Your Big Advantage Over Warren Buffett

After taking the helm of Berkshire Hathaway (NYSE: BRK.B) in 1964, legendary investor Warren Buffett steered the conglomerate to a 5.5 million percent gain during the next 60 years. It's a track record that might make him history's greatest investor. Yet if you're an investor with less than a few million dollars to your name, there is one sense in which Buffett envies you.

While Berkshire Hathaway shares averaged a 19.9% return from 1965 to 2024, its biggest annual gains (+77.8%, +80.5%, +129.3%, +102.5%, +93.7%, and +84.6%) had one thing in common. They came in 1968, 1971, 1976, 1979, 1985, and 1989, respectively, decades ago when Berkshire was a small fraction of its current size.

This front-loaded performance came as no surprise to Buffett. As far back as 1994, he warned in a letter to shareholders that while he made few predictions, there was one that he was confident about: Future performance of Berkshire shares would not come close to matching its past results.

Two reasons Berkshire's growth has slowed in recent decades

You might think that this is due to the law of large numbers, which states that enormous growth is always easier from smaller starting points. That is true, and it's one reason small-cap stocks have historically outperformed larger companies.

As Buffett said in a 1999 interview, "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."

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If Berkshire Hathaway were to find a small-cap gems, and turn $100 million invested in it into $1 billion, this would yield a $900 million profit -- hardly enough to move the needle for a huge conglomerate like Berkshire, with more than $380 billion in cash as of late 2025. For retail investors, on the other hand, a return of that magnitude would mark life-changing gains.

Additionally, if Berkshire wanted to buy more than 5% of the voting shares in a promising small-cap company, it would have to make a Schedule 13D filing with the Security and Exchange Commission, with the regulatory headaches and public disclosure that entails. Again, retail investors don't have this problem.

A straightforward way to play small caps

The Vanguard Small Cap Index Admiral Shares (NASDAQMUTFUND: VSMAX) is designed to track a broadly diversified index of stocks of small U.S. companies.

Impressively, it has narrowly outperformed its benchmark since its 2000 inception, returning 9.21% on average each year. These returns are even more striking when you consider the fund's ultra-cheap expense ratio of just 0.05%, compared to the 0.97% average expense ratio of similar funds.

All told, the fund holds 1,324 stocks, with a median market cap of $10 billion. Interestingly, their average price-to-earnings (P/E) ratio is 20.8, a nearly 33% discount from the S&P 500's current average P/E ratio of 28.5, which should appeal to value investors.

For investors seeking a low-cost, diversified, simple way to profit from small caps, the Vanguard Small Cap Index Admiral Shares is a top fund to consider.

William Dahl has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.