Issue #7 — Buffett’s Buying List

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Key Takeaways

Yesterday we closed Season 1 — Thinking Like an Owner. Five rules pulled from the first four Berkshire letters, interlocking into one coherent philosophy.

Today we open Season 2 — The Owner’s Manual Takes Shape (1981–1988). In Season 1, you learned to think like an owner. In Season 2, you’ll watch Buffett formally write down the rules — first for what businesses he wants to buy whole, then for how he and his shareholders will treat each other as partners.

And it starts with the small, strange public ad Buffett began printing in his annual letter in 1981.

By 1981, Berkshire was starting to get serious inbound inquiries from owners of private businesses wondering if Buffett might want to buy them. Rather than respond individually, he did something characteristically efficient — he published his criteria publicly, inside the annual letter, so sellers could self-select before anyone wasted time.

That small act turned into a tradition. Buffett has reprinted essentially the same six-criterion checklist in nearly every annual letter since. It became Berkshire’s acquisition criteria — and over the decades, something more. It’s the clearest template Buffett has ever written for how to evaluate any business.

Here it is, paraphrased from the 1981 and 1982 letters. Berkshire wants to buy businesses that meet all of the following:

Six lines. Forty-four years. Almost no changes. Let’s walk through what each one actually means.

1 — Large purchases. Small acquisitions don’t move the needle, so Buffett doesn’t do them. The lesson for you: don’t bother with investments too small to meaningfully affect your portfolio. If an idea doesn’t deserve 2–5% of your capital, it probably doesn’t deserve your attention either.

2 — Demonstrated earning power, not projected. Buffett wants a track record, not a story. He explicitly rules out forecasts (because nobody can really predict) and turnarounds (because, in his words, they rarely turn). This single line eliminates most of what Wall Street spends its time on.

3 — Good returns on equity, with little or no debt. This is where it gets sharp. Any company can inflate its ROE by levering up. Borrow at 5%, deploy at 10%, numbers look great. But that’s financial engineering, not business quality. A business that earns high returns without needing debt is genuinely great. A business that only looks good because it’s leveraged is a bomb waiting for the next downturn. Most “high-quality” stocks you’ll see praised by Wall Street fail this test.

4 — Management already in place. Buffett is admitting, honestly, that he’s not an operator. He can judge existing management. He can’t fix it when it’s bad. So he filters for businesses where that problem is already solved. For you: don’t buy a stock whose thesis depends on management changing. If today’s CEO is doing a bad job, assume they’ll keep doing a bad job.

5 — Simple businesses. “If there’s lots of technology, we won’t understand it.” Buffett is being ruthlessly honest about his circle of competence. The lesson isn’t to avoid tech. It’s to be ruthlessly honest about what you understand. If you can’t explain in one paragraph how a business makes money and what could kill it, you don’t understand it well enough to own it.

6 — An offering price. This looks administrative but it’s deceptively important. Buffett refuses to discuss any deal without knowing the asking price first. Why? Because he refuses to bid against himself. If a seller shows him a business and asks “what would you pay?”, Buffett is anchored in weakness. If the seller names a price, Buffett can evaluate it. The one who names the first number cedes less information than the one who answers. It’s true in acquisitions, salary negotiations, and house purchases.

Here’s what makes these six criteria especially elegant. They mirror almost exactly the four stock-picking criteria we covered in Issue #3 — but applied to a wholly different context (buying a private business whole).

Both lists are really asking the same five underlying questions:

Two different lists. Same underlying philosophy. That consistency is what makes Buffett Buffett — and it’s why Season 2 is called The Owner’s Manual Takes Shape. You’re watching him write down the rules in public and then follow them with inhuman consistency for 44 years.

Next time you’re evaluating any business — a stock, a franchise you’re thinking of buying, a startup you’re thinking of joining, a small business for sale down the street — run it through these six questions. Not the four from Issue #3. The six from Issue #7. The criteria for buying something whole are stricter than the criteria for owning a sliver, and that’s useful.

If you’d pass on it as a whole-business acquisition, you should probably pass on it as a stock too. The reverse isn’t always true — but when it is, you’ve found something special.

Issue #8 — The Investor’s Misery Index
In the 1979 and 1980 letters, Buffett wrote some of the sharpest paragraphs ever written on how inflation silently destroys investor returns, even when nominal gains look fine. We’ll pull apart the formula he laid out, and what it means for compounding in an inflationary decade like the one we might be entering.

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