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ValueSnark, I actually don't think this conflicts with Buffett's opinion on market inefficiencies. I imagine he would say that information doesn't budge the efficiency needle all that much. Improvements in human temperament would.

Careful study of companies capitalized under $1 billion just shows an utterly astounding amount of volatility year to year. I encourage investors to randomly pick a small-cap company, then map out its highs and lows for the last five years. I think it would stun people to see, for example, just how many times America's greatest corporations were cut in half in value en route to rising from a $100 million valuation to a $100 billion valuation. Trace Wal-Mart from its position as a $25 million company in the early 1970s all the way through to today's valuation of $210 billion today. It has gotten sliced down 50-70% numerous times.

I don't think Buffett believes that information creates substantially more efficiency. If you give a monkey a dictionary, he'll try to eat or throw it. I think what Buffett is saying here and throughout his career, is that the admixture of impatience, greed, and fear is what creates wide price ranges for someone like him to build a fortune from. It's particularly true with small companies, where stocks routinely get halved. I think Buffett believes that if he could have gotten more information on them a half century ago when he had less capital, he would have found even more great opportunities. I happen to believe he could earn 50% returns, focusing exclusively on companies valued under $1 billion.

Which leads me to a question I've never seen asked of Mr. Buffett. Given what he has said repeatedly about the burden of capital and the opportunities in obscure small companies, if he were a young investor with less than $5 million today, would he invest anything meaningful (or anything at all) in a company of the size and scope of Berkshire Hathaway? I don't think he would. It would be interesting to hear.

MHirschey, thanks for a terrific post.

Tom Gardner
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