Lessons form Buffett’s Shareholder Letters: ROE

This is the first article of what I believe will be an interesting series going back in time and into the mind of who I view as the greatest investor of all time... Warren Buffett

Like I mentioned the other day I will be reading some of his most notable Shareholder letters, unpacking lessons, sharing the examples and adding modern times commentary to give it context in today's world.

Today we cover a valuable lesson from his 1987 letter explaining Return on Equity and how it is a common success factor for companies that consistently beat the S&P time and time again.

He shared the results of a test run by Fortune in its 1988 Investor's Guide, that looked at America's 1000 biggest companies and checked which ones averaged more than 20% return on equity in the years from 1977 to 1986, without a single year below 15%.

Only 25 passed this filter, and 24 out of those 25 beat the S&P 500 over the same decade. ROE tells us how much profit a company earns on every dollar shareholders have put in... So, clearing that high bar means a business had to have been excellent for ten straight years.

The Test and Modern Time Re-run

Buffett expands to explain the attributes most of these 25 companies shared, which was really interesting to see... here's the list in his own words:

"First, most use very little leverage compared to their interest-paying capacity. Really good businesses usually don't need to borrow.

Second, except for one company that is "high-tech" and several others that manufacture ethical drugs, the companies are in businesses that, on balance, seem rather mundane.

Most sell non-sexy products or services in much the same manner as they did ten years ago (though in larger quantities now, or at higher prices, or both).

The record of these 25 companies confirms that making the most of an already strong business franchise, or concentrating on a single winning business theme, is what usually produces exceptional economics. "

Now to make this article extra juicy for you guys I ran the same test on the current S&P companies to see who'd pass the filter in our modern times 40 years later...

How the hell did you do that Moe???

Well, I used a coding script that ran an API data pull from data.sec.gov and got the numbers from the filings of every S&P 500 company over the last 10 years. (Check the output excel for yourself)

So, having pulled net income and shareholder equity for every S&P 500 company straight from SEC filings, covering 2016 to 2025, and applied Buffett's exact rules we now get to see the results... DRUM ROLL PLEASE

61 of the 503 companies passed, that's about 12%, compared with 2.5% in 1987. What is different vs. back then is that there were a lot more buybacks in the modern times version of the list distorting the ROE numbers in some cases

Some of the most notable names with a pass were:

$CDW $MA $AAPL $TSCO $ZTS $MSFT $PEP $TXN $SHW $NVDA

All of them averaged well above 30% with no year below 15%, though $MA, $AAPL and $NVDA had years above 100% ROE, mostly from buybacks shrinking equity (and for $NVDA, a profit explosion)

Further down the list you find $CTAS, $FAST, $WM , $COST we have a lot of diversity from selling uniforms, bolts, garbage collection, to bulk groceries the mundane businesses are still winning over a 10-Y horizon.

The top 25 companies ranked by ROE here for your reference.

I hope you find this series interesting and see you in the next lesson later this week!

This is not financial advice, Do your own research.