The Big Edge of a Small Investor

Paul Graham is a very successful venture capitalist. He is an accomplished entrepreneur and the founder of YCombinator, a startup incubator. But it’s not Graham’s accolades that sparkle, it’s his deeply thoughtful mind. The collection of essays on his blog that he’s been writing since 2004 is a treasure trove of wisdom for anyone who is in serious pursuit of learning how to think.

One of my favourite essays is How to Make Wealth. In this masterpiece, Graham argues –

Suppose you are a little, nimble guy being chased by a big, fat, bully. You open a door and find yourself in a staircase. Do you go up or down? I say up. The bully can probably run downstairs as fast as you can. Going upstairs his bulk will be more of a disadvantage. Running upstairs is hard for you but even harder for him.

Replace the little nimble guy with a small investor and the bully with a big institutional investor. In fact, the bully doesn’t necessarily have to be the institutional investor. Big-fat-bully represents majority of players in the stock market. And to outperform this bully a small investor needs to run upstairs. Running upstairs in this context means exploiting the structural strength that financial markets bestow on the small investor. What’s this strength?

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