The Motley Fool Previous Page

Big Winners for Small Investors

Paul Elliott
October 21, 2009

Some years ago, an eccentric Midwestern billionaire boasted that he could earn 50% a year on a portfolio of ordinary common stocks. There's a roughly 100% chance you know his name. Of course, there was a catch.

Or maybe that never really happened at all. Whenever I bring it up, I get bombarded with emails saying it can't possibly be true. So let's put it to rest: Did this celebrity investor really make that 50% boast? And if so, what was the one condition?

Enter a flock of Jayhawks
While we debated who said what and when, a bunch of students actually did something about it. They trudged across Kansas and sat down with the guy.

And they simply asked him, "Did you really make that infamous '50%-per-year' guarantee? And more importantly, would you stand by it today?"

You'll be surprised how he would do it
To earn you 50% per year -- essentially doubling your money every 20.5 months -- this fellow wouldn't buy the stocks that made him a legend, like publishing giant Washington Post (NYSE: WPO  ) . He wouldn't even buy his own $155 billion company.

So what would he invest your money in? Obscure outfits with names you've never even heard of, most likely. How do I know? He told us. Remember the catch?

This guy would guarantee he could earn you 50% per year ... only if he had less than $1 million to invest. That's because he would be loading up on undiscovered, thinly traded, small companies -- the one area in the market where the pros can't go, and where individual investors like us have an advantage.

Why Warren Buffett wishes he were you
You knew it was Buffett, didn't you? Well, can you guess why he wishes he were you? Because he has too much money. I know, that sounds backward. After all, the big money on Wall Street has all the advantages.

Right? Wrong.

For one thing, most pros have way more than $1 million to invest, so they can't mess around with great, up-and-coming small companies -- at least, not without risking running up the price or buying a controlling stake in the company.

That's why you see so much trading volume in the usual suspects. Take a look at these examples I pulled from the most widely owned, heavily searched, and massively traded NYSE stocks.


Market Capitalization

Average Volume

JPMorgan Chase (NYSE: JPM  )

$182 billion

38 million

Fannie Mae (NYSE: FNM  )

$1.2 billion

130 million

Ford (NYSE: F  )

$25 billion

77 million

Bank of America (NYSE: BAC  )

$150 billion

231 million

AT&T (NYSE: T  )

$153 billion

27 million

And over on the Nasdaq? How about Research In Motion (Nasdaq: RIMM  ) , weighing in at $38 billion and trading 16 million shares a day? On Wall Street, they call this "liquidity." That's really a polite way of saying "the usual suspects buying and selling the same old stocks to each other."

In other words, if you've got half a billion to put to work this afternoon, you'd better buy something big and forget about the next big