In the summer of 1896, Italian economist Vilfredo Pareto noticed something odd…
Pareto was an avid gardener. And he observed that a relatively small number of his peapods were producing an outsized proportion of the crop yield.
He noticed the same thing with his fruit-bearing trees. A small percentage of the trees were producing an overwhelming majority of the harvest.
Upon closer inspection, he discovered that approximately 80% of the crop yield was being generated by only 20% of the plants.
This was the beginning of what we know today as the “Pareto Principle,” or the “80/20 rule.”
And we can find it everywhere…
Pareto found that 20% of the Italian population owned 80% of the land.
In business, 20% of salespeople tend to produce 80% of sales.
Eighty percent of charitable donations come from only 20% of those who donate.
Microsoft once reported 80% of system crashes were fixed by addressing 20% of system bugs.
In 1992, the United Nations reported that 20% of the global population owned 82.7% of the wealth.
Even in the Amazon rainforest, estimates say that 20% of the trees provide approximately 80% of the shade cover.
It was a remarkable finding, and it has shaped economic thought and business practices ever since.
And for us, as investors, it has profound implications.
Approximately 80% of our returns will be generated by 20% of our holdings. And this seemingly simple observation has created some of the greatest fortunes in history.
My name is Mason Sexton. Since 1984, I have made a career of publishing research for my institutional clients. Two of my clients were among the top 10 hedge funds last year. Another is a self-made billionaire.
And in that time, I have discovered something important. It is something that very few everyday investors understand.
For almost every “legendary” investor we can think of, a very small minority of their trades generated the great majority of their success.
Warren Buffett – for instance – is famous for a concentrated portfolio. As of February this year, just five stocks have made up 75% of Berkshire’s portfolio.
George Soros reportedly made more than $1 billion in 1992 (approximately $2.1 billion adjusted for inflation today) by “breaking the Bank of England” and shorting the pound.
To reference Buffett again, the “secret” is that you don’t have to “swing at every pitch”:
The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling, “Swing, you bum!” ignore them.
It is an astonishingly simple strategy, yet few investors follow it.
Many investors believe they must “load up” with dozens of stocks in the “hottest” sectors like tech, crypto, or whatever they hear about on CNBC.
But if our goal is to see great returns with our investments – and it should be – there is a much easier method.
Free Trading Resources
Have you checked out Larry’s free trading resources on his website? It contains a full trading glossary to help kickstart your trading career – at zero cost to you. Just click here to check it out.
Great Returns in a Terrible Year
As mentioned above, I have provided institutional research for my clients for much of my career. I specialize in spotting important trend changes, sometimes down to the day.
I asked my analysts to perform an internal review of our recommendations for 2022. And the results astonished us.
Had you simply gone long or short according to our signals, you would have realized a 38% growth of your portfolio in 2022.
Does that mean every trade was a winner? Of course not. Nobody is perfect.
But what we found is that 79% of our trades were winners. The remaining 21% were small losses (our maximum loss on a single trade last year was -4.76%).
If those figures sound familiar, they should. It’s Pareto’s Principle once again.
And keep in mind, this was during the worst year for stocks in over a decade. Many investors saw the majority of their portfolios vanish as the “everything bubble” burst.
So, how did we do it?
I would like to show you on the morning of May 23. On that day, I’ll be hosting a special event that I hope you can attend.
You see, I believe we are not through the worst of this bearish cycle. There is more pain ahead for markets, the economy, and broader society.
And my analysis is telling me the next downturn could kick off this summer.
We are entering a “new paradigm” that many investors are woefully unprepared for.
For the full story, please join me on the morning of May 23. You can add your name to the reservation list by clicking right here.
Editor, New Paradigm Research
Another reader shared his recent win following The S&P Trader:
Hello, I did my first real option spread yesterday. I thought I had done something wrong as I got such high net credits, but I guess not! Made $972 for one contract. Very happy.
– Bruce H.
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