Warren Buffett

What it covers: How to filter the universe of thousands of stocks to find the few with exceptional business economics and predictable compounding growth.

📐 Buffett Metrics: CAGR 5-10yr, Earnings predictability, Reinvestment rate, ROE, Management quality

The 5 Criteria of a Valuable Company

• Future earnings can be reasonably predicted (stable track record 10+ years)
• Business economics favor it (moat, pricing power, asset-light)
• Can reinvest earnings or acquire new businesses at good returns
• High returns, strong earnings, and good management
• A good business produces a compound annual return of at least 15% year after year

What it covers: The initial yield you get on your investment based on the company's current earnings relative to the price you pay. It's the first test of whether you're paying too much.

📐 Buffett Metrics: EPS (diluted), Current price, IRR = EPS/Price × 100

Key Principle: Retain vs. Dividends

Always vote for the company to RETAIN its earnings instead of paying dividends — as long as it can reinvest them at rates above 15%. If the company cannot reinvest efficiently, then it should return capital via dividends or buybacks.

⚡ The price you pay determines your rate of return. This is the MOST IMPORTANT idea for winning in the market.

IRR as a Quick Filter

• IRR > 10%: Potentially undervalued — investigate further
• IRR 5-10%: Gray zone — needs strong growth to justify
• IRR 2-5%: Expensive — needs exceptional growth (>20% CAGR)
• IRR < 2%: Probably overvalued by any metric

What it covers: How to measure a company's real growth by eliminating year-to-year volatility. CAGR gives you the "cruising speed" of the business.

📐 Buffett Metrics: CAGR Revenue (5yr, 10yr), CAGR Earnings (5yr, 10yr), Present Value vs Future Value

Doubling Table by CAGR

• 15% CAGR → doubles every ~5 years
• 20% CAGR → doubles every ~3.8 years
• 25% CAGR → doubles every ~3.1 years
• 10% CAGR → doubles every ~7.2 years
• 7% CAGR → doubles every ~10.3 years

What it covers: The mathematical formulas to calculate how much a business is worth TODAY based on what it will generate in the FUTURE. The heart of Buffett valuation.

📐 Buffett Metrics: FV = PV × (1+r)^n, PV = FV / (1+r)^n, Earnings/day, Discount rate (bond yield)

Warren's Intrinsic Value

Intrinsic Value = Sum of ALL future earnings of the business discounted to present value using government bond rates as the discount rate.

This means: if you can predict earnings for the next 10 years with confidence, and discount them to the present, you get what the business is REALLY worth — regardless of what the market says.

What it covers: The characteristics that separate exceptional companies (consumer monopolies) from mediocre ones (commodity businesses). This is the most important qualitative filter.

📐 Buffett Metrics: Debt ratio, Brand value, Earnings trend, Retention rate, Buyback history, ROE

🚫 UNDESIRABLE Companies (avoid)

• Low profit and compressed margins
• Low return on equity and assets
• Absence of recognized brand
• Presence of multiple competing producers
• Substantial excess of productive capacity in the industry

✅ Consumer Monopoly (look for these 11 characteristics)

• No debt or very low debt
• Low or nonexistent competition in its niche
• Strong brand recognized by consumers
• Low debt ratio (conservative debt/equity)
• Earnings with consistent upward trend
• Conservative financing (not aggressive)
• High return on shareholders' equity (ROE >15%)
• Earnings retention for productive reinvestment
• Efficient operating costs (SGA/GP <30%)
• Expanding operations (organic growth)
• Active share buyback program (buybacks)

Merger Rule

• Consumer monopoly + Consumer monopoly = SUCCESS
• Consumer monopoly + Commodity = FAILURE
• Commodity + Commodity = DISASTER

What it covers: How to read the income statement like Buffett — focusing on the SOURCE of earnings, not just the bottom line. A dollar of recurring operating earnings is worth more than a dollar of extraordinary gain.

📐 Buffett Metrics: Total Revenue, COGS, Gross Profit, SGA, Depreciation, Interest Expense, Net Earnings, EPS, Earning Power

⚠️ IMPORTANT: Net Earnings > EPS

Don't focus on EPS — focus on Net Earnings. Why? Because EPS can increase through stock buybacks even if sales are declining. Companies buy their own shares, so EPS rises even though Net Earnings fall. Net Earnings tells you the REAL story.

Red Flag: Erratic Earnings

NEVER buy a company with erratic Net Earnings.
Ejemplo peligroso: 2020: $5.24 → 2021: $8.53 → 2022: $1.77
This indicates a business without a durable competitive advantage — inherently speculative.

What it covers: Margins are the fingerprint of competitive advantage. A consistent GPM >40% for 10 years is the clearest signal of a genuine moat. Operating expenses can destroy that advantage if not controlled.

📐 Buffett Metrics: GPM (>40%), SGA/GP ratio (<30%), Depreciation/GP (<25%), Interest Expense/Operating Income (<10%)

Gross Profit Margin — The King Indicator

GPM = Gross Profit ÷ Total Revenue × 100

• GPM ≥ 40%: Durable competitive advantage likely ✅
• GPM 20-40%: Gray zone — investigate further ⚠️
• GPM ≤ 20%: Highly competitive industry — commodity ❌

Rule: Track GPM over the last 10 YEARS. Consistency matters more than a single year's number.

SGA / Gross Profit — Expense Control

SGA includes: Management salaries, advertising, travel, legal fees, commissions, payroll.

Ideal ratio: SGA ÷ Gross Profit < 30% = EXCELLENT
Example: Coca-Cola SGA/GP = 59% (acceptable due to brand investment)

⚠️ This ratio stays stable even if revenue drops — it's a fixed cost. That's why it's so important.

Depreciation & Interest Expense

Depreciation/GP: Companies with durable advantage have lower depreciation costs as % of gross profit. Ideal ratio: <25%.

Interest Expense/Operating Income: Ideal ratio: <10%. More debt = more interest = less advantage. Within the same industry, the company with the LOWEST IE ratio has the advantage.

⚡ Warren does NOT use EBITDA because depreciated items have already been paid for.

What it covers: The balance sheet is a snapshot of financial health. It tells you how much it owns (assets), how much it owes (liabilities), and how much remains for owners (equity). Here you detect whether the company is conservatively financed or living on debt.

📐 Buffett Metrics: Cash position, Inventory trends, Net Receivables/GP, PPE, Goodwill, Current Ratio, Total Assets/Liabilities

Cash — What It Reveals

Lots of cash + little debt = GROWTH 🟢
Little cash + lots of debt = BAD FUTURE 🔴

Lots of cash can mean:
1. The company has a competitive advantage (excellent sign), OR
2. Sold a business or issued bonds (not always good — investigate)

Test: Review 7 years of Balance Sheets to understand if cash comes from consistent operations or one-time events.

Inventory, Net Receivables & PPE

Inventory: Should rise IN PROPORTION with earnings. If earnings drop and inventory rises → the company isn't selling → danger of cutting prices.

Net Receivables Ratio: NR ÷ Gross Profit × 100. Lower % = better. Indicates what portion of sales is still uncollected.

PPE: We want this to be LOW and not increase every 2 years. The company should use equipment to the end of its useful life without borrowing for constant upgrades.

Goodwill: If rising = the company is acquiring other companies. If unchanged = not making acquisitions or buying below book value.

What it covers: ROE measures how efficiently the company uses shareholders' money to generate earnings. ROA measures the efficiency of all assets. Together, they reveal the fundamental quality of the economic engine.

📐 Buffett Metrics: ROE = Net Earnings ÷ Shareholders' Equity, ROA = Net Earnings ÷ Total Assets, Treasury stock adjustments

ROE — Advanced Interpretation

If a company has:
✅ Strong net earnings + Negative equity + High ROE = GOOD company (aggressive buybacks reduced equity)
❌ Negative net earnings + Negative equity + Low ROE = BAD business

⚠️ IMPORTANT: Stay away from companies that use massive amounts of debt to generate earnings. High ROE from leverage is an illusion.

ROA — Beware the Paradox

ROA = Net Earnings ÷ Total Assets

High ROA seems good, but Warren warns: a VERY high ROA can indicate that the industry has low barriers to entry (few assets needed). This invites competition that can erode earnings long-term. High ROA = good sign, but always consider long-term prospects.

What it covers: How to evaluate whether a company's debt is manageable or dangerous. Includes analysis of short-term and long-term debt, the debt-to-equity ratio, and warning signals for rolling debt.

📐 Buffett Metrics: Short-term debt, Long-term debt, D/E ratio, Treasury-adjusted D/E, Debt payoff period (≤3-4 years), Retained Earnings trend

Golden Rule: Payoff in 3-4 Years

IMPORTANT: A company must have enough annual earnings to pay off ALL its long-term debt in 3-4 years.

Test: Long-term Debt ÷ Annual Net Earnings ≤ 4 años

If it needs more than 4 years → the debt is excessive for its earnings capacity.

⚠️ Rolling Debt — The Death Trap

Some companies borrow short-term (5% interest) to lend long-term (7.5%). Then they borrow MORE short-term loans to cover the first ones.

Problem 1: If interest rates rise above the long rate, you lose money.
Problem 2: Creditors can refuse to lend more → collapse.

Warren stays away from companies that are bigger short-term debtors than long-term debtors.

Debt to Equity — With Treasury Stock Adjustment

D/E = Total Liabilities ÷ Shareholders' Equity

⚠️ Excellent companies that do aggressive buybacks reduce their equity (treasury stock) and artificially INCREASE their D/E ratio. They look mediocre on paper.

Adjustment: Treasury-Adjusted D/E = Total Liabilities ÷ (Equity + |Treasury Stock|)
Adjusted ratio < 0.80 = good position.

Retained Earnings — The Compounding Engine

Retained Earnings MUST increase every year. This means the company is growing year after year.

Calculation: After-tax Net Earnings – Dividends – Buybacks = Retained Earnings added to the balance.

If Retained Earnings are falling → the company is distributing more than it earns or has losses.

What it covers: The cash flow statement tells you whether the company generates more cash than it spends (positive) or spends more than it generates (negative). CapEx reveals how much it needs to reinvest just to maintain its competitive position.

📐 Buffett Metrics: Operating CF, Investing CF, Financing CF, Net Change in Cash, CapEx/Earnings ratio (<50%), Buyback activity

The 50% CapEx Rule

If a company uses less than 50% of its annual earnings for capital expenditure → it probably has a durable competitive advantage. It doesn't need to reinvest massively just to maintain its position.

Warren does NOT invest in AT&T, Verizon, or T-Mobile because their CapEx is too high to build and maintain the networks.

Stock Buybacks — A Signal of Confidence

Busca en: "Issuance (Retirement) of Stocks, Net"

When the company consistently repurchases shares → management believes the stock is undervalued AND has excess cash to do it. Double positive signal.

IMPORTANT: When interest rates are low, earnings are valued MORE because they can be leveraged to acquire more debt that will generate value.

What it covers: Buffett's final rules — the entry moment and the only 4 valid reasons to sell. Also: P/E as an indicator of market overvaluation.

📐 Buffett Metrics: P/E Ratio (trailing & forward), P/E vs industry average, P/E > 40 = sell signal, 15% minimum annual return threshold

P/E Ratio — How to Calculate It

P/E = Precio de la Acción ÷ EPS

Ejemplo: Precio $50, EPS $2.50 → P/E = 20x
Meaning: Investors pay $20 for every $1 of earnings.

• P/E < industry average → relatively cheap
• P/E > industry average → relatively expensive

Types: Trailing P/E (last 12 months), Forward P/E (projected), Shiller CAPE (10-year inflation-adjusted)

🛒 When to BUY

1. The company has all consumer monopoly characteristics ✅
2. The price offers an IRR ≥ 15% projected over 10 years
3. Earnings CAGR is predictable and ≥ 15%
4. P/E is below the company's historical average
5. You can understand the business (Circle of Competence)
6. Management is honest and rational with capital

🔴 When to SELL (Only 4 valid reasons)

1. Better investment available: To move money to a superior opportunity
2. Loss of competitive advantage: The company starts losing its durable moat
3. Doubts about the advantage: You're not sure if the moat is still intact
4. Extreme bull market: The entire market is overvalued

⚠️ IMPORTANT: When P/E > 40, it may be time to sell. If the market is overvalued, it's better to put money in US Treasury securities until better opportunities appear.