The Warren Buffett golden rule that investors can't ignore

His golden returns are underpinned by this simple rule.

a man wearing a gold shirt smiles widely as he is engulfed in a shower of gold confetti falling from the sky. representing a new gold discovery by ASX mining share OzAurum Resources

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • Warren Buffett's key to success is surprisingly straightforward: purchase outstanding businesses and hold onto them for as long as possible, letting the power of compounding work its magic.
  • Patience, not prediction, is the cornerstone of Buffett's strategy; he avoids market speculation in favour of companies with enduring advantages, a principle easily applicable to ASX stocks like ResMed and TechnologyOne.
  • By focusing on businesses with solid earnings potential and long-term growth rather than market buzz, investors can emulate Buffett's approach and achieve lasting wealth.

Most people know Warren Buffett as one of the world's greatest investors.

But very few everyday investors actually follow the golden rule he credits for almost all of his success. A rule so boring and so uncomplicated, but so quietly powerful that most people overlook it.

Meanwhile, Buffett quietly turned a small investment partnership in the 1950s into a fortune worth an estimated US$160 billion.

What is Warren Buffett's rule?

The rule is very simple. Buy great businesses and hold them for as long as humanly possible.

This may sound obvious. But many investors don't actually do it. And that is why so few achieve Buffett-like results.

Let's break down what this looks like in practice, and how you can use this mindset to build wealth on the ASX.

Be patient

Buffett's entire strategy boils down to patience, not prediction

Many investors spend their time trying to guess what the market will do next. Buffett doesn't. He once said:

The stock market is designed to transfer money from the active to the patient.

His edge wasn't timing. It wasn't trading. Nor was it chasing hot ideas. It was identifying businesses he understood and holding them long enough for compounding to take over.

That's why he avoided speculation and focused on companies with durable advantages.

If you were to apply that to the ASX, the equivalents might be global compounder ResMed Inc. (ASX: RMD), tech leader TechnologyOne Ltd (ASX: TNE), and long-term growth machine Goodman Group (ASX: GMG).

These aren't get-rich-quick stocks. They're get-rich-slow stocks. Exactly the kind Buffett prefers.

Why this works

The biggest problem most investors face is impatience. They sell too early. They panic on dips. They move from one idea to the next. Buffett does none of that.

When Buffett buys a company, he asks a simple question: would I be happy owning this business if the stock market shut down for 10 years?

Imagine applying that question to your own portfolio. Suddenly, the noise disappears. Headlines stop mattering. Instead, the focus shifts to businesses with real earnings power, strong competitive moats, recurring revenue, and positive long-term outlooks.

Companies like Xero Ltd (ASX: XRO) and Life360 Inc. (ASX: 360) arguably fit this mould. They are global platforms with sticky customers and massive addressable markets.

But it doesn't have to be stocks. Buffett has openly said that if he were starting today with a small amount of money, he would simply buy an S&P 500 index fund, like the iShares S&P 500 ETF (ASX: IVV), and hold it forever.

Foolish takeaway

Buffett's rule is simple: buy great businesses, ignore the noise, and hold them for decades. Most investors never do it, and that's why most investors never achieve Buffett-like returns.

The good news? There's nothing stopping you from following in his footsteps.

Motley Fool contributor James Mickleboro has positions in Goodman Group, Life360, ResMed, Technology One, and Xero. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goodman Group, Life360, ResMed, Technology One, Xero, and iShares S&P 500 ETF. The Motley Fool Australia has positions in and has recommended Life360, ResMed, and Xero. The Motley Fool Australia has recommended Goodman Group, Technology One, and iShares S&P 500 ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on How to invest

Beautiful young couple enjoying in shopping, symbolising passive income.
How to invest

The smart way to make a $25,000 passive income from ASX shares

This could be the smart way to make your money work for you.

Read more »

Happy young couple saving money in piggy bank.
How to invest

$20,000 in savings? Here's how you can use that to target an $8,000 yearly second income

Having $20,000 saved is more powerful than most people realise. Not because $20,000 can produce an income today, but because…

Read more »

A smiling woman with a handful of $100 notes, indicating strong dividend payments
How to invest

How to turn $50 a week into a six-figure ASX share portfolio

Small investments could grow into big wealth with this strategy.

Read more »

Excited couple celebrating success while looking at smartphone.
How to invest

Why today's cheap ASX shares could double my money during the next bull market

These shares could be the ones to buy if you are looking for undervalued options.

Read more »

A businessman compares the growth trajectory of property versus shares.
How to invest

The 10-year wealth plan: how to turn small savings into life-changing results

Building wealth doesn't need to be hard. Here's a simple plan you can follow.

Read more »

Legendary share market investing expert and owner of Berkshire Hathaway, Warren Buffett.
How to invest

I'd listen to Warren Buffett's advice to buy undervalued ASX shares today

The Oracle of Omaha knows a good deal when he sees one.

Read more »

Concept image of man holding up a falling arrow with a shield.
How to invest

Is the S&P 500 set for a crash? Here's my plan for the US stock market

No one can predict when the next crash will come.

Read more »

a smiling picture of legendary US investment guru Warren Buffett.
How to invest

Want to build wealth? Here's how Warren Buffett does it

Following Buffett's lead could help you build significant wealth in the share market.

Read more »