Small Investors Have An Edge Over Big Institutional Investors!

Picture from http://www.chaiwithpabrai.com/

Mohnish Pabrai has consistently emphasized that individual or “small” investors have distinct advantages over large institutional players not despite their size, but because of it. This theme runs throughout his book, The Dhandho Investor, and in many of his public talks.

Here are reasons why he thinks this is the case:

1. Flexibility and No Mandates Pabrai notes that institutional investors are constrained by mandates, benchmarks, and large pools of capital that require them to invest in big, liquid stocks. Small investors are not bound by these rules, giving them a much larger universe of potential investments, including overlooked or illiquid gems.

   
   

2. No Pressure to Perform Quarterly Unlike fund managers, individual investors don’t have to hit short-term KPIs, cater to clients, or fear job loss due to temporary underperformance. This enables patience the rarest and most powerful advantage in investing.

   
   

3. Ability to Be Truly Contrarian Institutional managers often can’t afford to go against consensus, their careers depend on it. Retail investors, however, can buy when others are fearful and sell when they’re greedy, embodying Buffett’s timeless advice.

   
   

4. Low Costs and No Management Fees Pabrai stresses that small investors avoid the burden of management fees and performance-based fees. Their returns compound directly to their benefit, not diluted by layers of costs.

5. Ability to Invest in Microcaps and Spinoffs The “small guy” can comfortably invest in stocks with market caps in the tens of millions, far too small for a fund managing billions. Many of these businesses are underfollowed and mispriced. "The small investor has the ability to go where the elephants can’t.”

   
   

6. Clear Thinking and Simplicity Pabrai models his approach on Buffett and Munger: few bets, big conviction, long duration. Retail investors can do the same, with no pressure to diversify beyond logic.

“Heads, I win; tails, I don’t lose much.” This Dhandho principle reflects the idea of asymmetric bets, something a nimble investor can pursue more easily than a large institution. If you stay patient, think independently, and look where others aren’t, you can outperform the big guy.

Written By Elisha Chikosi (Value Investment Analyst)

Ardent student of Warren Buffet, Charlie Munger & Mohnish Pabrai