The Three Numbers Warren Buffett Uses to Build Wealth (And Why Wall Street Doesn’t Want You to Know Them)

If you had to start over tomorrow with nothing and rebuild your investment portfolio from scratch, what would you do? Would you subscribe to expensive financial data services? Would you spend hours watching CNBC and reading analyst reports? Would you build complex spreadsheets tracking dozens of different metrics?

Warren Buffett wouldn’t. And he’s built one of the most successful investment track records in history over the past 70 years.

Here’s something that might surprise you: Buffett is currently sitting on a $325 billion cash pile at Berkshire Hathaway, and he’s not using 300 different data points to decide what to buy next. He’s using three numbers. The same three numbers he used when Berkshire bought See’s Candies for $25 million—an investment that has generated nearly $2 billion in pre-tax earnings over five decades.

Why Wall Street Complicates Investing

There’s an uncomfortable truth about the financial services industry that nobody wants to talk about: Wall Street profits from your confusion. The more complicated they make investing seem, the more you need their services, their analysts, their reports, and their management fees.

Investment managers charging 2% annual fees track hundreds of data points, run sophisticated computer models, and employ entire teams of analysts. Meanwhile, Buffett famously eats at McDonald’s, drinks five Cokes a day, tracks three simple numbers, and consistently outperforms most professional money managers. That’s not a coincidence—it’s proof that simplicity wins in investing.

Here’s something counterintuitive that most investors never realize: every additional metric you track actually tends to reduce your returns. Not because the information itself is bad, but because it dilutes your focus. When you’re trying to process dozens of different inputs, you lose sight of what actually matters. You become paralyzed by complexity, which creates dependency on financial advisors and wealth managers who claim to understand it all.

But the reality is much simpler. There are three fundamental numbers that tell you almost everything you need to know about whether a business is worth owning for the long term.

Buffett’s First Number: Return on Equity

Return on equity (ROE) tells you whether a business is actually good at making money with the money it already has. Think about it this way: imagine you and a friend each contribute $10,000 to start a hamburger stand. That’s $20,000 of total equity in the business. At the end of the first year, your hamburger stand generated $4,000 in profit. That means you earned 20% on your equity—for every dollar you invested, you got 20 cents back in annual profit.

But here’s what most investors completely miss about return on equity: it reveals whether a business has a competitive moat. When a company consistently generates 20% or 25% returns on equity year after year, that’s telling you something powerful. This business has competitive protection that allows it to earn outsized returns on capital.

Maybe it’s a brand that consumers love and trust. Maybe it’s network effects that make the product more valuable as more people use it. Maybe it’s cost advantages that nobody else can match. Whatever the source, high return on equity sustained over many years is the fingerprint of an economic moat—a durable competitive advantage.

And here’s the critical part that separates Buffett’s approach from casual stock picking: he doesn’t look for one good year of high returns. He looks for return on equity above 15%—ideally 20% or higher—maintained consistently for at least 10 years. That’s the test of true durability.

Let’s look at a concrete example. In 1972, Berkshire Hathaway purchased See’s Candies for $25 million. At the time, critics said Buffett had overpaid for a regional candy company. But Buffett saw that See’s was generating return on equity north of 30%. Over the following five decades, See’s has produced nearly $2 billion in pre-tax earnings from that original $25 million investment. That’s the power of high return on equity compounding over time.

Now contrast that with a business earning just 5% or 6% on equity. You’re barely keeping pace with inflation. Those low returns signal that you’re operating in a commodity industry with no competitive protection, where profits get competed away because anyone can enter the business.

Here’s something that might surprise you: you can find a company’s return on equity on virtually any financial website in about 30 seconds. Most investors never bother to look at it because they’re too busy watching the stock price bounce around day to day. But here’s the difference: the stock price tells you what other people think about the company today. Return on equity tells you what the business actually accomplishes year after year after year.

Buffett’s Second Number: Debt to Equity

The debt to equity ratio serves as your safety filter, because Buffett’s number one rule of investing is simple: never lose money. The debt to equity ratio tells you how much borrowed money a company is carrying relative to shareholder ownership.

Let’s go back to that hamburger stand example. You and your friend initially put in $20,000 of your own equity. Then you decide to borrow an additional $20,000 from the bank to expand. Now you have $20,000 in debt and $20,000 in equity, which gives you a debt to equity ratio of 100%.

Here’s what you need to understand about leverage: when business is good and sales are growing, debt amplifies your returns. You’re earning profits on money you borrowed, not just your own capital. But when business slows down—when sales drop or the economy enters a recession—debt becomes a potential death sentence. The bank wants its interest payments and principal repayment regardless of whether your business is struggling. Companies can go bankrupt even if they’re still generating some profits, simply because they can’t meet their debt obligations.

Buffett typically looks for debt to equity ratios below 50%. And here’s the part that most people miss about this conservative approach: low debt gives you offensive capability during market crashes and economic downturns.

When markets panic and fear spreads, companies buried under heavy debt loads are fighting for survival. They’re slashing costs, selling valuable assets at fire-sale prices, and desperately trying to make debt payments. But companies with little or no debt? They’re doing the opposite. They’re acquiring competitors at bargain prices. They’re investing in growth opportunities. They’re taking market share while everyone else is in survival mode.

Consider a concrete example from Buffett’s recent investment history. In 2016, when Berkshire Hathaway started accumulating a massive position in Apple, many critics said that Buffett didn’t understand technology companies. But what Buffett understood was the balance sheet. Apple had manageable debt levels and was sitting on a massive pile of cash. That’s a financial fortress that can weather any storm.

When you’re evaluating any potential stock investment, pull up the company’s balance sheet. Take total debt and divide it by shareholders’ equity. If that number is over 100%, you need to ask yourself a critical question: can this company survive if sales drop 30% in a severe recession? If the answer isn’t obviously yes, you should walk away.

But here’s where the real magic happens in Buffett’s approach: you’re looking for the combination of low debt together with high return on equity. That powerful combination tells you this is a wonderful business that generates so much cash flow internally that it doesn’t need to borrow money to grow. Those are the businesses worth owning forever.

Buffett’s Third Number: Price to Earnings

The price to earnings ratio (P/E ratio) tells you whether you’re buying a stock at a fair price or getting ripped off. Because here’s a fundamental truth about investing: price is what you pay, but value is what you get. You can find the absolute best business in the world with incredible competitive advantages, but if you overpay, you’ll earn poor returns.

The price to earnings ratio is beautifully simple to understand. It tells you how many dollars you’re paying for every dollar of annual profit the company generates. If a company earns $5 per share in annual profit and the stock is currently trading at $100 per share, that gives you a price to earnings ratio of 20. You’re paying $20 for every $1 of current annual earnings.

Now here’s where most investors get this completely wrong. A low price to earnings ratio looks like a bargain at first glance. But you have to ask the critical question: why is it low? Is the business dying? Is the entire industry collapsing? Is the company facing major competitive threats? Sometimes a low P/E ratio is what’s called a “value trap”—it looks cheap because it deserves to be cheap, and the business is actually deteriorating.

On the other hand, a high price to earnings ratio might be justified if the business is growing rapidly and has tremendous future potential. But when P/E ratios climb into the 30s, 40s, or 50s, you’re paying enormous premiums for future growth that hasn’t happened yet and might never materialize.

Buffett’s sweet spot for price to earnings ratios is typically in the mid-teens to low twenties. When he made his famous investment in Coca-Cola back in 1988, the P/E ratio was around 15—which Buffett considered very reasonable for a business with over 30% return on equity, low debt levels, and a brand moat a mile wide.

How These Three Numbers Work Together

Here’s the real power of Buffett’s approach: these three numbers together tell you the complete story about an investment opportunity.

Return on equity tells you whether it’s actually a great business with competitive advantages. Debt to equity tells you whether it’s financially safe enough to survive difficult times. Price to earnings tells you whether you’re getting a fair deal at today’s stock price.

All three metrics must pass Buffett’s standards. If even one fails, he walks away—no matter how attractive the other numbers might look.

Let’s look at a real-life example from recent market history. In 2022, when technology stocks crashed dramatically, many high-flying companies with 8% return on equity, 150% debt to equity ratios, and price to earnings ratios of 60 got absolutely destroyed. These stocks fell 60%, 70%, or even 80% from their peaks.

But companies with fundamentally sound metrics—25% return on equity, 30% debt to equity ratios, and P/E ratios around 18—recovered within just a few months. The difference? The fundamentals were genuinely strong, so rational investors recognized these temporary price drops as buying opportunities rather than permanent value destruction.

How to Actually Use This Strategy Starting Today

Here’s your practical action plan for implementing Buffett’s three-number approach:

Look at Multiple Years: Don’t just examine one year of data. Pull up at least 5 years of historical performance, and 10 years if the company has been publicly traded that long. Is return on equity consistently high? Is debt stable or decreasing over time? Are earnings growing steadily? Consistency matters far more than one spectacular year that might be a fluke.

Compare Against Competitors: Look at how the company stacks up against its direct competitors in the same industry. If one business has 25% return on equity while another comparable company has just 9%, that gap reveals the competitive moat. The business with superior returns has something special that competitors can’t easily replicate.

Adjust Based on Your Life Stage: If you’re young with decades until retirement, focus most heavily on high return on equity. The power of compounding works magic over 30-40 years, and you have time to ride out volatility. If you’re closer to retirement, weight debt to equity most heavily in your analysis. You can’t afford to own companies that might blow up from excessive leverage. If you’re actively hunting for opportunities during market crashes, watch price to earnings ratios closely. When wonderful businesses become temporarily cheap because everyone is panicking, that’s when you should be loading up.

Remember Buffett’s famous advice: “Be fearful when others are greedy, and be greedy when others are fearful.” These three numbers give you the confidence to act decisively when everyone else is scared.

The Power of Simplicity

Three numbers. That’s genuinely all you need to evaluate most investment opportunities. Not 30 numbers. Not 300 numbers. Just three.

Simplicity beats complexity every single time in investing. When you find those rare companies that pass all three of Buffett’s tests with flying colors—high return on equity, low debt to equity, and reasonable price to earnings—those might very well be worth owning for the next 30 years.

You don’t need a Bloomberg terminal costing tens of thousands of dollars per year. You don’t need to understand complex derivatives or credit default swaps. You don’t need teams of analysts or sophisticated computer models. You just need to focus on what actually matters: is this a great business, is it financially safe, and am I paying a fair price?

That’s how Warren Buffett has built wealth for 70 years. And that’s how you can build wealth too!