What Does Warren Buffett Use to Invest? Unveiling the Oracle’s Secret Sauce

Have you ever wondered how Warren Buffett—the legendary “Oracle of Omaha”—turned himself into one of the wealthiest people on Earth? With a net worth hovering around $167.7 billion as of May 2025 Buffett’s investment strategy has reached mythical proportions. But what exactly does he use to invest? What tools, principles, and approaches have made him so darn successful?

I’ve dug deep into Buffett’s methods, and lemme tell ya, it’s fascinating stuff that can help us regular folks too So grab your coffee, and let’s discover the investment approach that built one of the world’s greatest fortunes

The Core of Buffett’s Investment Philosophy

Warren Buffett follows the Benjamin Graham school of value investing—a strategy that’s as straightforward as it is powerful,

Value Investing Defined

At its heart, value investing means looking for securities with prices that are unjustifiably low based on their intrinsic worth. While Buffett himself primarily invests in individual stocks, he noted that “for most people, the best thing to do is to own the S&P 500 index fund.”

The fascinating thing about Buffett is that he doesn’t obsess over daily stock market fluctuations. As he famously paraphrased from his mentor Benjamin Graham: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”

Business-Picker, Not a Stock-Picker

In his 2022 letter to shareholders, Buffett wrote something really enlightening: “We own publicly traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. Charlie [Munger] and I are not stock-pickers; we are business-pickers.”

This distinction is crucial. Buffett doesn’t see himself as trading pieces of paper—he sees himself as buying ownership in actual businesses. He wants companies that can generate substantial earnings over many years, not just stocks that might pop in price temporarily.

Buffett’s 6-Step Investment Methodology

So what specific criteria does Warren Buffett use when evaluating potential investments? Let’s break it down:

1. Company Performance

Buffett carefully examines a company’s Return on Equity (ROE), which shows how efficiently a company generates profits from shareholders’ investments.

The formula is:

ROE = (Net Income ÷ Shareholder's Equity) x 100

He doesn’t just look at the most recent year either—he analyzes 5-10 years of data to understand the historical performance trends.

2. Company Debt

Buffett prefers companies with minimal debt. He uses the debt-to-equity (D/E) ratio to evaluate this:

Debt-to-Equity Ratio = Total Liabilities ÷ Shareholders' Equity

Lower ratios are generally better, as they indicate the company isn’t overly dependent on borrowed money to fund its operations.

3. Profit Margins

Buffett loves companies that maintain strong profit margins and, even better, those that can consistently increase their margins over time. This suggests good management and a competitive advantage in the marketplace.

He calculates profit margins by:

Profit Margin = Net Income ÷ Net Sales

4. Company Longevity

This might surprise you, but Buffett typically only considers companies that have been around for at least 10 years. This actually explains why he missed out on many tech companies’ early growth phases—he wants to see a proven track record before investing.

5. Competitive Advantage (“Moat”)

Buffett looks for what he calls a “protective moat” around a business—some characteristic that’s hard for competitors to replicate.

He tends to avoid companies whose products are indistinguishable from those of competitors. For example, commodity-based businesses often struggle to maintain a competitive edge unless they have some unique advantage.

6. Intrinsic Value vs. Market Price

Finally, Buffett determines if the company is actually undervalued. This requires calculating the company’s intrinsic value by analyzing earnings, revenues, and assets, then comparing that value to the current market price.

If the intrinsic value exceeds the market price by a significant margin, it might be a good investment opportunity.

Buffett’s Top Investment Tips

Beyond his technical methodology, Buffett has shared some timeless wisdom that guides his investment decisions:

Wait…Then Pounce

Buffett advises taking a step back when you find a promising company. He suggests giving the stock time to reach a reasonable valuation, then moving when the market presents an opportunity. Patience is key here.

Stay the Course

Once you’ve invested, resist panicking and selling when prices drop temporarily. Instead, Buffett suggests buying more during market dips if you truly believe in the business.

As he said in a CNBC interview: “Just keep buying. American business is going to do fine over time, so you know the investment universe is going to do very well.”

Pick Businesses Within Your “Circle of Competence”

Buffett only invests in businesses he understands. This principle has led him to miss out on some opportunities—he once famously passed on Google and Amazon because he admitted he didn’t thoroughly understand the internet industry.

As he wrote in his 1996 letter to Berkshire Hathaway shareholders: “You don’t have to be an expert on every company or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important. Knowing its boundaries, however, is vital.”

Hold for the Long Term

Buffett isn’t interested in making quick trades. He famously stated: “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”

Tools of the Trade: What Buffett Actually Uses

So what specific tools and resources does Warren Buffett use to implement his investment strategy?

1. Annual Reports and Financial Statements

Buffett is known to be a voracious reader of annual reports and financial statements. He spends hours each day reading about companies, industries, and markets. He particularly focuses on:

• Balance sheets
• Income statements
• Cash flow statements
• Management discussions and analyses

2. Newspapers and Business Publications

Buffett starts his day by reading several newspapers and business publications. He’s known to read:

• The Wall Street Journal
• Financial Times
• The New York Times
• The Omaha World-Herald (his hometown paper)
• Annual reports from various companies

3. SEC Filings

Buffett carefully studies SEC filings like:

• Form 10-K (Annual reports)
• Form 10-Q (Quarterly reports)
• Form 8-K (Significant event reports)

These provide standardized, detailed information that Buffett can use to compare companies across different periods and against competitors.

4. Simple Math

Despite having access to sophisticated financial tools, Buffett relies primarily on basic math and logical reasoning. He doesn’t use complex financial models or algorithms. Instead, he focuses on understanding the business and making reasonable projections about its future.

5. No Computer on His Desk

Interestingly, for many years Buffett famously didn’t have a computer on his desk. While this has changed somewhat with time, his approach remains decidedly low-tech compared to many modern investors.

What Buffett Recommends for Regular Investors

While Buffett himself invests primarily in individual stocks, he doesn’t actually recommend that approach for most people. Instead, he suggests:

Low-Cost S&P 500 Index Funds

Buffett has consistently recommended low-cost S&P 500 index funds for non-professional investors. In fact, he once bet $1 million that an S&P 500 index fund would outperform a selection of hedge funds over ten years—and he won!

The S&P 500 index fund earned returns of nearly 126% during that period, while the hedge funds averaged only about 36%.

The math is compelling too. If you invest just $200 monthly in an S&P 500 index fund earning the historical average return of around 10% annually, here’s how your investments could grow:

Yep, that’s right—over 40 years, your $200 monthly investment (totaling $96,000 of your own money) could grow to over $1 million!

Buffett’s Current Portfolio

Curious about what Buffett is actually investing in today? As of May 2025, Berkshire Hathaway’s largest holdings include:

• Apple, Inc. (AAPL)
• Bank of America (BAC)
• American Express (AXP)
• Chevron (CVX)
• Coca-Cola (KO)
• Kraft Heinz (KHC)
• Occidental Petroleum (OXY)

Buffett also owns significant stakes in privately held companies like Burlington Northern Santa Fe (BNSF) Railroad and GEICO Insurance.

Practical Takeaways for Everyday Investors

So what can we regular folks learn from Warren Buffett’s investment approach?

1. Focus on value, not price movements – Look for solid businesses selling below their intrinsic value.

2. Stay within your circle of competence – Only invest in businesses you truly understand.

3. Think like an owner – When you buy stock, imagine you’re buying the whole company, not just a tradable security.

4. Be patient – Good investments often take years or decades to fully mature.

5. For most people, index funds are best – Unless you have the time, knowledge, and temperament to analyze individual companies like Buffett, low-cost index funds are likely your best option.

6. Invest regularly – Consistent, regular investments over time can build substantial wealth through the power of compounding.

7. Don’t follow the crowd – Buffett is famously contrarian, being “fearful when others are greedy and greedy when others are fearful.”

Final Thoughts

Warren Buffett’s investment success isn’t due to complex algorithms, high-frequency trading, or secret insider knowledge. Rather, it stems from a disciplined approach to finding value, understanding businesses thoroughly, and maintaining a long-term perspective.

While few of us will ever match Buffett’s extraordinary success, we can definitely apply his principles to improve our own investment outcomes. Whether you choose to follow his recommendation for index funds or dive deeper into individual stock selection, Buffett’s time-tested wisdom offers a solid foundation for any investor.

Remember, Buffett didn’t become a billionaire overnight. His wealth came from decades of patient, intelligent investing—and that’s something we can all aspire to emulate in our own financial journeys.

So, what investment approach are you gonna take? The choice is yours, but Buffett’s principles have certainly stood the test of time!