Hey folks,

Last week I wrote about the tension between ROI and scale.

To recap: a small opportunity might produce incredible returns, but if it can only absorb a small amount of capital, it won’t move the needle very much. Meanwhile, a larger opportunity may produce a lower return — but if it can absorb far more capital, it will generate more total profit.

After writing that piece, I started noticing something related that’s even more interesting.

Different investors don’t just pursue different opportunities.

They actually operate in different layers of the economy.

And those layers are often invisible to each other.

Let me give you two examples.

A friend of mine in finance was looking at rolling up a specific type of small business. (I’m keeping things vague to protect his identity and avoid giving him unwanted competition.)

His strategy was straightforward: identify owners nearing retirement, build relationships with them, and offer a clean exit by buying their company.

What’s interesting is that private equity firms weren’t competitors in this space.

Not because the businesses weren’t profitable.

Not because the strategy was unsound.

But because the deals were simply too small.

For a large private equity fund, evaluating, negotiating, and managing a small acquisition can require nearly the same amount of work as a much larger one. If the potential return only moves the needle by a tiny fraction of the fund, the opportunity simply isn’t worth pursuing.

So there exists an entire layer of businesses that institutional capital largely ignores.

For my friend, though, those same opportunities are perfect.

Because he’s operating with far less capital, a deal that’s irrelevant to a billion-dollar fund can be incredibly meaningful to him.

In this case, being smaller isn’t a disadvantage.

It’s the strategy.

I’ve experienced something similar in the public markets.

For a number of years I focused on stock picking and was fortunate enough to generate strong returns. The opportunities I found usually came from mispriced securities — situations where the market misunderstood a company’s fundamentals or overreacted to some temporary issue.

But exploiting those opportunities came with tradeoffs.

Investing in individual stocks means taking on additional risk.

I wasn’t comfortable putting my entire portfolio into a single company, so I spread my investments across multiple businesses.

That helped manage risk.

But it created another constraint.

Maintaining deep knowledge about one company is manageable.

Maintaining deep knowledge about twenty companies across different industries is much harder.

Over time I realized that the real limitation wasn’t capital.

It was attention.

The more positions I held, the harder it became to maintain the level of understanding that originally created the opportunity.

Every investor operates under constraints.

Private equity firms are constrained by minimum deal sizes.

Small acquirers are constrained by capital.

Opportunity investors are constrained by attention and time.

And the list goes on.

These constraints shape the opportunity set available to each investor.

Which means the market isn’t one giant pool of opportunities.

It’s more like layers.

Each layer contains opportunities that are accessible to certain types of investors but largely invisible — or irrelevant — to others.

This is one reason markets can remain inefficient even when millions of smart people are participating in them.

They aren’t all playing the same game.

They’re operating under different constraints.

And those constraints determine which opportunities they can pursue.

Which leads to a useful question for any investor:

Not just “What are the best investments?”

But:

“Which investments are uniquely available to someone like me?”

Because sometimes the biggest advantage you have in markets isn’t more capital.

It’s the constraints you’re operating under.

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