Three categories of businesses based on the cost of business growth: Great, Good and Gruesome

Buffett uses a simple checklist to determine the attractiveness of businesses as investments.  To meet his tests, companies must possess:

1.  a sensible price tag
2.  durable competitive advantages
3.  business he can understand
4:  managers who have integrity and who are passionately involved in their business creations.

Even though he is not involved in the day-to-day operations, Buffett pays close attention to how much cash each business generates.  He determines how much is needed to maintain a rate of appropriate growth and how much can be invested elsewhere to build intrinsic value in the Berkshire enterprise.

In his 2007 shareholder letter, Buffett offered a capsule view of how he assess companies based on their capital allocation profiles.  He sorts businesses into three categories based on the cost of business growth:  great, good, and gruesome.  This sorting allows him to see sizzle where others cannot.