Warren Buffett’s 5 Key Investing Formulas for Long-Term Wealth

Warren Buffett has built extraordinary wealth over six decades by transforming Berkshire Hathaway into a global powerhouse using simple yet powerful investment principles. His 5 essential formulas offer a clear blueprint for successful investing, emphasizing fundamental analysis and long-term value creation over complicated strategies or market timing.

The Five Core Investing Formulas According to Warren Buffett

Value Investing: Buy Below Intrinsic Value
Buffett focuses on a company’s intrinsic value, which reflects the present worth of all expected future cash flows. He buys stocks only when they trade significantly below this intrinsic value—typically 25% to 50% lower—to maintain a margin of safety that reduces risks and maximizes potential gains.
Debt-to-Equity Ratio: Favor Low-Leverage Companies
He favors businesses with low debt levels, preferring a debt-to-equity ratio below 0.5. Companies with low leverage are more resilient in downturns and rely on operational strength rather than risky borrowing, enabling sustainable growth funded mainly through retained earnings.
Return on Equity (ROE): Seek Consistent High Performance
Buffett uses ROE as a key measure of management efficiency, targeting firms with consistently high ROE—above 15%—that generate substantial profits from their shareholder capital without heavy debt use. This indicates durable competitive advantages and reliable wealth compounding ability.
Owner Earnings: True Cash Flow Power
Beyond reported earnings, Buffett calculates “owner earnings” to gauge actual cash flow available after necessary capital expenditures. This reveals the business’s true ability to generate free cash flow and highlights companies that provide real shareholder value by funding growth internally rather than relying on external financing.
Economic Moat: Sustainable Competitive Advantages
Buffett invests in companies with strong economic moats—durable advantages such as powerful brands, network effects, high switching costs, or cost leadership—that protect profits from competitors. The wider and more durable the moat, the longer the company can sustain above-average returns.