Small-Caps Fit for Buffett

Warren Buffett has repeatedly warned Berkshire Hathaway (BRK.A/BRK.B) shareholders that, at the company's present size -- $260 billion and counting -- Berkshire needs "elephant" investments in order for the needle to move. Buffett's assertion is simply mathematical fact: The bigger the denominator, the bigger the numerator needs to be in order for it to make an impact. As a result, Berkshire's investment dollars must go toward mega-cap investments like Wells Fargo (WFC) and IBM (IBM). (This excepts his recent foray back into newspapers.)

Another past Buffett comment that continues to intrigue his ardent followers: He has said that, if he were starting over again, he feels confident that he could earn a 50% return per year. This may sound overconfident, but I really think it goes back to the mathematics again. Buffett is saying that, in the beginning, he was working with much smaller numbers -- so his opportunity set was much wider, because it included small-caps stocks that were less followed by Wall Street and thus more likely to be mispriced....362 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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