February 16, 2006

In 1999, Warren Buffett reportedly made the uncharacteristically bold guarantee that he could earn 50% profits on a portfolio of shares each year. Even better, he would accomplish this feat using publicly traded shares that you or I can buy and hold ourselves.

Buffett’s claim intrigued an investment class at the University of Kansas and they wanted to find out more. So they trekked half way across the US last year and requested a private audience with the investment legend.

And these brave souls demanded to know. is it true? Did the investing genius really make his 50% per year boast and does he stand by it today?

The answer was yes and yes! But the Sage of Omaha added one condition.

Let me explain.

Most of us know that Buffett has made vast profits investing in consumer giants such as Coca-Cola (NYSE: KO). But here’s something you may not know. To earn that 50% per year — to double your portfolio every 20.5 months — Buffet wouldn’t’ buy Coca-Cola. He’d buy obscure little outfits with names you may never have heard.

That’s why Buffett guaranteed that he could earn 50% a year. if he had less than $1m to invest. With a small sum of capital, the world’s greatest investor would focus on undiscovered, lightly traded small caps — the area of the market where individual investors have an advantage over the pros.

Why Warren wishes he were you

I know that sounds crazy. After all, the big investors have all the advantages, don’t they?

No. Think about it. The professionals have much more than $1m to put to work. They can’t mess about with smaller shares — no matter how undervalued or how great the business. Well, at least they can’t without risking running up the price (before the order is filled) or getting stuck with a controlling share of the business.

So if you’ve got 100m to put to work this afternoon, you’d better buy shares like GlaxoSmithKline (LSE: GSK) or HBOS (LSE: HBOS). And forget about investing in the next Glaxo.

Don’t get me wrong. A long-term investment in GlaxoSmithKline will probably do pretty well — it’s a great company in a growing market. But let’s face it, the company doesn’t have many more doubles left in the tank — much less one every 20 months or so.

That’s why Buffett said: The best decade was the 50s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps be even easier to make that much money in today’s environment because information is easier to access.

There we have it. The biggest potential returns are in small caps. And Champion Shares editor, Maynard Paton, spends much of his time scouring the market looking for small cap winners.

We’re not claiming that all of Maynard’s small cap picks will deliver 50% gains each year. After all, there’s only one Warren Buffett! But Maynard has got off to a good start. He has recommended six small cap companies since Champion Shares launched last year, and they were all showing a profit on February 10.

In fact, Maynard’s best-performing small cap tip so far, Shed Productions (LSE: SHDP). has jumped 44% since Maynard’s original tip. Sign up for a FREE 30-day trial to Champion Shares and you can read all of Maynard’s small cap picks plus three larger company recommendations. You’ll also receive a free copy of Richard Farleigh’s Taming the Lion if you become an annual subscriber (RRP 12.99.)

So go on, sign up now!

Maynard recommends at least one share every month for members of the Champion Shares service. On February 10, the average gain for the portfolio was 12.8% while the equivalent figure for the FTSE All-Share index was 7.1%. Performance figures are based on mid-prices taken at the time of recommendation. They include due dividends and exclude costs.

Thanks to Paul Elliott for the concept for this article.

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