The Small-Cap Advantage Buffett Wishes He Had

When Warren Buffett took control of Berkshire Hathaway in 1964, he engineered what many call the greatest investment transformation in history—a staggering 5.5 million percent gain over 60 years. Yet there’s an ironic twist buried in this remarkable record: the smaller Buffett’s fortune was, the faster it grew. Today, with over $380 billion in cash reserves, Buffett’s compound advantage has become his compound disadvantage. If you’re investing with less than a few million dollars to your name, you possess something even the world’s greatest investor cannot easily replicate.

Why Scale Becomes a Burden for Legendary Investors Like Buffett

Between 1965 and 2024, Berkshire Hathaway delivered an average annual return of 19.9 percent. But here’s the catch: the fund’s most explosive years—gains of 77.8%, 80.5%, 129.3%, 102.5%, 93.7%, and 84.6%—all clustered in a single decade: 1968 through 1989. These weren’t magical market anomalies. They simply represent what Buffett himself predicted decades earlier.

In a 1994 shareholder letter, Buffett warned with rare confidence about one certainty: future returns would pale in comparison to the past. As his empire ballooned from a struggling textile mill into a colossal financial powerhouse, the mathematics worked against him. This isn’t a character flaw or poor strategy. It’s the inexorable reality of investing when you control hundreds of billions in assets.

Buffett himself articulated this limitation in a 1999 interview with brutal honesty: “Anyone who says that size does not hurt investment performance is selling. 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.” Those aren’t the words of a humble observer—they’re the candid acknowledgment of someone who understands exactly why his early years crushed his recent decades.

Two Structural Handicaps That Buffett Can’t Overcome

The first handicap is mathematical simplicity itself. Suppose Berkshire found a small-cap gem and invested $100 million to turn it into $1 billion—a phenomenal 900 percent gain. For a massive conglomerate with $380 billion on hand, that $900 million profit barely registers as a rounding error. For a retail investor with $50,000, that same percentage return transforms life circumstances entirely.

The second handicap flows from regulatory architecture. If Berkshire purchases more than 5% of any publicly traded company’s voting shares, it triggers mandatory SEC filings (Schedule 13D disclosures) that announce its intentions to the market and attract unwanted regulatory scrutiny. By contrast, individual investors can quietly accumulate smaller positions without drawing public attention or compliance headaches. The very regulations designed to protect markets inadvertently penalize scale.

Together, these constraints explain why smaller portfolios retain advantages that even legendary investors cannot overcome. When you manage under a few million dollars, you can chase the exact opportunities Buffett cannot touch: small-cap stocks with explosive growth potential, positions large enough to move the needle on your net worth but negligible to institutional giants, investments that bypass regulatory entanglement entirely.

Vanguard’s Small-Cap Fund: A Smart Entry Point for Individual Investors

For those ready to exploit this structural advantage, the Vanguard Small Cap Index Admiral Shares (NASDAQ: VSMAX) offers a straightforward vehicle. The fund tracks a diversified basket of small U.S. companies and has impressively outpaced its benchmark since inception in 2000, delivering 9.21% average annual returns.

What makes this particularly compelling is the ultra-lean operating cost: a mere 0.05% expense ratio, compared to the 0.97% average for competing small-cap funds. That efficiency compounds dramatically over decades. The fund holds 1,324 individual stocks with a median market cap around $10 billion, providing genuine diversification without complexity.

Perhaps most intriguingly for value-oriented investors, the fund’s average P/E ratio sits at 20.8—nearly 33% cheaper than the S&P 500’s current valuation of 28.5. This suggests the small-cap space still harbors undervalued opportunities that the broader market has overlooked or ignored.

Building Your Own Investment Strategy Beyond Buffett’s Blueprint

Buffett’s track record remains unmatched. Yet his own words and experience reveal a counterintuitive truth: his legendary success eventually became constrained by the very scale that created it. This insight shouldn’t inspire despair but rather confidence.

The structural advantages he identified—the ability to deploy capital nimbly, avoid regulatory visibility, hunt for outsized returns in smaller vehicles—remain available to any investor willing to think independently. Buffett’s genius was recognizing these edges; his current constraints confirm their validity.

A diversified small-cap strategy, implemented through low-cost funds like Vanguard’s offering, provides a practical framework for individual investors to operate in the realm where Buffett wishes he could still compete. The greatest investor of our era has inadvertently handed a roadmap to those patient enough to exploit the one advantage he cannot reclaim.