Warren Buffett is probably the best known investor in the history of investing. He is studied closely by many and he has many devotees who try to emulate him with varying degrees of success.
What most people don’t realize though is that Warren Buffett has so many billions of dollars to manage and grow these days, his investment style HAD to change through the years. The types of stocks he used to buy early on are different than the types of stocks he buys now but he used to make more profit than he does now. See what I mean by considering the following statistic:
Investors in Buffett’s Berkshire Hathaway saw a staggering 10,000% gain in the 15 year period from 1977 to 1992. Yes, you read those zeros right – that a TEN THOUSAND percent gain in 15 years!
However, during the next 15 years, Buffett’s Berkshire Hathaway brought investors only a 1200% gain. This is still a great profit compared to other investment firms but it is about 8 times less profit than what Buffett was able to do during the first 15 years.
So what is the difference?
Why was Buffett able to make a much higher percentage profit his first 15 years?
The short answer is that early on he was able to buy penny stocks!
The longer answer is that he was managing much less money those first 15 years. Portfolio managers who manage huge amounts of money can not take advantage of penny stocks and small caps (remember the line between penny stocks and small caps can be very blurry).
In order for a large investment firm or portfolio manager managing billions of dollars to show a good increase percentage wise, they have to buy tens of thousands of shares every time they make a purchase. This means they can not buy penny stocks and small caps that have less capitalization on hand and fewer stock shares outstanding. If they were to try to buy this many shares of these companies with a small capitalization (less than 10 million for example), their purchase would make the price of the stock skyrocket immediately and they would out-price themselves out of profit before the deal even went through! The SEC might also come after them for “manipulating” the price (the SEC did go after Buffett once for something similar).
Alice Schroeder, who has written the only authorized biography of Buffett entitled, “The Snowball,” describes how Buffet not only bought “penny stocks” he bought them listed on the pink sheets! Pink sheet stocks are usually the low end of the spectrum remember.
Buffett knew in his early days that penny stocks and small caps are the fastest way to make big profits in the stock market. You can still apply the underlying principles that Buffett is famous for such as only buying stock in a company you can understand… BUT if you want to make really good money in the stock market and you want to do so quickly, buying penny stocks is the best strategy.
Buffett would buy penny stocks now if he could. He told Business Week, “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.”
The only reason he doesn’t buy them nowadays is he manages too much money and it would manipulate the price of them if he bought them.
However, if you are working with less money – a few hundred to several thousand or even a million – you will make far more money if you buy stock like Buffett did early on when he got his highest returns!
The only caveat I would offer here is that you really do have to know which penny stocks to purchase in order to make profits like 50% and 100% and you simply can NOT use traditional fundamental analysis to figure these out. The big boys use fundamental analysis on mid caps and large caps and even the larger small caps but it simply does not work on penny stocks. For these cheap stocks with small caps, you need an entirely different research strategy – as unconventional as Buffett himself. Very few people have demonstrated a real talent for picking the right ones consistently but there are a few geniuses out there who do.
What I have found to the easiest way to find the highly profitable penny stocks and avoid the scams is to plug into these genius minds. I purchase penny stock picks from reputable sources and make a bundle doing so. You want picks from someone who has a track record of picking penny stocks that soar very consistently, i.e. they didn’t just get lucky once. Then of course you want to test these picks before you place any real money on them.