The Simplest Way to Compare Investments
- Buffett compares everything to government bonds — the safest investment available
- If a stock doesn’t obviously beat the “safe” option, why take the risk?
- He also has a 10% minimum return rule — won’t accept less regardless of interest rates
- Simple beats complicated: use one yardstick, not different rates for every situation
The Government Bond Yardstick
Every investment competes against a simple alternative: government bonds.
You can always put your money in U.S. Treasury bonds and earn a guaranteed return — currently around 4-5%. No stress. No analysis. Just a safe return.
Buffett uses this as his baseline:
“We can always buy government bonds. Therefore, that becomes the yardstick rate.”
The logic is straightforward: - Bonds pay 4%? Any stock you consider should clearly beat 4%. - If a stock might return 5-6%, is the extra headache worth it? - If a stock clearly returns 15%, now you’re talking.
This simple comparison cuts through a lot of complexity.
Why One Rate for Everything
In Part 3, we saw that Wall Street uses different “discount rates” for different investments — higher rates for “riskier” companies.
Buffett disagrees. He uses the same government bond rate for everything. Why?
Because he handles risk differently.
Instead of adjusting his rate, he: 1. Only invests in things he truly understands (less risky by definition) 2. Demands a big gap between price and value (margin of safety)
If a business is too hard to predict, he doesn’t invest at all — no rate adjustment would make it safe.
If a business is predictable and cheap enough, the government bond rate is the right comparison.
The 10% Minimum Rule
Buffett also has a floor:
“10% is the figure we quit on — we don’t want to buy equities when the real return we expect is less than 10%, whether interest rates are 6% or 1%.”
This isn’t a mathematical rule. It’s an opportunity cost decision.
Buffett knows he can usually find investments returning 10%+ somewhere. So he won’t accept less just because interest rates are low.
Think about it: - If government bonds pay 2%, a stock returning 6% might look good in comparison - But Buffett would still pass — he believes better opportunities exist - Why tie up money at 6% when 10%+ is available if you wait?
This discipline has served him well. During low-interest-rate years, many investors stretched for mediocre returns. Buffett sat on cash until truly great opportunities appeared.
Putting It Together
Here’s Buffett’s practical approach:
Step 1: Calculate the “Clean” Value
Using owner earnings (from Part 2), estimate what the business could return if you bought it today.
A simple version: If a company earns $10 in “owner earnings” per share, and you pay $100, you’re getting a 10% return (before any growth).
Step 2: Compare to the Safe Alternative
Is that return clearly better than government bonds (~4-5%)?
If it’s close — say, 5-7% — is the extra risk worth it?
Step 3: Check Against the 10% Floor
Even if it beats bonds, does it meet the 10% minimum?
If not, keep looking.
Step 4: Demand a Safety Margin
Even if the numbers work, don’t pay full price. Wait until you can buy at 20-50% below your estimated value.
This margin protects you if your estimates are wrong.
The Low Interest Rate Trap
When interest rates are very low (like 2% in 2020), every stock looks attractive by comparison. Your brain says: “This stock returns 5%! That’s 2.5x better than bonds!”
Buffett stays disciplined:
“We don’t want to buy equities when the real return we expect is less than 10%, whether interest rates are 6% or 1%.”
Low interest rates don’t make mediocre investments good. They just make cash less attractive.
The 10% floor keeps him from accepting poor returns just because the alternative is worse.
In 2020, with rates near zero, many investors piled into stocks paying 4-5%.
Buffett sat on $140+ billion in cash.
In 2022, when stocks crashed, he had dry powder to invest at much better prices.
Patience and discipline look boring until they work.
The Bottom Line
Buffett’s comparison system is simple:
Use government bonds as the yardstick — Can this investment clearly beat the safe alternative?
Apply the 10% floor — Don’t accept mediocre returns just because rates are low.
Demand a margin of safety — Even good investments need a buffer for error.
No complex formulas. No different rates for different companies. Just common sense comparisons and patience.
Buffett compares all investments to government bonds — the safest option available. If a stock doesn’t clearly beat bonds, why take the risk?
He also maintains a 10% minimum return requirement, regardless of interest rates. This discipline prevents him from reaching for mediocre investments when rates are low.
Simple beats complicated. One yardstick for everything.
Next up: Part 8 — Margin of Safety. Even when an investment looks good, Buffett demands a big discount. Here’s why “buying $1 for 50 cents” is the cornerstone of his approach.
References
Buffett, W. (1997). Berkshire Hathaway Annual Meeting. 25iq.
Buffett, W. (2003). Berkshire Hathaway Annual Meeting. Yahoo Finance.