Warren Buffett's 'vital' tip for valuating companies before you invest, says 'don't have to be an expert'

Billionaire investor Warren Buffett, revered for turning Berkshire Hathaway into a global powerhouse, is known for his emphasis on long-term investments. He focuses on businesses that he believes will maintain a competitive edge for decades to come and credits his success to discipline. Buffett’s investment decisions are rooted in the longevity of a business, not its current performance.

Warren Buffett's vital tip for investors

“You don't have to be an expert on every company, or even many," he wrote in a 1996 letter to Berkshire Hathaway shareholders. "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.”

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In his 1996 letter to shareholders Buffett wrote, "Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio's market value. If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes."

According to a report in Investopedia, Warren Buffet urged investors to stick to a “circle of competence,” investing only in businesses they fully understand.

"Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, 10, and 20 years from now," Buffett wrote in the 1996 letter.

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Warren Buffett bases his investment choices on a company’s long-term potential rather than its short-term performance. This philosophy guided his decision to invest in See’s Candies in 1972 and Coca-Cola in 1988—both of which became highly profitable holdings that remain in his portfolio to this day.

“Buffett’s style keeps you focused on what the business does and why it matters," Pamela Sams, a financial advisor at Jackson Sams Wealth Strategies, told Investopedia. "That’s how you avoid mistakes and busted portfolios."

“People chase trends or fall for flashy numbers, but Buffett knows that revenue is meaningless if expenses are out of control, and leadership is critical for success,” Sams said.

She cited Apple Inc. as a key example: Although Buffett initially steered clear of tech stocks, viewing them as beyond his expertise, he eventually recognized that Apple had cultivated unmatched customer loyalty and a durable brand. To him, it became less of a tech company and more of a consumer staple.