“If I had $10,000 to invest, I would focus on smaller companies, because there would be a greater chance that something was overlooked in that arena.” 

—Warren Buffett

Here are just three reasons why you need to hold top-flight small-cap stocks right now:

• Higher returns: If you had invested in small-cap value stocks instead of large-cap growth from 1927 to 2010, you would be 49 times richer!

• They’re frugal and investor-friendly: They don’t buy corporate jets and don’t pile up debt (banks won’t let them). So they must finance through the equity markets—which keeps management hyper-focused on the stock price.

• Management has skin in the game: These small, innovative companies are run by entrepreneurs who hit paydirt only if the stock price goes up.

Small caps’ stunning growth potential is hardly a secret. Fifty years ago, Warren Buffett tapped into high-growth small-cap companies to build Berkshire Hathaway into a mammoth money-spinning machine. Today, its investment portfolio clocks in at $233 billion. Buffett’s personal net worth? A cool $60 billion.

Problem is, this strategy is useless to him now. It’s not that Buffett can’t find great small-cap stocks—far from it—but that these stocks can’t absorb the massive amount of capital that Berkshire needs to invest to move the needle on its performance.

Consider this: Even if Buffett bought every share of a $100-million company and the stock doubled, it would increase Berkshire Hathaway’s value by just 0.04%. Considering the amount of research involved and the SEC headaches of owning a controlling stake, why bother?

“The highest rates of return I’ve ever achieved were in the 1950s,” the Oracle of Omaha said back in 1999. “I killed the Dow. You ought to see the numbers. But I was investing peanuts then. 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. But you can’t compound $100 million or $1 billion at anything remotely like that rate.”

Now Buffett has to satisfy himself with slower-growing large cap stocks. But you and I don’t have to.

The Magic Formula for Big Gains in Small Caps

When looking for stocks that can score huge gains, it helps to look back and see what worked in the past. So just for kicks, I ran a screen to find the 10 biggest gainers over the past 10 years in the Russell 3000 Index (which covers 98% of the investable U.S. market).

Nine out of 10 have one thing in common: They started their epic runs as tiny companies.

But sophisticated investors like Buffett don’t stop there. The magic formula is to add value to the criteria—in other words, stocks that are sporting bargain price-to-earnings and price-to-book ratios.

Consider Monster Beverage (NasdaqGS: MNST), one of the best-performing stocks of the past decade. Back in 2002, it not only had a tiny market cap, but it was also cheap, with a p/e ratio of only 10. Cal-Maine Foods (NasdaqGS: CALM), another big winner, had a p/e of just 9.

A recent study by Ibbotson Associates tells the tale. Ibbotson’s researchers divided the entire stock market into four groups: small-cap and large-cap value, and small-cap and large-cap growth.

They then examined the 83-year period between 1927 and 2010. The results were staggering: $1 invested in small-cap value stocks grew to $49,822. The same $1 in the worst-performing group, large-cap growth stocks, was worth only $1,008, or 98% less.

As you can see from the chart below, small-cap value stocks were by far the top-performing category, at 14.1% a year over eight decades.

Group	Compound Annual Return (1927-2010)	$1 Invested in 1927 Worth in 2010
Small-Cap Value	14.1%	$49,822
Large-Cap Value	11.1%	$5,605
Small-Cap Growth	9.2%	$1,363
Large-Cap Growth	8.8%	$1,008

Note also that small-cap growth stocks did not outperform large-cap value stocks, so going small isn’t enough by itself. Rather, a combination of small size and value is the magic formula.

Editor’s Note: We’ve created a new presentation on how you can put this magic formula to work right now. Click here to watch the video now.

Another thing to keep in mind is that many small-cap value stocks are cheap for a reason: their businesses are in decline. Fifty-five percent of all small-cap value stocks do worse than the market, but the group wins out anyway, because of the spectacular performance of the other 45%.

Now I want to show you how to zero in on the very best of that 45% absolutely free. And being a conservative sort, I’ll shoot for just half of the 50% Buffett insists we can make. At 25% a year, you triple your money in five years. That’s plenty good enough for me.

Even better, I’ll give you the inside track on my top 4 small-cap value picks right now—with no risk and no obligation.

Learn the Secret to Picking Winning Small Caps FREE

I’ve discovered dozens of companies in position to deliver 10-year returns anywhere from 1,000%, 2,000% and a few even higher.

I call these high-flying investments “roadrunner stocks.” They’re precisely the kind of swift-moving, opportunistic stocks master investors like Peter Lynch, Buffett and others bought to kickstart their wealth at the beginning of their careers.

Best of all, I’ve put together a one-of-a-kind free video presentation that will show you, step-by-step, how to zero in on these “under the radar” companies before the average investor picks up on them. You can view this exclusive video by clicking here.

I’m very proud of this new video. The medium is new to me, but I think it’s the best way to get this information out as quickly and clearly as possible, so we can make sure more investors profit from it.

I urge you to take a minute and watch it through to the end. The information on these roadrunner stocks is not something the general public is even aware of. And I can’t guarantee this one-of-a-kind video will be available for long.

“Like Buying McDonald’s at the Start of the Fast-Food Era”

These are nothing less than the breakthrough companies that will change the lives of millions and turn entire industries on their heads. They’re the ground-floor opportunities that every investor dreams of—like buying McDonald’s at the start of the fast-food era, or Microsoft at the start of the PC craze, or Google as the Internet changed the world.

Of course, not all of my picks will be big winners, but I’ve identified a handful of these Buffett-quality stocks with the best odds for success in a new special report. It’s called “Small-Cap Wealth Builders: Roadrunner Stocks Warren Buffett Would Invest in Now (If He Weren’t So Darn Rich).”

In my free video presentation, you’ll learn how you can get your own copy with no risk and no obligation. In just a few minutes, you could be adding these powerful small caps to your portfolio and watching as their share prices take off into the stratosphere.

As I said before, this free video will likely be available only for a limited time. Don’t wait. Sit back and take in my one-of-a-kind video presentation now. It could be the best investment move you make this year.

Editor’s Note: I don’t have to tell our regular readers about Jim Fink’s proven investment expertise. His track record speaks for itself: using the same techniques he’ll show you in this new video, he turned $50,000 into $5.3 million in 10 years and “retired” at the ripe old age of 37.

Now, through this comprehensive video, he’ll show you exactly how you can put the proven profit-making power of the best small-cap stocks to work on your portfolio now. Plus he’ll give you his new free report—which contains everything you need to know to profit from his top picks among these future high-fliers—at no risk.

This kind of life-changing investment advice doesn’t come along every day. Don’t miss out. Click here to start this extraordinary free video now.