Investment Insights from Warren Buffett

Warren Buffett shared valuable investment advice in a letter to Berkshire Hathaway shareholders back in 2013. He outlined a straightforward yet challenging two-step process for deciding whether to buy a stock.

Currently, two stocks that appear to meet Buffett’s criteria are AbbVie and Nucor.

Even though Buffett is no longer CEO of Berkshire Hathaway after 60 years, he remains the chairman and is still deeply involved in key decisions.

The wisdom Buffett has imparted over the years continues to resonate. For instance, he once provided a compelling framework that I believe everyone should consider as we look toward the future.

In that 2013 letter, Buffett detailed the two-step test he and his long-time business partner, Charlie Munger, use when evaluating stocks.

“When Charlie and I buy stock, we think of it as part of a company, but our analysis is very similar to what we would use if we were buying an entire company. First, you need to determine whether you can reasonably estimate your return horizon over five years. If the answer is yes, buy the stock that sells at a reasonable price compared to the lower end of the estimate. However, if you lack the ability to estimate future returns (which is usually the case), simply move on to other prospects.”

The first step in this test is figuring out if you can estimate a stock’s return for at least five years. It’s not about guessing; Buffett emphasizes the importance of being able to “sensibly” predict earnings.

If you’re confident in your ability to estimate potential returns, then the next step involves checking the stock’s valuation against the lower end of the expected return range. Essentially, he wouldn’t buy unless he believed the valuation was attractive.

While Buffett’s two-step test is straightforward, executing it is another story. The primary challenge remains in forecasting a stock’s return over the coming years.

In that same 2013 letter, he highlighted an assumption that is vital for earnings projections: focusing only on stocks within his “range of competence.” By sticking to companies you understand, you’re more likely to make accurate earnings forecasts, given you’re aware of industry trends and competitive factors.

Despite this focused approach, Buffett acknowledged that mistakes can still happen, underscoring the need for the second step in his test—assessing based on the lower bound of potential returns to avoid overly optimistic forecasts.

As we move further into 2026, some stocks may seem fit for Buffett’s evaluation, but not too many. This scarcity explains why he’s maintained a net short position in stocks for twelve consecutive quarters, alongside a hefty cash reserve at Berkshire. Nevertheless, there are still stocks worth exploring.

Consider AbbVie, for example. This major pharmaceutical company has successfully developed Humira, and it’s expected to experience solid revenue growth in the coming years, with attractive stock value. Plus, AbbVie offers a forward dividend yield of around 3% and is part of an exclusive group known as Dividend Kings, recognized for increasing dividends for at least 50 consecutive years.

Nucor is another company that might catch Buffett’s eye. As a significant steel producer, it stands to benefit from the increasing data center construction and broader infrastructure spending in the United States. With a favorable forward price-to-earnings ratio of 14.5 compared to its growth prospects, it also looks appealing.

Before considering an investment in AbbVie, there are some insights to ponder:

• While AbbVie has been highlighted, it was not included in a recent list of top investment opportunities put forth by analysts.
• Just a few storied stocks have yielded impressive returns over time, reflecting effective investment strategies.

It’s also worth mentioning that while stock returns can be enticing, it’s crucial to remain cautious and conduct thorough evaluations before making decisions.

Ultimately, as we think about investing, applying Buffett’s principles could guide us through an uncertain market landscape.