This Is the 1 Investing Rule Warren Buffett Has Followed for Decades -- and History Says He's Never Been Wrong

It's a lucrative time to be an investor, as the S&P 500 (SNPINDEX: ^GSPC) and Nasdaq Composite (NASDAQINDEX: ^IXIC) have each nearly doubled over the last five years. By investing for decades, it's possible to build life-changing wealth.

If there's one investor who has proven how lucrative long-term investing can be, it's Warren Buffett. The investing legend has reportedly generated around 98% of his wealth after age 65, according to estimates from wealth management firm Creative Planning, largely thanks to his savvy investing strategies.

While there's no single correct way to invest in the stock market, Buffett has one simple rule for choosing winning stocks: Be a business picker, not a stock picker.

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The key to Buffett's investing success

In Berkshire Hathaway's 2021 letter to shareholders, Buffett explained his and then-business partner Charlie Munger's approach to choosing stocks:

We own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves. That point is crucial: Charlie and I are not stock pickers; we are business pickers.

This is a sentiment he's echoed throughout his investing career. "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price," he emphasized in Berkshire's 1989 shareholder letter. "[W]hen buying companies or common stocks, we look for first-class businesses accompanied by first-class managements."

History says fundamentals beat hype every single time

In times like these, when the market is surging and many stocks are experiencing unprecedented growth, it's more important than ever to focus on businesses with quality underlying fundamentals.

Even weak companies can thrive when the broader market is surging, but these stocks will typically struggle the most during a recession or market downturn.

The dot-com boom is perhaps the clearest recent example of this. Between 1995 and 1999, the S&P 500 soared by close to 200% as countless tech stocks rocketed to record valuations. Many investors were excited about the internet's potential to transform society, and the hype can make it easy to overlook factors such as unstable business models or underqualified leadership.

^IXIC data by YCharts

When the dot-com bubble popped in early 2000, some stocks that were previously setting records crashed hard. The weakest of those companies never recovered.

In short, a stock's short-term performance can sometimes be deceptive, and bear markets quickly reveal which companies are unprepared for tough times. In Buffett's words: "You only learn who has been swimming naked when the tide goes out."

How investors can prepare for the next bear market

Bear markets are an inevitable part of the market cycle, so we'll face another downturn at some point. But history has proven time and again that strong companies are the most likely to recover.

The S&P 500 itself has soared by more than 765% since January 2000 -- surviving the dot-com bubble, the Great Recession, the COVID-19 crash in 2020, and the latest bear market that lasted most of 2022.

^SPX data by YCharts

The market's long-term resilience has been a consistent theme throughout history. Since 1919, for example, every one of the S&P 500's rolling-20-year periods ended in positive total returns, according to analysis from Crestmont Research.

While not all companies will survive bear markets, healthy businesses have always thrived over time. So the best move investors can make right now is to focus on fundamentals above all else. A business with a strong balance sheet, a competent leadership team, and a durable competitive advantage is far more likely to recover from volatility. The more of these stocks you own, the better prepared you'll be for whatever the market throws at you.

Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.