One thing I’ve noticed over time is how some of the smartest investors achieved outsize success early in their careers by starting out in small, inefficient markets. They took this approach because smaller markets have fewer players (specifically, big-money institutions). When they found an undervalued opportunity, the upside was often larger because it was mispriced to the downside. Those asymmetrical opportunities allowed them to turn a small amount of capital into a large amount of capital at a faster rate. At that point, they then usually entered larger markets. A few notable people I’ve read about used this strategy.

One of my favorite books is the autobiography of Ed Thorp, A Man for All Markets. It’s a combination biography and framework book that’s full of little hacks for navigating life. Thorp realized that equity derivatives (warrants and options) were new and nobody could figure out what they were worth. A mathematician, he used his training to create a formula to price them. He then used that information to buy underpriced derivatives and sell overpriced derivatives, generating outsize returns for decades.

Michael Milken did the same thing with junk bonds in the 1970s and 1980s, becoming the de facto market maker in the infant junk bond market. He helped create bond offerings and sold them to investors. His efforts not only birthed the junk bond market but also helped birth the private equity industry by providing debt for people wanting to take large public companies private.

Warren Buffett did the same with the investment partnership Buffett Partnership Limited from 1956 to 1969, pre-Berkshire Hathaway. He found, OTC, small public companies and some small private companies that were selling for much less than they were worth. He’d buy a huge position and then wait for the market to rerate the public company to true value and sell the private company. When he wound down the partnership in 1969, he’d mostly sold his holdings, except for a few like Berkshire Hathaway.

My takeaway is that it’s often better to start in a small, inefficient market with less competition. After you have some success there, then move to the larger markets where you can now compete better because you have a larger capital base and more experience.