This Is the Most Powerful Contributing Factor to Warren Buffett's Success -- and History Proves It Works

Warren Buffett's investing track record is widely publicized. However, there's one statistic that is truly mind-boggling. And it shows just how incredible his run leading Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) was.

Credit goes to Michael Batnick for posting this data point on X on Sept. 22. The visual shows that the conglomerate's share price could fall by 99% today, and it would still match the performance of the S&P 500 index over the past six decades.

The power of compounding has been, without question, the most impactful contributing factor driving the Oracle of Omaha's financial success. History clearly proves that it works.

Image source: Getty Images.

Get out of your own way

It might sound like a boring concept, but compounding is arguably the most potent force in the world of investing. The math is simple. Returns earned in one year generate returns in subsequent years. Consider a hypothetical $10,000 investment growing at 15% annually. After 30 years, it would be worth $662,000. It's worth noting that about half of the gain arrives in the last five years.

Warren Buffett knows how the numbers add up later on. About 99% of his $151 billion net worth was built after his 65th birthday.

"The first rule of compounding is to never interrupt it unnecessarily," is a quote attributed to investor and Buffett associate Charlie Munger. The late investor is also known to have said, "The big money is not in the buying or selling, but in the waiting."

Compounding only works if investors get out of the way and leave it alone. This means avoiding selling. That can trigger a tax bill that eats away at returns. The benefit accrues to long-term business owners who can defer capital gains taxes.

It sounds simple. But it's a mental game. The market is constantly testing investors. Bear markets occur, on average, every six years. And since 1980, 5% drops have happened almost every year. You might be inclined to sell during those weak periods, but it's best to stay the course and continuously add capital to your portfolio. This is what's known as dollar-cost averaging.

Apply this framework to your portfolio

Investing is a unique field in which doing nothing might actually be a superpower. The investors who end up producing winning returns aren't the ones who trade the most. Instead, they're the ones who are able to sit still. Patience is an invaluable edge.

This framework should be applied to your own portfolio. We all want to be like Warren Buffett and Charlie Munger. While we might not possess their stock-picking abilities, we can at least try to emulate their philosophy. Letting compounding do its thing is one of the core tenets.

Neil Patel 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.