Warren Buffett, often referred to as the “Oracle of Omaha,” is one of the most successful investors of all time. As the chairman and CEO of Berkshire Hathaway, his approach to identifying a good company has become a blueprint for investors worldwide. But what exactly does Buffett look for in a business? In this article, we’ll explore the key characteristics that define a good company according to Warren Buffett, based on his timeless principles.
1. Strong Economic Moat
One of Buffett’s core beliefs is that a good company must have a durable competitive advantage, often referred to as an “economic moat.” This moat protects the business from competitors, ensuring long-term profitability. Examples include strong brand loyalty (think Coca-Cola), unique technology, or exclusive patents.
Buffett once said, “In business, I look for economic castles protected by unbreachable moats.” A company with a wide moat can maintain its market position and fend off rivals, making it a prime candidate for investment.
Why It Matters: For Buffett, a strong moat translates to consistent earnings and resilience, even in tough economic times—qualities every investor should prioritize.
2. Consistent Earnings Power
Buffett favors companies with a proven track record of generating steady and predictable earnings. He avoids businesses with erratic profits or those heavily reliant on external factors like commodity prices. Instead, he seeks out companies that demonstrate financial stability over decades.
Take Berkshire Hathaway’s investment in See’s Candies as an example. Its consistent profitability and ability to generate cash flow without significant reinvestment caught Buffett’s eye.
3. High Return on Equity (ROE)
A good company, in Buffett’s view, efficiently uses shareholders’ equity to generate profits. Return on Equity (ROE) is a key metric he analyzes to assess how well a company reinvests its earnings to create value. Buffett prefers businesses with a high ROE that don’t require excessive debt to achieve it.
For instance, companies like American Express, part of Berkshire’s portfolio, showcase Buffett’s preference for firms that deliver strong ROE year after year.
Key Takeaway: A high ROE signals management’s ability to allocate capital wisely—a hallmark of a Buffett-approved company.
4. Competent and Trustworthy Management
Buffett places immense value on a company’s leadership. He looks for management teams that are not only skilled but also honest and shareholder-focused. He famously invests in businesses run by people he trusts, often leaving them to operate independently after acquisition.
In his own words, “We do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business.” This principle underscores his long-term partnerships with companies like Geico.
5. Simple and Understandable Business Model
Buffett avoids complexity. He invests in companies with straightforward, understandable business models that he can easily grasp. This “circle of competence” philosophy ensures he only bets on what he knows well.
For example, Buffett has steered clear of tech startups in their early stages, preferring established players like Apple once their dominance became clear. A good company, to him, doesn’t require a PhD to understand its operations or revenue streams.
Pro Tip: Simplicity reduces risk—a lesson for both investors and business owners looking to emulate Buffett’s success.
6. Fair Valuation
Even the best company isn’t worth buying if the price is too high. Buffett emphasizes purchasing businesses at a reasonable valuation, ideally below their intrinsic value. He famously said, “Price is what you pay, value is what you get.”
This discipline has led him to avoid overhyped stocks and wait for opportunities where the market undervalues a quality business. Patience is key to his definition of a good company.
7. Long-Term Growth Potential
Buffett doesn’t chase short-term gains. A good company, in his eyes, has the ability to grow and thrive over decades. He looks for businesses that can adapt to changing markets while maintaining their core strengths. His “buy and hold forever” strategy—seen with holdings like Coca-Cola—reflects this belief.
Why It Works: Long-term growth aligns with sustainable success, a topic that attracts readers interested in enduring wealth-building strategies.
Applying Buffett’s Wisdom to Your Investments
So, what is a good company according to Warren Buffett? It’s a business with a strong economic moat, consistent earnings, high ROE, trustworthy management, a simple model, fair pricing, and long-term potential. These principles don’t just apply to billionaire investors—they’re actionable insights for anyone looking to build wealth over time.
By studying Buffett’s approach, you can identify companies that stand the test of time, whether you’re investing in the stock market or running your own business. His philosophy is a reminder that quality, not hype, drives lasting success.
Final Thoughts
Warren Buffett’s definition of a good company is rooted in common sense and discipline. From Coca-Cola to Apple, his investments showcase how these traits lead to exceptional returns. Want to invest like Buffett? Start by seeking businesses that check these boxes—and watch your portfolio grow steadily over the years.