The Oracle of Omaha is famous for making large purchases in companies like IBM (IBM) and Coca-Cola (KO), but this isn’t where he made all of his biggest returns. The investments that made Buffett worth $72 billion are in smaller less known companies with higher potential for growth and businesses protected from competition.
Hands down, Warren Buffett is one of the greatest investors of all-time.
And after Buffett made his largest purchase ever last week, spending $37 billion for Precision Castparts (PCP), it is time to look at other companies that might be on Buffett’s radar.
However, this isn’t what you’d think; we’re not looking for companies that Buffett might buy, rather, we’re looking for companies that Buffett would buy, if he could.
As of now, Buffett is managing a stock portfolio of over $100 billion, which means, it is tough to find companies that can really move the needle for him and Berkshire Hathaway (BRK-B).
As a result, Buffett has to stick to mega-cap stocks like International Business Machine (IBM) and Wal-Mart (WMT). That’s because buying shares of smaller companies does little to meaningfully boost his portfolio value. But just because Buffett is handcuffed to slow-growth large-cap stocks, you don’t have to be.
This comes as Buffett still believes that it’s within the smaller-cap space that alpha is really generated. During a shareholder meeting back in 1999, Buffett said that he could generate returns of 50% if he had less money. That’s because he would be able to invest in smaller and faster growing companies.
As retail investors, we can use Buffett’s methodology to find smaller companies that Buffett and large asset managers just can’t invest in.
To start — if you look at some of Buffett’s greatest investments, they all came when he could invest a large part of his portfolio in small- and mid-cap stocks.
