Buffett is well-known for buying large businesses which demonstrate consistent earnings power. He also looks to buy companies with a sustainable competitive advantage and great managers. He doesn’t buy companies he doesn’t understand; more specifically, he avoids technology companies. A key metric Buffett looks at when valuing a business is owners’ earnings (a company’s expected net cash flows less maintenance costs).

Using these concepts, we have set the following criteria for this strategy:

– Exclude technology stocks
– Exclude OTC stocks
– Rank companies from highest to lowest using return on invested capital (our engine will work progressively down this list until it finds a company which matches the other criteria below)
– Only buy companies which are generating more than $20 million in profits and have a five-year average return on invested capital greater than 12%
– After three years, sell any companies which have lost money.
– Review data monthly over a twelve-year period and invest any funds remaining in the portfolio at a 6% allocation per investment.

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