Warren Buffett is one of the world’s greatest investors but some of his biggest gains came early in his career from a lesser-known part of the market. Here’s what every investor can learn from that
Let’s start with a quote …
If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that ‘size does not hurt investment performance’ is selling.
The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then.
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.
As you probably guessed from the title of today’s Digest, that quote comes from legendary investor, Warren Buffett. It dates back to an interview with Bloomberg Businessweek in 1999.
Buffett was building off of a comment he’d made just a few weeks earlier at the Berkshire Hathaway annual meeting of shareholders …
The universe I can’t play in has become more attractive than the universe I can play in.
I have to look for elephants. It may be that the elephants are not as attractive as the mosquitoes. But that is the universe I must live in.
In this second quote, Buffett is lamenting the reality Berkshire Hathaway faced even back in 1999 — namely, it had grown so big that he could no longer invest in small-cap stocks (mosquitoes). Instead, he was forced to invest in large-cap stocks (elephants).
Buffett’s grumble is rooted in the reality that it’s the smaller, faster-growing companies that typically offer the most explosive returns (enabling Buffett to guarantee 50% per year).
By 1999, Berkshire had grown so big, that even massive gains from small-cap stocks wouldn’t move the needle in a meaningful way for its profitability.
***To explain why through a simplistic illustration, look at the image below
The big green circle is a proxy for Berkshire’s market cap. The tiny white dot represents the market-cap of a hyper-growth, small-cap stock. It’s loosely scaled relative to Berkshire’s size.
Buffett is compounding his big green circle of investment capital each year at an average rate of, let’s call it, 17%.
Now, even if this fast-growing small-white-dot company exploded in value, say, 400%, given its tiny size relative to Berkshire’s overall huge size, would that 400% growth have any real, major impact on Berkshire’s overall returns?
No, not a material impact.
In the context of Berkshire’s massive investment pool growing 17%, that 400% small-cap growth would look a bit like the below …
But you know who would see an impact from such 400% growth?
Most regular investors (I surely would).
The bottom line is that if size wasn’t an issue for Buffett, he’d still be snooping around the small-cap universe looking for investment opportunities. That’s because small-cap investments, combined with hyper-growth, can lead to explosive, portfolio-changing returns.
Fortunately for you and me, we don’t have the same size-limitations as Buffett. And that means not only can we operate in the small-cap world, we can take it one step further where the potential gains are even more magnified …
The micro-cap world.
***The explosive, wealth-generating potential of microcaps
Another quote for you …
Micro-cap stocks — the small companies just at the beginning of their growth cycle — are where you make the big money. The really big money.
This one comes from our very own Matt McCall, editor of Early Stage Investor.
And if anyone is qualified to make this claim, it’s Matt.
In the past decade, his time in the micro-cap sector got him into Ross Stores (ROST). If you bought Ross on his recommendation, you’d have made 1,024% …
Then there was 1,407% in Boston Beer Company (SAM) …
Or 1,495% in Advanced Micro Devices (AMD) …
And 2,772% on Stamps.com (STMP).
***So, what’s the deal with microcaps? Why can they be so explosive?
Well, as we noted above, the first reason is size.
These are tiny companies — usually under a market-cap of $300 million. That means if any large investment shop — think a pension or big fund … or even a high-net-worth investor — wanted to take a meaningful position in a microcap, that influx of investment capital could push a stock price up 10%, 20%, or 30% in a day.
(This is another reason why Buffett can’t “shop” in the micro-cap space — the size of his investment capital would overwhelm the market price.)
But given this tiny size, even just one new, major sales contract with a new client could triple profits overnight. Now, imagine 50 such new contacts over, say, three years. Think about what that would do for a microcap’s profitability … and by extension, its share price.
The second reason why microcaps can be so explosive relates to inefficiencies.
Massive companies like Apple have armies of analysts covering them. One rates Apple as a “buy.” Another puts it at “overweight.” Another “underweight.” It goes on and on …
In order for the research departments of the big brokerages to come up with these ratings, they have to scour every bit of information known to man relative to these companies.
A hiccup on Apple’s 10Q? They’re on it.
A delay in the Apple’s supply chain? They’re on it.
Apple sells three fewer iPhones in China because the Ping family decided to buy an Android this year? In 0.00004 seconds, the army of analysts have factored this into 17 new, potential growth trajectories for Apple’s bottom-line …
This spotlight on the mega-cap stocks reduces the room for an investor like you and me to get an edge in the same way it’s harder for Buffett to get an edge … hence him missing the good ‘ole days of hunting in the small-cap space.
But this “spotlight” doesn’t shine on the micro-cap sector …
Microcaps are often-overlooked, operating in the shadow of Wall Street’s mega-cap stocks.
Analysts don’t spend much time here. That means news stories and information that’s substantive to a specific microcap often flies under the radar. And that breeds inefficiencies …
It means you can buy-in before the broad investment public realizes the opportunity. And by the time everyone is waking up to what a great stock this is, and it’s beginning to be covered by the investment media, you’re already up hundreds of percent.
***Take Ulta Beauty, one of Matt’s early microcaps winners
As Matt recently wrote to his subscribers, in 1990, Ulta’s founders opened their first five stores around Chicago. The tiny company started with a dream and just $11.5 million …
Matt found them in 2009. It was great timing — long-enough into Ulta’s growth curve so that the company was enjoying big gains … but not so far into its growth that all of Wall Street knew about it.
From Matt:
I recommended Ulta Beauty on November 20, 2009 to subscribers of my newsletter at the time. Over the next decade, the stock exploded, gaining as much as 2,075% — more than 21 times the initial investment!
Of course, there’s a lot more to know about investing in microcaps. After all, these stocks can be very volatile — that’s why you need to invest with a healthy respect for how much they can rise and fall.
To learn more about the huge opportunity in microcaps, join Matt tonight at 7:00 PM ET for his Microcap Millionaire event.
He’ll be discussing the top sectors and industries where investors can find microcaps for rare 2,500% gains or more in the years to come.
He’ll also detail the #1 mistake many investors are making in the bull market right now, which could end up costing them tens of thousands of dollars. You’ll learn how to avoid falling into this trap.
Matt is also going to give away his #1 blockchain microcap, which provides a critical service almost no one else in the industry is doing right now. This stock is worth just $290 million but Matt believes it could become a billion-dollar blockchain business soon.
Finally, you’ll hear Matt provide all the details about his new Microcap Millionaire Portfolio — his nine favorite micro-cap stocks to own right now.
It’s a free event. Just click here to RSVP.
Hope to see you there. Have a good evening,
Jeff Remsburg
