Billionaire super investor Warren Buffet wishes he could invest small, but the truth of the matter is, he simply has too much money.
Buffet, founder of Berkshire Hathaway has made his reputation by beating the market and taking a value investing approach, buying undervalued companies and reaping profits when his thesis plays out. But unfortunately for him his gains are realistically capped.
Buffet, with his massive amounts of capital to invest on behalf of Berkshire Hathaway, is limited to the companies he can put his money. He can only invest in large-cap stocks with capitalizations of billions not millions. And it is the smaller cap stocks that are going to make people millionaires.
If you were to invest your money in large companies like Google or Wal-Mart, you wouldn’t expect your money to double in a short time frame. While they may both be good companies, Google would need to add $170 billion in market cap and Wal-Mart would need to add $200 billion in size for your money to double, a feat not likely in the coming years.
Buffet has even admitted he could make much greater returns if he just had less money. When he invests such large sums, if he were to invest in the small promising companies he would take a controlling stake in the company. And most people aren’t interested in running dozens of small companies at once.
But the average investor is at an advantage. You can buy stakes in these up and coming companies and hold the shares while they double or triple.
This is certainly not to say that by putting your money in small cap companies you can’t help but strike it rich, in fact just the opposite. By investing in such small companies you run a much greater risk of loosing all your money as the small companies are much more likely to go out of business than their behemoth large cap counterparts.
But a small amount of research and you can beat the ‘Oracle of Omaha.’ The idea is to find well-run companies that offer a strong return on equity, and with clean balance sheets, which means low to no debt and relatively large amount of cash at their disposal. Begin looking at companies that dominate a niche market that is waiting to explode.
An example is Hansen Natural. Nobody had heard of the maker of Monster energy drinks 10 years ago, and it was a meager $53 million company. In 1999 it sported a 26 percent return on equity and almost no debt. 10 years later it is a $3 billion behemoth, that makes for an annual growth rate of 48 percent.
Nobody was even looking at this company 10 years ago however, because everyone was obsessed with the dot-com companies. Promptly one year later most of those companies crashed and Hansen Natural thrived.
The idea, as preached constantly by Buffet, is to go against the grain. Find the hidden gems where no one is looking and the industry trends set to take off.
Take a lesson from Buffet and invest like he does in the places where he wishes he could put his money.
