Warren Buffett’s 4 Timeless Stock Investing Rules – Still Relevant After 48 Years?

Nearly five decades ago, legendary investor Warren Buffett outlined four key criteria for evaluating stocks in his 1977 Berkshire Hathaway shareholder letter. Fast forward to today, and these principles remain a cornerstone of value investing.

Recently, I applied Buffett’s four investing rules to assess whether Babcock International Group (LSE:BAB) was a worthwhile addition to my portfolio. Here’s how Buffett’s timeless wisdom holds up in today’s market.

Rule 1: Invest in Businesses You Understand

Buffett’s first rule is simple: only invest in companies you truly comprehend. For me, this is the trickiest principle.

While I know Babcock is a defense contractor specializing in warship design, nuclear submarine support, and aerospace engineering, I have no direct industry experience. Does that disqualify it as an investment?

Not necessarily. Even without deep sector expertise, I can evaluate fundamentals:

• Revenue and earnings growth – Babcock’s financials are improving.

• Strong balance sheet – Net debt has dropped from 2.4x EBITDA in 2020 to just 0.3x in 2024.

• Profitability – The company sells services for more than they cost to deliver.

However, a £200m cost overrun on a Royal Navy contract raises concerns—highlighting why understanding a business matters.

Rule 2: Look for Favorable Long-Term Prospects

Buffett seeks businesses with durable competitive advantages. For Babcock, the outlook is promising due to rising global defense spending:

• The UK government plans to increase defense spending to 2.5% of GDP by 2027.

• The European Union is boosting military budgets amid geopolitical tensions.

• Global defense spending hit a record $2.46 trillion in 2023.

As the second-largest supplier to the UK Ministry of Defence, Babcock stands to benefit. However, ethical concerns may deter some investors, potentially limiting share price growth.

Rule 3: Management Must Be Honest & Competent

Buffett insists on investing in companies run by capable and trustworthy leaders.

Babcock’s CEO, David Lockwood, has been widely praised for turning the company around since joining in 2020. Under his leadership:

• The stock has surged 275%.

• Questionable accounting practices and poor acquisitions were addressed.

• Operational efficiency improved.

While I don’t know the management personally, their track record suggests competence—a key Buffett criterion.

Rule 4: Buy at an Attractive Price

Buffett’s final rule is to buy undervalued stocks. Babcock appears cheaper than peers:

• Forward P/E ratio: 18.7 (vs. BAE Systems at 24.5).

• Strong earnings growth potential.

Given its improving financials and sector tailwinds, Babcock could be a value opportunity—if it continues executing well.

Final Verdict: Do Buffett’s Rules Still Work?

Nearly 50 years later, Buffett’s principles remain a powerful framework for stock selection. While Babcock meets most criteria, the cost overruns and sector complexity give me pause.

For investors, the lesson is clear: Stick to businesses you understand, with strong leadership, long-term growth, and a reasonable price. Whether you follow Buffett’s rules or not, disciplined investing beats chasing hype.