How Warren Buffett Picks Stocks: His Complete Investment Checklist
Published February 21, 2026 | Investment Strategy
Warren Buffett has turned Berkshire Hathaway into a $900+ billion company by following the same stock-picking framework for over 60 years. The process isn't complicated. It's actually surprisingly simple. But most investors either don't know the specific criteria or lack the discipline to stick with them.
Here's the exact checklist Buffett uses to evaluate every stock, based on decades of shareholder letters, annual meeting transcripts, and actual portfolio decisions.
Step 1: Can You Understand the Business?
This is Buffett's first filter, and it eliminates most stocks immediately. If you can't explain how a company makes money in one or two sentences, skip it.
Buffett calls this the "circle of competence." He famously avoided technology stocks for decades because he didn't feel he could predict where the industry would be in 10 years. When he finally bought Apple in 2016, it wasn't because he suddenly understood chip architecture. It was because he understood Apple as a consumer brand with incredible customer loyalty and recurring revenue from services.
The test is simple: could you explain this business to a friend over coffee? If you're reaching for buzzwords or industry jargon, you probably don't understand it well enough.
Stocks Buffett bought that pass this test: Coca-Cola (sells beverages globally), See's Candies (premium boxed chocolates), GEICO (low-cost auto insurance). Each one is dead simple to explain.
Step 2: Does It Have a Durable Competitive Advantage?
This is the "moat" question, and it's the most important factor in Buffett's framework. A moat is whatever stops competitors from stealing a company's customers and profits.
Buffett looks for four types of moats:
Brand power. When customers choose your product without comparing prices, you have brand power. Coca-Cola doesn't win on taste alone. Blind taste tests have shown people prefer Pepsi. But Coke outsells Pepsi because the brand itself creates demand. Apple charges $1,000+ for phones in a market where $300 alternatives exist. That pricing power comes from brand, not specs.
Switching costs. When it's painful for customers to leave, they tend to stay. Think about how much work it would take to move your business off Microsoft Office or Salesforce. The product doesn't even have to be the best. It just has to be deeply embedded in workflows. Intuit's TurboTax benefits from this: once your tax history is in their system, starting over somewhere else feels like a hassle.
Network effects. When each new user makes the product more valuable for existing users, you get a self-reinforcing cycle. Visa's payment network is a classic example. Merchants accept Visa because customers carry it. Customers carry Visa because merchants accept it. A competitor would need to simultaneously convince both sides to switch, which is nearly impossible.
Cost advantages. When you can produce goods or deliver services cheaper than anyone else due to scale, location, or proprietary processes. Costco's buying power lets it negotiate prices competitors can't match. GEICO's direct-to-consumer model skips the agent middlemen that add 15-20% to competitors' costs.
The key word in Buffett's framework is "durable." Having an advantage today isn't enough. It has to be the kind of advantage that gets stronger over time, not weaker. That rules out most technology advantages, which tend to be temporary.
Step 3: Is Management Honest and Competent?
Buffett spends significant time evaluating the people running the business. He's looking for two things: integrity and capital allocation skill.
Integrity check: Does management communicate honestly with shareholders? Read the annual letter. If it's full of excuses and blame-shifting during bad years but self-congratulatory during good years, that's a red flag. Buffett's own letters acknowledge mistakes openly. He expects the same from companies he invests in.
Capital allocation check: What does management do with excess cash? The best operators reinvest in high-return projects, buy back shares below intrinsic value, and return the rest as dividends. The worst ones overpay for acquisitions, build empires, and dilute shareholders with stock compensation.
Buffett pays close attention to insider ownership. When executives have meaningful personal stakes in the business, their incentives align with outside shareholders. He's consistently invested in companies where management thinks like owners, not hired help.
Red flags that cause Buffett to walk away: excessive stock options, serial acquisitions at premium prices, and compensation packages that reward revenue growth instead of per-share value creation.
Step 4: Are the Financial Metrics Strong?
Buffett's financial filters are straightforward. He wants businesses that generate consistent, growing returns without excessive leverage.
Return on equity (ROE) above 15%. This shows the business earns attractive returns on shareholder capital. Consistently high ROE, especially without excessive debt, signals a genuine competitive advantage. Apple's ROE of 160%+ (boosted by buybacks) and Visa's ROE of 45%+ reflect businesses that don't need much capital to generate enormous profits.
Low or reasonable debt. Buffett prefers companies that could pay off all long-term debt within 3-4 years using current earnings. He's not allergic to debt, but he wants companies that don't need it. Businesses that require heavy borrowing to maintain operations usually lack the pricing power and cash generation that characterize true moat companies.
Consistent earnings growth. Buffett wants to see at least 10 years of steady earnings growth. He's not looking for hockey-stick charts or explosive growth quarters. He wants predictability. A company that grows earnings 8-12% per year for a decade is far more valuable to Buffett than one that grows 40% one year and shrinks 20% the next.
Strong free cash flow. Earnings can be manipulated through accounting choices, but cash flow is harder to fake. Buffett focuses on what he calls "owner earnings": net income plus depreciation minus maintenance capital expenditures. This represents the actual cash a business owner could pull out of the company each year without hurting future performance.
High profit margins. Companies with fat margins have room to absorb cost increases, competitive pressure, and economic downturns without becoming unprofitable. Visa operates at 65%+ net margins. Coca-Cola runs at 23%. These margins reflect pricing power that comes from competitive advantages.
Step 5: Is the Price Right?
Even the best business in the world is a bad investment at the wrong price. Buffett wants a "margin of safety," meaning he buys at a significant discount to what the business is actually worth.
His valuation approach is conceptually simple: estimate the future cash flows of the business, discount them back to today at a reasonable rate, and only buy when the market price is meaningfully below that intrinsic value.
In practice, Buffett thinks about it as: what would I pay to own this entire business? He doesn't think in terms of stock prices or price-to-earnings ratios. He thinks about buying the whole company and living off its cash flows for the next 20 years.
The margin of safety is typically 25-35% below estimated intrinsic value. This buffer protects against errors in estimation, unexpected business problems, and general market volatility. If a stock is worth $100, Buffett wants to buy it for $65-75.
One nuance: Buffett has evolved on price. His mentor Benjamin Graham insisted on buying "cigar butts" at extreme discounts. Charlie Munger convinced Buffett that paying a fair price for a wonderful business beats paying a cheap price for a mediocre one. The shift led to investments like Apple and Coca-Cola that were never statistically "cheap" but were wonderful businesses at reasonable prices.
Step 6: Can You Hold It for 10+ Years?
Buffett's ideal holding period is "forever." He buys businesses he never wants to sell. This isn't just philosophy. It's practical.
Long holding periods let compound interest work. They minimize taxes (unrealized gains aren't taxed). They reduce transaction costs. And they force you to think about business quality rather than short-term price movements.
Before buying any stock, Buffett asks: if the stock market closed tomorrow and didn't reopen for 10 years, would I still be comfortable owning this business? If the answer is no, don't buy it.
This test eliminates most "hot" stocks. Trendy companies with unproven business models, companies dependent on a single product cycle, and businesses in rapidly changing industries all fail the 10-year hold test.
Putting It All Together
Buffett's checklist in summary:
- Simple, understandable business
- Durable competitive advantage (moat)
- Honest, skilled management
- Strong financials (high ROE, low debt, consistent growth, strong cash flow)
- Price below intrinsic value (margin of safety)
- Confidence to hold 10+ years
Most stocks fail on item 2. A business might be easy to understand with great financials, but without a durable moat, those financials will erode over time as competition increases.
The beauty of this framework is that it's repeatable. You don't need insider information, technical analysis, or macroeconomic predictions. You need patience, discipline, and the ability to honestly assess whether a business has lasting competitive advantages.
How Moatifi Automates This Framework
Moatifi's stock analysis applies Buffett's criteria systematically across 458 stocks. Each company receives a moat score based on competitive advantage analysis, financial health metrics, and management quality assessment.
The stock screener lets you filter by moat strength, financial health, and valuation to find stocks that pass Buffett's checklist. Individual stock pages like Apple (AAPL) or Visa (V) break down each company's competitive advantages, key financials, and management quality in plain English.
It's the same framework Buffett uses, applied consistently across the market so you don't have to read 458 annual reports yourself.
To see this framework in action, check out our analysis of 5 insurance stocks that pass Buffett's criteria. Insurance is Buffett's favorite business model, and these companies demonstrate every principle from the checklist above.