Warren Buffett has long emphasized simplicity and discipline when evaluating potential investments. At Berkshire Hathaway’s 1995 annual meeting, he explained the two threshold questions he always asks before committing capital.
“The first question is, can I understand it?” Buffett said, noting that he avoids businesses outside his circle of competence, such as software or biotech. “There’s no sense kidding myself into thinking that I’m going to understand some software company … what the hell am I going to know about it?”
Once he clears that hurdle, Buffett turns to the second question: does the business have strong economics? Specifically, he looks for companies that consistently earn high returns on capital.
These two principles—understandability and solid economics—remain cornerstones of Buffett’s investing approach.
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© 2025 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.