Big Investors Can't Touch This Small-Investor Edge

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Sure, it would be great to have billions, wouldn't it? Just think -- you could pay for all the premium cable channels you want. And you could forget about trying to shop at your local department store on Wednesdays, when it offers special discounts.

But there's a bit of a downside to having billions. Most of us, however much money we have, want to have more. We want our nest eggs to get bigger. That can be harder to accomplish when you have billions than when you have mere thousands or hundreds of thousands. Even superinvestor Warren Buffett of Berkshire Hathaway (NYSE: BRK-B) has noted in his owner's manual for shareholders that "As our net worth grows, it is more difficult to use retained earnings wisely."

So there's one area where we smaller investors have an edge: investing in small-cap stocks. Here's why:

• Small-cap stocks have more potential to outperform the market.
• Small-caps have a very promising record in recessions.
• Small-caps stand the best chance of delivering huge returns.

Check out these strong performers over the past year:

Company	CAPS Stars (out of 5)	Market Cap	1-Year Return	5-Year Avg. Annual Return
A-Power Energy Generation Systems (Nasdaq: APWR)	*****	$394 million	123%	N/A
Force Protection (Nasdaq: FRPT)	****	$398 million	165%	20.1%
Northgate Minerals (AMEX: NXG)	****	$712 million	321%	8.3%
Spectrum Pharmaceuticals (Nasdaq: SPPI)	****	$200 million	417%	(2.1%)
Smith & Wesson (Nasdaq: SWHC)	****	$300 million	153%	27.8%
S&P 500			20%	1.6%

Sources: Motley Fool CAPS, Yahoo! Finance.

Yet these tantalizing investments are simply out of reach for many big investors.

Think about it. If you're managing a $10 billion portfolio, as many mutual fund managers and some wealthy investors are, it's close to pointless to invest in small companies such as the ones above. If you invested $300 million in Smith & Wesson, it would represent just 3% of your entire asset base. And you couldn't invest that much in it, anyway, unless you bought the whole company, which funds generally don't do. Also, remember that the $300 million market cap today is after the 153% rise. Last year, the company's market cap was closer to $120 million, significantly tinier.

Look at some of those returns -- as much as 400% or more. Results like that aren't as likely to happen with the huge companies that dominate many mutual funds and index funds. $100 billion companies like Pfizer (NYSE: PFE) can't quickly double the huge amount of business they do.

So be sure to consider small caps for your portfolio. Over time, they can give you the punch your portfolio needs.