Pareto's Law In Investing?

Financial & Investment Dictionary: Pareto's Law

Theory that the pattern of income distribution is constant, historically and geographically, regardless of taxation or welfare policies; also called law of the trivial many and the critical few or 80-20 law. Thus, if 80% of a nation's income will benefit only 20% of the population, the only way to improve the economic lot of the poor is to increase overall output and income levels.


Other applications of the law include the idea that in most business activities a small percentage of the work force produces the major portion of output or that 20% of the customers account for 80% of the dollar volume of sales. The law is attributed to Vilfredo Pareto, an Italian-Swiss engineer and economist (1848-1923).

Pareto is also credited with the concept called Paretian optimum (or optimality) that resources are optimally distributed when an individual cannot move into a better position without putting someone else into a worse position.
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CreateWealth8888:

Pareto's principle can be true in your Portfolio Management. 20% of those stocks (multi-baggers) in your Portfolio are providing 80% of the returns. Likewise, 80% of losses are contributed by 20% of losers.



The rest are small gains and losses here and there; and don't have any serious impact to total or net returns of your Portfolio.

Take note of Pareto Principle and apply them to your Portfolio Management, let the top 20% of winners run; and prevent the top 20% of the losers from creating havoc and cut losses fast.