The Four Criteria — 1977

Starting with Berkshire Hathaway's earliest shareholder letters, Warren Buffett began laying out, in plain language, exactly what he and Charlie Munger looked for before buying a stake in any business. By the late 1970s the checklist had crystallized into four criteria, first articulated clearly around the 1977 letter and repeated, almost word for word, in the decades that followed. It remains the simplest public summary of Berkshire's entire investment process.

What the 1977 Letter Argued

Buffett explained that Berkshire selected its marketable equity securities using essentially the same standard it would use to evaluate acquiring an entire business outright. That standard came down to four things: a business the firm could understand, one with favorable long-term prospects, one run by honest and competent people, and one available at a very attractive price. He was explicit that Berkshire generally didn't buy stocks hoping for a favorable short-term move in price — if anything, as long as the underlying business kept performing well, a lower market price was welcome, since it meant more of a good business could be bought for less. Buffett's broader point was that the stock market regularly offered pieces of genuinely outstanding businesses at prices well below what those same businesses would fetch in a negotiated sale of the whole company — bargains available through stock ownership that simply weren't available to a buyer trying to acquire the entire enterprise directly. When the price was right, Berkshire was willing to take very large positions in a company without any intention of taking control, seeking a sell-out, or pursuing a merger, on the expectation that excellent underlying business results would eventually show up as excellent market value and dividends for every owner, majority and minority alike.

Buffett's four-part checklist for a marketable equity investment, laid out in the letter, has been repeated in Berkshire's letters almost verbatim ever since:

"(1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price."

Each element does different work, and all four have to be satisfied together — a wonderful business at a terrible price, or an honestly run business with poor economics, would each fail the test on their own.

Why It Matters

"Understandable" ties directly to what Buffett would later popularize as staying within one's circle of competence — not avoiding complexity for its own sake, but refusing to invest in businesses whose economics, competitors, and risks he couldn't reasonably forecast. "Favorable long-term prospects" is really a question about durable competitive advantage, the foundation of what's now commonly called a moat: pricing power, scale, or brand strength that protects earnings from being competed away. "Honest and able management" reflects a lesson Buffett drew from painful experience — that skilled, trustworthy stewards compound an already-good business, while dishonest or incompetent ones can destroy even a great one. And "attractive price" ties the whole exercise back to discipline around intrinsic value: even a great business is a poor investment if too much is paid for it.

The enduring appeal of the four criteria is that they turn "value investing" from an abstract philosophy into a checklist an ordinary investor can actually apply. Before researching valuation multiples or reading analyst notes, an investor can ask, in order: Do I understand how this company makes money? Does it have real staying power against competitors? Do I trust the people running it? And even if the first three answers are yes, is the price still reasonable? This ordering matters because it's easy to get seduced by any one criterion in isolation — a business that's easy to understand but has no competitive protection, or a well-run company bought at a price that leaves no room for error. The 1977 framework insists on all four together, which is precisely why the actual number of qualifying opportunities in a given year tends to be small: it's less a formula for finding stocks constantly than a filter for saying no to almost everything, so that capital is reserved for the rare business that clears every bar at once.