DIGIVESTASI - Warren Buffett, known as one of the best investors in the world, has recently been buying fewer stocks. For eight consecutive quarters, he has been selling stocks more often than buying. Berkshire Hathaway's report for the fourth quarter of 2024 is expected to reflect the same pattern.

Buffett's decision is based on strong reasoning: he only buys stocks that meet certain criteria. As a selective investor, his approach has made him one of the best in investment history.

In a letter to Berkshire Hathaway shareholders in 2013, Buffett revealed two testing criteria that guide his decisions.

1. The Two-Part Test: Can we understand how Buffett selects stocks?

The answer is yes. In his 2013 letter to shareholders, Buffett revealed two key criteria that guide his decision-making.

First, Buffett ensures that he can "reasonably estimate the range of a company's earnings for the next five years or more." He avoids excessive speculation and focuses on deep analysis of the company’s business and industry trends. Five years is the minimum estimate, as Buffett aims to avoid companies with unsustainable earnings growth. If he cannot predict future earnings, he will look for other stocks.

The second step is to buy a stock only if its price is reasonable compared to the lower end of the estimated earnings range. If the stock price does not meet this criterion, Buffett will disregard it.

2. Simple, Yet Difficult to Apply

Although it may seem simple, applying Buffett's tests is not easy.

First, reasonably estimating a company’s earnings for five years or more is a significant challenge. This explains why Buffett did not invest in companies like Apple or Amazon from the start, or why he avoided Nvidia despite it becoming a highly profitable stock. Buffett always emphasizes the importance of understanding a business and its industry. He reminds investors to recognize their "circle of competence" and stay within it.

Second, it is not always easy to find stocks with attractive valuations that meet Buffett's tests, especially in a difficult market. This is why Buffett prefers holding cash, as evidenced by Berkshire Hathaway’s current reserve of over US$ 325 billion.