Warren Buffett is known as the top investor of our time.
But, what you may not know is that YOU have an unfair advantage over the “Oracle of Omaha.”
You can invest in a lucrative group of stocks that he can’t touch.
A group of stocks that he says could generate an annual return of 50% for him.
Guaranteed!
If he could invest in them.
Let me explain…
When a big investor (like Buffett) buys more than 10% of a company, he or she becomes a “principal shareholder.”
And that means work: controlling board seats, hiring the CEO and public reporting on your investment.
And Buffett would prefer not to do that work.
Yet, if Buffett just invests $200 million (of his $780 billion fund) into the biggest small-cap companies ($2 billion) … that’s what happens. He becomes a 10% stakeholder.
So, he avoids the small-cap companies.
Furthermore, a $200 million investment won’t move the needle at his company, Berkshire Hathaway, even if the stock went up 1,000%…
Why?
Again, his fund is valued at $780 billion.
A 1,000% gain would mean a $2 billion profit … or, a .26% increase.
It’s like you winning on the penny slots.
Sure, your $0.01 turned into $1, but that doesn’t really move the needle for you.
So, for Buffett … why bother?
But for you and me … making a 1,000% gain off a $200 million investment (or, even a $2,000 investment), would be a game-changer.
This is our “unfair advantage.”
Big investors and Wall Street firms can’t touch the small-cap market. But you and I can (and should, especially in 2024 … you’ll see three reasons why in a moment).
And that is why Buffett envies you.
He would love the thrill of being small again. To fly under the radar and buy unknown small companies and ride them to ever-higher gains, like he did in the 1950s.
Here’s Buffett’s full quote …
If I had $10,000 to invest, I would focus on smaller companies because there would be a greater chance that something was overlooked in that arena. 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. But you can’t compound $100 million or $1 billion at anything remotely like that rate.
Those days are gone and he knows it.
(Poor guy, right? The suffering. The pain. The agony of having billions of dollars.)
Yet, you and I can find and buy small companies.
And 2024 is a great time to invest in them.
Tom Lee, head of research at Fundstrat, agrees. He expects small-cap stocks to climb as much as 50% in the next year.
Here’s why…
Reason #1: The Reversion to the Mean
You may have heard about the “Magnificent Seven” stocks driving up the overall market in 2023.
These are large-cap tech stocks that include Alphabet (Google), Amazon, Apple, Meta Platforms (Facebook), Microsoft, NVIDIA and Tesla.
Here’s what happened with those stocks over the past year…
The top line is the Magnificent Seven. Those stocks are up 75%.
The yellow line is the S&P 500. It is up about 22%.
The bottom line is the other 493 companies in the S&P 500 … they’re up about 15%.
It’s amazing to think that just seven stocks pulled the entire market up so high!
But, there is more to the story.
2000 stocks more…
I’m talking about the 2,000 small-cap stocks included in the Russell 2000.
That market is up 17% over the last year, but they are still 16% below its peak in 2021 (versus the Dow which just hit its all-time high and the S&P 500 which is days away from its peak).
Eventually, we could see a “reversion to the mean” as money flows from the overpriced markets and into all these small-cap stocks.
Especially because small-cap stocks are CHEAP when it comes to their price-to-earnings multiple.
While large-cap growth shares (led by the Magnificent Seven) are trading 36% above their 20-year average price/earnings multiple, small-cap companies are trading 14% below it.
Reason #2: Small-Caps Go Up After Bear Markets and Recessions
Since 1980, we’ve had seven bear markets.
And one year after a new bull market was confirmed, small caps have made a gain six of those seven times (see chart below).
(One thing to note is that it has taken 239 days to reach a 20% return from the recent bear market bottom. That’s about five times longer than the previous bear markets. So, if you feel like your portfolio has been in a lull, that’s why!)
The average gain is 19.76%.
Here’s the thing … a new bull market was confirmed in June.
And we’ve seen stocks rebound.
But, again … why small caps?
Because they do better AFTER a recession.
Take a look…
The chart above shows just outperformance, by how much small caps beat large caps following a recession.
But, there are more great things in the works here that could cause small caps to soar higher.
Reason #3: Lower Interest Rates
The Federal Reserve has made it clear that they will lower rates if inflation cools. Their goal is 2%.
And that seems to be happening.
Inflation has fallen from a peak of 9% down to 3.2%.
Now, many are worried that the Fed has gone too far, and that they may have to reduce rates drastically.
Fed policymakers have already penciled in three rate cuts for this year. They expect 150 basis points to be cut (going from 5.5% to 4%).
This is especially good for small-cap stocks.
Smaller companies rely on more borrowing, and borrowing money for less can boost the balance sheets.
And there’s another reason the Fed will start reducing interest rates: It’s an election year.
Lower interest rates help the incumbent, which in turn helps Jerome Powell keep his job.
So, small-cap stocks:
- Are drastically underpriced.
- Do better after a recession and bear market.
- Do great when interest rates are cut.
Which is why investing in them is a no-brainer.
How to Beat Buffett’s Berkshire Hathaway Starting Tomorrow
An easy way to invest in small-cap stocks is to move money into the Vanguard Small Cap Value ETF (NYSE: VBR).
I own it, and it has performed very well for me.
Top holdings include Builders FirstSource (NYSE: BLDR) which is up 160%, Reliance Steel & Aluminum Co. (NYSE: RS) which is up 40% and Jabil (NYSE: JBL) which is up 90% … all in the last year.
If you are a bit more speculative, you may even want to consider investing in some individual stocks.
I invest in them, but … I don’t do it alone.
I use Charles Mizrahi’s recommendations.
He was the one who alerted me to invest in Bel Fuse Inc. (Nasdaq: BELFB) a little over a year ago. I would have never heard of the company if it weren’t for Charles.
And I’m now sitting on open gains of 156%.
If you want to get Charles’ next small-cap stock recommendations, simply go here to see how.
When it comes to investing, small caps may be your ONLY unfair advantage over the big guys like Warren Buffett.
He would love 50% annual gains again.
But, he knows he can’t touch this market.
But, you can.
And 2024 is the perfect time to do it.
Next week, I’ll talk about one of my favorite stocks. A tiny $125 million company that is taking on a $19 billion behemoth. And, it just may win.
Aaron James
CEO, Banyan Hill, Money & Markets