stock in a company that is repurchasing shares, we hope for two events: First, we have the normal hope that earnings of the business will increase at a good clip for a long time to come; and second, we also hope that the stock underperforms in the market for a long time as well.” – Buffett 2011 Letter
• “The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon.” – Buffett 2011 Letter
• “The best thing that could happen would be if the stock did nothing for five years because they were going to buy in a lot of stock…People have the conception – misconception when we buy a stock we like it to go up. That’s the last thing we want it to do.” – Buffett on CNBC

Buffett on valuation and paying up a bit for quality…

• “Only a relatively few businesses earn the 16.3% after tax on unleveraged capital that our WPPSS investment does and those businesses, when available for purchase, sell at large premiums to that capital.  In the average negotiated business transaction, unleveraged corporate earnings of $22.7 million after-tax (equivalent to about $45 million pre-tax) might command a price of $250 – $300 million (or sometimes far more).  For a business we understand well and strongly like, we will gladly pay that much.” – Buffett 1984 Letter
• “Aided by their flight from bank stocks, we purchased our 10% interest in Wells Fargo for $290 million, less than five times after-tax earnings, and less than three times pre-tax earnings.” – Buffett 1990 Letter
• “I first became interested in Disney in 1966, when its market valuation was less than $90 million, even though the company had earned around $21 million pre-tax in 1965 and was sitting with more cash than debt.  At Disneyland, the $17 million Pirates of the Caribbean ride would soon open.  Imagine my excitement – a company selling at only five times rides!” – Buffett 1995 Letter
• “Freddie Mac is a triple dip. You’ve got a low price/earnings ratio on a company with a terrific record. You’ve got growing earnings. And you have a stock that is bound to become much better known to equity investors.” – Buffett in Fortune (via CNN Money)
• “I was confounded by the fact that we could buy into these companies…[they had] an earnings yield maybe 14% or something like that, but dividends would grow…they were selling at what I thought was a ridiculous price, particularly the price compared to the interest rates prevailing at that time.” – Buffett on CNBC
• “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” – Buffett 1989 Letter
• “Time is the friend of the wonderful business; it is the enemy of the lousy business. If you are in a lousy business for a long time, you will get a lousy result even if you buy it cheap. If you are in a wonderful business for a long time, even if you pay a little bit too much going in you will get a wonderful result if you stay in a long time.” – Warren Buffett, University of FL 1998
• “When you find a really good business run by first-class people, chances are a price that looks high isn’t high. The combination is rare enough, it’s worth a pretty good price.” – Buffett in Forbes

Buffett on what he is ultimately after (the pot of gold he is looking for at the end of the rainbow)

• “Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understood business whose earnings are virtually certain to be materially higher, five, ten, and twenty years from now.” – Buffett 1996 Letter
• “We don’t have any magic multiples in mind. We want to be in a business that, ten years from now, is earning a whole lot more money than it is now.” – Berkshire Hathaway Shareholder Meeting
• “You just have to have some conviction that a given company — or a group of companies — [is] likely to earn more money 5 or 10 or 20 years from now than [it’s] earning now. And that is not a difficult decision to come to.” – Buffett on CNBC

Buffett on his ideal holding period…

• “We are quite content to hold any security indefinitely, so long as the prospective return on equity capital of the underlying business is satisfactory, management is competent and honest, and the market does not overvalue the business.” – Buffett 1987 Letter
• “When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.” – Buffett 1998 Letter