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Stock Strategist

How to Invest in Small Companies

Small-cap firms can have wide moats, too.

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Warren Buffett has often noted how Berkshire Hathaway's (BRK.B) size limits its ability to invest in small companies. It would just be too difficult to move the needle on Berkshire's performance with investments in small stocks. Most of us don't have that problem, and devoting a significant percentage of your portfolio's assets to small companies can be attractive for many reasons.

First, small companies are often noted for their growth potential. This potential can set them apart from larger companies that must contend with the law of large numbers constraining their growth rates. So even if you don't find the next Wal-Mart (WMT), a small company's growth potential can make it more attractive than a larger counterpart. Also, by virtue of size, small companies do not always receive a lot of attention from investors and analysts. Information gaps can lead to mispriced stocks and opportunities for investors.

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Julie Utterback does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.