Warren Buffett gets opportunities the rest of us don't. He's the name-brand investor companies go to when they need cash or a smidge of reputation in a hurry.
I have previously chronicled the crazy-sweet terms Goldman Sachs and General Electric gave Buffett. How crazy-sweet? They begged Buffett -- technically his company, Berkshire Hathaway -- to lend them money at a guaranteed 10% plus equity upside.
But before you get too jealous, know that this wasn't always the case.
How Buffett made his opportunities
Let me take you back to a time when Buffett wasn't worth 11 figures. Back to a time when he had only five figures to work with.
In his 20s, Buffett's eventual avalanche was just a snowball. All his name could get him was a dinner reservation ... if he called ahead.
So he had to work to find deals to invest in -- deals that would form the basis of his fortune. He sought out the master investors of his time, including his hero Benjamin Graham, and learned everything they would teach him.
But more than anything, he did the legwork that others weren't willing to do. In this time before the Internet, he'd physically go to Moody's and Standard & Poor's to read old reports, to the SEC to read filings, and to company headquarters to talk with management.
His persistence was rewarded handsomely, particularly in tiny, underfollowed companies. In Buffett's own words: "I would pore through volumes of businesses and I'd find one or two ... that were just ridiculously cheap."
How cheap? In one six-year period, he grew his wealth by more than 60% a year. By age 26 he had amassed so much wealth that he considered retirement.
How Buffett lost his opportunities
Of course, he didn't retire. In the decades since, he's continued putting up incredible returns, and he's laid claim to the unofficial title of greatest investor ever.
But with all this wealth comes a problem.
That problem is exemplified by Buffett's recent purchase of the Burlington Northern Santa Fe
The man who has absolutely throttled the market for more than five decades now says, "Reasonable return is good enough. ... I mean, 50 years ago, I was looking for spectacular returns, but I can't -- I can't get them."
Why the surrender? One word: size.
Berkshire Hathaway is roughly the size of a Johnson & Johnson
For Buffett, analyzing and buying a small-cap stock has roughly the same cost-benefit as us walking a mile to pick up a quarter. Instead, he's stuck stalking elephants like Burlington Northern, which is roughly the size of a General Dynamics
Could he still do it today?
When Buffett could stalk mosquitoes instead of elephants, his returns were consistently monstrous. That was a long, long time ago, though. Could he still do it today?
He thinks so. He says, "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."
Wow. Now, before we get carried away, that's the greatest investor in the world taking on the market with no restrictions.
The takeaway for us mere mortals is that there's more opportunity for outsized returns in small-cap stocks than there is in larger-cap stocks.
Just like Buffett
It's nice to know we have one advantage over Warren Buffett. For an idea of how to take advantage of said advantage, I turned to our small-cap experts at Motley Fool Hidden Gems.
They recommended doing the same type of work Buffett did back in his heyday -- studying the master investors, vetting company management, and digging into financial statements to find strong balance sheets and large margins of safety.
Using this process, they've unearthed Neutral Tandem, a fledgling telecommunications network play that is disrupting the switching services provided by the Baby Bells. Backed by a cash-rich balance sheet, the company's growth opportunities lie in the increase of voice and data needs as well as its own geographic expansion.
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This article was originally published on Dec. 24, 2009. It has been updated.
Anand Chokkavelu owns shares of Berkshire Hathaway and Burlington Northern. Berkshire Hathaway, Costco Wholesale, and General Dynamics are Motley Fool Inside Value recommendations. Berkshire Hathaway and Costco Wholesale are Motley Fool Stock Advisor picks. Johnson & Johnson is a Motley Fool Income Investor selection. The Fool owns shares of Berkshire Hathaway, Costco Wholesale, and Neutral Tandem. The Fool has a disclosure policy.