In 1936, one smart six-year-old purchased a few 6-packs of Coca Cola from his grandfather’s grocery story for a quarter per pack and resold each bottle for a nickel apiece. With that initial 20% profit he made of each 6-pack, the world’s richest man got his start in business.
Today, that same man owns $12.2 billion worth of Coca Cola Co. Obviously, I’m talking about Warren Buffet…
Everyone already knows all there is to know about him… or so they think…
Sure, we know that he went to Columbia to study under Benjamin Graham. And, that he’s one of the largest owners in many of the brand names we enjoy everyday — General Electric, Anheuser Busch, Bank of America, and of course, Coca Cola. He’s also the wealthiest man in the world, totaling $62 billion.
But there is something that only a handful of people know… He wants to be poor again.
That’s right! Back in 1999, he told Business Week “…it’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”
The reason for his guarantee is simple… The best opportunities in the world are in small caps. If you have a tiny company worth 50 cents per share, it’s a lot easier for it to go to $1, as opposed to a $50 one going to $100. But that’s not the only reason Buffett loves small caps.
He also discusses his affinity for finding little nuances in companies that other investors don’t see right away. In a 2005 Kansas University interview, Buffett elaborates, “You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map – way off the map. You may find local companies that have nothing wrong with them at all…”
You can’t do that with big blue chips…
If a small company has a hidden asset that investors haven’t picked up on yet, it would take some work, but you could find it and make big money off of it. Finding a large company with a hidden asset is exponentially tougher.
There are a thousand reasons why smaller companies offer more potential, but at the end of the day, it comes down to one thing. How much more money can I make with small caps.
Buffett’s Small Cap Advantage
Through Berkshire Hathaway, Buffett brought investors gains of 10,000% from 1977 to 1992. But between 1992 and 2007, he only brought a 1,200% gain. Now, I know that still sounds pretty darn good (which it is), but the question remains, why did he do so much better in the first 15-year period of Berkshire than the second 15-year period? The answer is small caps…
You see, back in 1977, Berkshire was a much smaller company, with a lot less money to invest. So, Buffett was able to invest in smaller companies at the time, including American Express, Disney, and the Washington Post Company… Those companies were able to grow much faster than the ones Buffett is restricted to now. Now, Buffett has to look at companies worth tens of billions of dollars. In ’77, he could look at companies worth just a few hundred million dollars.
But to do even better than Buffett, your only chance is to look for companies even smaller. I’m talking companies flying way under the radar. Companies in the tens of millions of dollar range… Simply put, buy penny stocks because Warren Buffett can’t.
By: Jim Nelson
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Jim Nelson is the managing editor of daily e-letter The Penny Sleuth. The Penny Sleuth offers unbiased commentary from expert analysts and authors on Small Cap Stocks, Pink Sheet Companies, OTCBB and Penny Stocks.