Most investing advice is noise: forecasts about rates, elections, AI and the next recession. Warren Buffett’s approach is famous partly because it ignores nearly all of that. You don’t need to predict the market. You need to judge a business, and refuse to overpay for it.
The whole idea, in four questions
- Is it a good business? It earns high returns on the money invested in it, year after year, without needing ever more capital to grow.
- Does it really make money? Real profits and real cash, not a story about profits one day.
- Can it survive a bad year? Modest debt, so a recession is a nuisance rather than a threat.
- Is the price sensible? Well below a conservative estimate of what the business is worth. That gap is the margin of safety, the idea Buffett took from his teacher Benjamin Graham.
Buffett has said he’d rather own a wonderful company at a fair price than a fair company at a wonderful price. Then comes the hard part: waiting.
Why it suits anyone who feels lost
Graham described the market as a moody business partner, Mr. Market, who offers you a new price every day. Some days he’s euphoric, some days terrified. You don’t have to trade with him. You only act when his price is clearly wrong. That turns a confusing, noisy market into a short list of yes-or-no questions about companies.
The same questions, as one rule
The rule here asks those questions of 499 large US companies every trading day, using only each company’s own SEC filings (10-Ks and 10-Qs) and its closing price. Today 55 pass every test.
| The question | What the rule checks | To qualify |
|---|---|---|
| Is the price sensible? | Upside to the model’s value, estimated from the company’s own filings | 20% or more |
| Is it a good business? | Quality score: a blend of percentile ranks for returns on capital (50%), revenue growth (25%) and low debt (25%) | 0.5 or more |
| Does it really make money? | Net income over the last twelve months, and the cash earnings the valuation starts from | Both positive |
| Can it survive a bad year? | Net debt divided by operating income (EBIT) | 3.5× or less |
| Are today’s profits real? | Cyclical businesses at peak margins, where profits flatter the price | Excluded |
Every formula and threshold, term by term: the methodology.
From the companies that pass, the model portfolio holds the top 15 by upside, in equal weights. It sells when the margin of safety is gone (upside under 5%), or when the business breaks: quality below 0.4, losses, negative cash earnings, or net debt above 4.5× operating income. Everything is published on the portfolio page, including the track record against the S&P 500.
Where it differs from Buffett
- Diversified, not concentrated. Buffett puts big money behind a few ideas he knows deeply. A rule can’t know a business that well, so it spreads across 15 companies.
- It sells at fair value. Buffett’s favorite holding period is forever. The rule sells once the price catches up with its estimate, and recycles the money into the next bargain.
- Numbers only. Buffett also judges management, brands and competitive moats. The rule only sees what the filings show: returns, growth, cash and debt.
That is the trade: less genius, more discipline. The rule never gets excited, never panics, and never skips a company because it’s boring.
Try it on a company you know
Look up any company in the companies list or browse a sector. Each page shows the price, size and one-year chart, and members see how the company scores on every test above.