Warren Buffett’s 50%-a-Year Formula That He Can’t Use Anymore (But You Can)

By Jim Fink on

Warren Buffett says he could make 50% a year if he had just $1 million to invest. In fact, he guarantees it, and I don’t doubt him. So, if you have less than $1 million in the market, you need to hear this.

We’re using the same techniques that Buffett would if he could, and I think we’re onto something. The following picks are all from my Roadrunner Stocks portfolio. Notice that all three are up more than 50% in less than a year.

  • Diamond Hill Investment Groupup 58.7% in 6 months
  • Future Fuelup 52.5% in 7 months
  • GrafTech Internationalup 56.0% in 6 months

How did we do it? By focusing on the sort of small stocks that Warren Buffett himself would invest in right now—if he weren’t so rich. Let me explain…

Fifty years ago, Buffett tapped into small fast-growing companies to build Berkshire Hathaway into a mammoth money-spinning machine. Today, its portfolio clocks in at $233 billion. Buffett’s personal net worth? A cool $60 billion.

Problem is, this strategy is useless to him now. It’s not that Buffett can’t find great small-caps—far from it. But these stocks can’t absorb the massive amounts of capital that Berkshire needs to invest to move the needle on its performance.

Consider this: Even if Buffett bought every share of a $100-million company and the stock doubled, it would increase Berkshire’s value by just 0.04%. Considering the amount of research involved and the SEC headaches of owning a controlling stake, why bother?

“It’s a huge structural advantage not to have a lot of money," Buffet says. "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.”

Now, Buffett has to satisfy himself with sluggish mega-cap stocks—but you and I don’t.

The Not-So-Obvious Secret Behind the Biggest Stock Gains

When looking for stocks that make huge runs, it helps to look back and see what worked in the past. So just for kicks, I ran a screen to find the 10 biggest gainers over the past 10 years in the Russell 3000 Index (which covers 98% of the investable U.S. market).

These epic gainers range from 2,580% to a stunning 21,050%. And they come from industries ranging from soft drinks to copper mining. But as you might guess, 90% of them started their epic runs as tiny companies.

This makes sense. It’s much easier to grow fast when starting from a small base than from a large one.

But dig a bit deeper and you find something that’s not so obvious: Not only did 90% of the top-performing stocks of the past decade start out as small caps but most were value stocks, too. In other words, they were cheap, sporting bargain price-to-earnings and price-to-book ratios.

Consider Monster Beverage (Nasdaq: MNST), the best-performing stock of the past decade—up 21,050%.

Ten years ago, Monster Beverage not only had a tiny market cap, but it was also cheap, with a p/e ratio of only 10. Cal-Maine Foods (Nasdaq: CALM), another big winner (up 2,900%), had a p/e of just 9. Deckers Outdoors (Nasdaq: DECK), up 5,210%, sported a p/e of just 7.

A study by Ibbotson Associates sheds light on why these cheap small stocks did so well. Ibbotson’s researchers divided the stock market into four groups: small-cap and large-cap value, and small-cap and large-cap growth.

They then examined the 83-year period between 1927 and 2010. The results were staggering: $1 invested in small-cap value stocks grew to $49,822. The same $1 in the worst-performing group, large-cap growth stocks, was worth only $1,008, or 98% less.

As you can see here, small-cap value stocks were by far the top-performing category, at 14.1% a year over eight decades.

Note: Small-cap growth stocks did NOT outperform large-cap value stocks, so going small isn’t enough by itself. The magic happens when you combine small size AND value.

Of course, “value” is another way of saying “cheap”—and many stocks are cheap for a reason: their businesses are in trouble. Fifty-five percent of all small-cap value stocks do worse than the market, but the group wins out anyway, because of the spectacular performance of the other 45%.

Now I want to show you how to zero in on the best of that 45%. What’s more, I’ll give you my top 4 small-cap value picks right now—with no risk or obligation.

Editor's Note: We've created a new video presentation that shows you exactly to put this unparalleled formula to work right away. Click here to watch it now.

The Top 4 Small-Cap Buys

By running my “What Buffett Would Buy If He Could” screen, I’ve discovered four companies in position to deliver 10-year returns above 1,000%.

I call these high-flying investments “roadrunner stocks.” They’re precisely the kind of swift-moving, opportunistic outfits legendary investors like Peter Lynch and Warren Buffett bought to kick start their wealth at the beginning of their careers. Yes, the kind they can no longer buy because they’re too rich.

I’ve put together a free video presentation that shows you, step-by-step, how to uncover these “under the radar” companies yourself before the average investor picks up on them. You can view this exclusive video by clicking here.

Like Buying McDonald’s in 1965

These companies are the ground-floor opportunities that every investor dreams of—like buying McDonald’s at the start of the fast-food era, or Microsoft at the start of the PC craze, or Google as the Internet changed the world.

In 1965, McDonald’s went public at $22.50 per share. Anyone who bought 100 shares for $2,250 and held on is now sitting on more than $8.1 million.

I’ve zeroed in on a handful of these “next McDonald’s” with the best odds for success and compiled them in a new report. It’s called Small-Cap Wealth Builders: Roadrunner Stocks Warren Buffett Would Invest in Now (If He Weren’t So Darn Rich).

You’ll see how to get your own copy in my free video presentation. A few minutes from now, you could be adding these remarkable stocks to your portfolio.

As I said before, this free video will likely only be available for a limited time. Don’t wait. Sit back and take in my one-of-a-kind video presentation now. It could be the best investment move you make this year.