From 1957–69, the world’s greatest investor had the best run of his life.
He made money and beat the Dow Jones every year.
In the end, Warren Buffett’s returns would’ve turned $50,000 into almost $1.4 million.
Had investors put the same in the Dow Jones, they would have received less than a tenth of this sum.
Source: Columbia Business School
Then again, this probably isn’t that surprising. Buffett is a stock picking genius. Why wouldn’t he be able to turn thousands into millions?
Yet what you might not know is how Buffett achieved the best investment run of his career. He didn’t do it by investing in the huge blue chips and waiting decades for significant returns.
For a long time, he specialised in dumpster diving. He would buy small- and microcap stocks that traded at heavy discounts.
Then, as a catalyst caused the share price to spike, he sold out for huge gains in a relatively short time.
Now it seems droves of fund managers are trying to do the same thing.
Let me explain how this will create opportunities for individual investors like you…
An annual 50% guaranteed
Size will affect your performance. Simple as that.
Well, imagine investing $100 million. This is a mind boggling sum. Trying to find enough investments just to put such an amount in is hard enough.
But try only investing this $100 million in extremely attractive investments. The calibre which don’t come along that often.
It’s a pretty tall order.
Size also dictates what you can and can’t invest in.
For example, you can’t invest in microcap stocks if you want to be close to fully invested with $100 million. The volume traded on such small stocks simply isn’t large enough for you to buy and sell meaningful amounts.
It’s why you’ll see many large investors restricted to the biggest stocks on the market. And it’s there, the top end of the market, that they’ll put millions to work.
You can probably guess how this might limit potential returns. The big money managers, because of their size, have to buy large blue chips. Those large stocks have limited growth prospects to begin with.
Check out what Buffett famously said about size (with my emphasis):
‘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 (which you saw above). 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.’
You can bet there are plenty of fund managers dreaming of that annual 50% return.
It’s why Lennox Capital is the latest to set up their own microcap fund.
They’ve joined many other funds dabbling in the small end of the market, including Eley Griffiths, Perennial Value, Willison Asset Management and Bennelong Australian Equities Partners.
As reported by the Australian Financial Review:
‘Lennox Capital’s new fund starts life with $10 million seed capital and is fully invested.
‘Its inaugural investments include stakes in $115 million Perth-based civil and resources sector contractor SRG, $319 million payments company Zip Co, $383 million in-data centre network provider Megaport and $520 million active agricultural real estate investor Rural Funds Group.
‘Lennox Capital co-manager Liam Donohue says the average size of stocks is $350 million, while the average in its small-caps fund – which is up 26.4 per cent net of fees since inception last April – and Australia’s small ordinaries index is closer to $1.4 billion.’
So how will this affect you going forward?
More volatility, more opportunities
You might think more experts in small-caps and microcaps are a bad thing. They’ll be first to snap up all the opportunities hiding on the ASX.
But even professional money managers aren’t always rational. That’s why I believe more money in the small end of the market might increase volatility, presenting opportunities for individual investors like you.
For the technically savvy, this might provide momentum opportunities.
For those who are value orientated, this could give you a chance to pick up heavily discounted microcaps — like Buffett did back in the day.
Of course, there are risks when you venture into small-caps.
But it might be one way to take advantage of volatility as more money pumps into the smaller end of the market.
Editor, Money Morning
PS: Our small-cap expert Sam Volkering believes he’s found incredibly cheap stocks in the hyper growth industry of medicinal cannabis. Find out which stocks Sam believes will rise high in the next few months, here.