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Eighty-20

The Pareto principle: 20% of causes lead to 80% of the consequences. Italian economist Vilfredo Pareto observed that 80% of land in Italy was owned by just 20% of the population. It was then noted how often this relationship existed in the wider world.

The Pareto principle: 20% of causes lead to 80% of the consequences. Italian economist Vilfredo Pareto observed that 80% of land in Italy was owned by just 20% of the population. It was then noted how often this relationship existed in the wider world.

As far back as 2002, Microsoft noted that fixing 20% of computer bugs solves 80% of the errors a program faces. Taking that further, 1% of bugs cause 50% of issues. It may seem obvious that a uniform distribution of inputs to outcomes doesn’t exist but what is fascinating is how closely the relationship tends to 80/20.

In baseball, 85% of team wins were caused by 15% of players. 20% of criminals commit 80% of the crimes. 20% of patients take up 80% of the health costs.

The takeaway for investing is understanding the impact just a few positions can have on your portfolio. Just a few positions can be responsible for the majority of your gains or losses. I am sure you can attest to this anecdotally.


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