The power-law distribution involves that: Fixing 20% of the most-reported bugs fixes 80% of the related crashes.20% of a company’s products generate 80% of the revenue.80% of the GDP is in the hand of roughly 20% of the population.This principle is observed across economics, computing, and sports: Pareto states that roughly 80% of consequences come from 20% of the causes (also called the “vital few”). He also noticed that 20% of the pea pods in his garden were responsible for 80% of the peas. Pareto realized that 80% of the land in Italy was owned by 20% of the population. Italian economist Vilfredo Pareto developed this concept in 1906. You have probably heard of the Pareto Principle, also called the 80/20 rule.
It is called the power law, also known as a Pareto distribution. Other normal distribution examples include the distribution of height or shoe size.īut in investing, another distribution of outcomes comes into play. The further away you move from the number seven, the less likely the outcome is. If we use the example of the roll of two dice, the distribution is centered around the number seven. The first secret is about statistics and probability.Ī normal distribution of outcomes, also known as the Gaussian distribution or the bell curve, shows that extreme scenarios (also called outliers) tend to happen less. I hope you’ll take the time to share your own learnings with me in the comment section. Some might appear semi-controversial because they challenge the way many people think. So today, I want to cover ten essential investing secrets I have gathered over the years. I call them secrets because they remain elusive to most investors, as illustrated by the chart above. The way we invest at any given time results from epiphanies accumulated over the years. I like to look at the sum of our learning experiences as a collection of investing “secrets” that require time and effort. As illustrated below by the data from Richard Bernstein Advisors, the average investor can barely keep up with inflation.Ģ0-year annualized returns by asset class (Richard Bernstein Advisors) Others may already live off their investment portfolio and feel enlightened.Ĭollectively, we are terrible at investing. Some of us are still dabbling with a brand new brokerage account. We are all our own heroes, each of us at different stages of our journey. As a result, we tend to poorly assess our level of competence, also known as the Dunning-Kruger Effect. The main challenge? There is no way to really know what we have yet to learn. The investing journey requires us to experiment, learn painful (costly) lessons, and ultimately change for the better (hopefully). I often describe investing as a “journey” requiring its fair share of trials and failures. You can find this pattern in novels, movies, and TV shows, from Homer’s Odyssey to George Lucas’ Star Wars. In 1871, anthropologist Sir Edward Tylor observed a common pattern in literature and mythology.
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