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Warren Buffett's five-year earnings range test

Turn a low and high five-year earnings estimate into an explicit range, lower-bound multiple, and sensitivity table instead of a false-precision stock score.

Warren Buffett at the 2015 SelectUSA Investment Summit Warren Buffett Historical strategy from 2014 Rule located in Berkshire Hathaway, 2014

Portrait: USA International Trade Administration, Public domain, via Wikimedia Commons. Self-hosted by JMM.

Interactive model

Put your numbers through the rule

The source establishes the rule. The values below belong to you, and the output is JMM's deterministic calculation.

Make the assumptions yours

Every field recalculates immediately. Changed values can be copied into a shareable URL.

Lower-bound earnings yield12.3%
Lower-bound multiple
8.1×
Upper-bound multiple
5.4×
Distance from your yield floor
6.3%

The calculator evaluates the range you enter; it does not generate or validate the business forecast.

Inspect the calculationThe same result in a readable record view

Low case

Earnings per share
$14.80
Multiple
8.1×
Yield
12.3%

High case

Earnings per share
$22.40
Multiple
5.4×
Yield
18.7%
Source and translation

What the source says, and what the calculator adds

Source-supported ruleBuffett describes estimating an earnings range at least five years out, comparing price with the lower boundary, and staying inside a circle of competence.
JMM calculationJMM converts the reader’s range into lower- and upper-bound per-share earnings, multiples, yields, and threshold distance.
Formula and methodLower-bound earnings yield = low estimate ÷ shares ÷ share price. Lower-bound multiple is its reciprocal.
Berkshire Hathaway Feb 28, 20142013 Annual LetterPDF page 18, paragraphs beginning “When Charlie and I buy stocks” and “It’s vital, however”
Decision notes

What changes the answer

A range communicates uncertainty

The spread between low and high cases is useful information. A single point estimate can imply confidence the analyst does not possess.

The lower boundary carries the decision weight

The model focuses on the downside end of the user’s own range rather than rewarding a high optimistic case.

A filter, not a valuation. Its real value is telling you when to walk away.

Most of what this test does is disqualify. If you cannot write down a five-year earnings range you would defend to someone who disagrees with you, the honest output is not a lower number, it is no position. That is the discipline, and it is unfashionable precisely because it removes most of the market from consideration. JMM likes the lower-bound framing: judging price against the weak end of your own range is a real constraint, where judging it against a point estimate is theatre. What it will not do is tell you what a business is worth. Debt, cash, dilution and reinvestment all sit outside it.

Written by the JMM editor. This is a view, not a recommendation for your circumstances. Who writes this

Not the calculator’s limits. The rule’s.

  1. The range comes from you, so the test inherits your bias

    A confident analyst writes a narrow, high range and the test approves. Nothing inside the method audits whether the range was defensible, which is why the circle-of-competence condition is not decoration.

  2. Five-year earnings visibility is rare and getting rarer

    The businesses where a defensible five-year range exists are mostly slow, boring and already widely owned. Applying the test to anything fast-moving produces a range so wide it stops constraining anything.

Limits

What this model does not know

  • The earnings range is subjective and must be justified outside the calculator.
  • Share count, dilution, debt, cash, and capital intensity can change.
  • No pass/fail “Buffett score” is produced.
Questions people ask

Before you use the result

Does this calculate intrinsic value?

No. It evaluates an entered earnings range against price and leaves other valuation inputs visible as omissions.

What if I cannot defend a range?

The model should remain unavailable for that company rather than manufacturing precision.

Take the answer further

The next question this page cannot answer

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