# Are there opportunities for small investors unavailable to big ones?

*Epistemic status: Not investment advice. Just pure speculation by a non-rich investor in index funds and EMH partisan, inexperienced in the details of financial markets, doing his best to fit a simple model to a complex problem and steelman the opposing view.*

One explanation for why you should invest in index funds goes something like this:

*"You're competing against hedge funds, physicists, and the most rococo of high-frequency trading algorithms. Good luck, sucker."*

I want to give an explanation as to why this might not be a complete perspective. It's based on two advantages of a small investor relative to a large hedge fund or big-money investor:

*   Inertia vs. agility
*   Investment size floors

Inertia vs. agility
-------------------

Professional investors are often managing huge funds. Bridgewater has almost $100 billion. It employs about 1,500 people to manage that money, so each employee is responsible, on average, for about $66 million. That's about average for a large hedge company.

There are about [630,000](https://www.investopedia.com/financial-edge/1212/stock-exchanges-around-the-world.aspx#:~:text=By%20most%20estimates%2C%20approximately%20630%2C000,public%20firms%20continues%20to%20grow.) publicly-traded companies in the world. If Bridgewater was looking at all of them, each employee would need to keep track of about 420 companies, giving each one just under 1 day of attention per year.

Realistically, hedge funds and their associated businesses have to specialize. And indeed, they do. They invest in forms of capital to support their monetary investments. They do things like using [satellite imagery to monitor Walmart parking lots](https://www.theatlantic.com/magazine/archive/2019/05/stock-value-satellite-images-investing/586009/).

This gives them a gigantic advantage over individual investors. However, it also means that they are less agile, just like any other large company. The small time investor, not having spent a lot of money to analyze a certain company or market, may also be more able to explore new and strange markets, such as cryptocurrency.

Here, they may be more on an even playing field with the smart people in the hedge fund, who may not yet have figured out how to make sense of crypto. It's more a problem for individual human minds, not an experienced and organized collective of professionals.

Investment size floors
----------------------

The huge size of a hedge fund, and the sheer amount of money that each employee is responsible for (on average) means that they need to find big trades to make the kind of profits that will pay for their fees, and deliver the returns their investors expect. Fees aside, Bridgewater needs to make about $10 billion per year to keep up with the market as a whole in an average year. Each employee needs to make on average about $6.7 million per year, or almost $25,000 per weekday, $2,000 per hour if they're working 12 hours a day.

And that's to do only as well as an index fund.

These are restrictions on the kinds of investments they can consider. They need to find not just investments that will be profitable, but investments where enough shares are being bought and sold to absorb the kind of money they want to invest.

By contrast, small-time investors can afford to consider companies that hedge funds may not be able to bother with, due to the smaller trading volume. When investing in these sorts of companies, they are most likely *not* competing against hedge funds.

Imagine that the hedge fund employee and the small-time investor (playing with, say, $1,000), are looking for opportunities to make a 20% return. The hedge fund needs to find an opportunity that can absorb $6.7 million, or many such opportunities to absorb smaller amounts. By contrast, the small-time investor only needs to find an opportunity that can absorb $1,000. That lets them cast a wider net.

To be sure, a small investor still must compete against other smart, small investors for whatever edge there is to be found. But now we're basing the EMH, with respect to these small-time and strange investments, on the intelligence of people more or less like you and me.

You might think that any thoughts you have on Apple and Walmart are light-years behind those of the hedge funds. But do you think your thoughts are light-years behind those of the other investors in a company with a trading volume of 1,000 shares/day? It seems far less intimidating to conceive of out-thinking the competition in an arena like that.

Implications
------------

It's still hard to determine when you'd want to take the plunge and invest, outside of doing it as a sheer hobby. After all, earning 20% returns per year on $1,000 makes you a grand total of $200 before taxes, so I hope you didn't put too much time into finding that trade. And the more money you hope to invest in a given trade, the less the "investment floor size" argument above applies.

So perhaps this helps to partly contradict this argument.

On the other hand, perhaps you can, with experience, reasonably find investments that can absorb $10,000 with an average return of 20% with about 20 hours of work. That would yield a nice $100/hr for your trouble. That hypothetical Bridgewater employee would need to find one such trade per hour to make it worthwhile to consider such trades, meaning that they'd need to be 20x as efficient as you in identifying them. 

Perhaps our markets are adequate for large trading volume stocks, but [inadequate](https://equilibriabook.com/) for low trading volumes.

These are tentative conclusions, with no deep understanding of finance standing behind them. Yet if it's worth doing with made up statistics, it's also worth doing with made up causal models. I look forward to your feedback, mainly in hopes of people who are better informed than me.