The Law Of The Vital Few

In yesterday’s home page post: “Change of Character“, I did a small study on the action of various sectors during the tech debacle, beginning March 6, 2014. Eight (8) sectors moved counter to the debacle in tech and the Nasdaq.  Utilities and Telecommunications have a good deal of higher dividend yielding stocks therefore moving counter to the techs is normal. Risk off so to speak.

The eight up represents about 25% of the 31 sectors. Removing the two obvious ones above six counter trend sectors represents 19.8% of the sectors. Why do I bring this up? There is an old rule in life called the 80/20 rule or the Pareto principle the law of the vital few, and the principle of factor sparsity. Named after Italian economist Vilfredo Pareto, who observed in 1906 that 80% of the land in Italy was owned by 20% of the population; Pareto developed the principle by observing that 20% of the pea pods in his garden contained 80% of the peas.

The distribution is claimed to appear in several different aspects relevant to entrepreneurs and business managers. For example:

  • 80% of a company’s profits come from 20% of its customers
  • 80% of a company’s complaints come from 20% of its customers
  • 80% of a company’s profits come from 20% of the time its staff spend
  • 80% of a company’s sales come from 20% of its products
  • 80% of a company’s sales are made by 20% of its sales staff.

I’ll add one more: 80% of stocks follow the major averages but 20% do not. And 99% of people follow the major averages, then make their stock decisions based on that analysis. I could probably tell many personal stories about becoming very bearish on “the market” and selling my stocks. Being right on my market call, only to watch those stocks steady and move higher during the decline or even worse sometimes they would not move at all and I would not buy them back looking for something better. Then I look back and go OMG!  Your exit strategy should be based upon your holdings, not the S&P or Nasdaq. Not unlike my asset allocation study. The outs based on the asset class not some major US market average.

Therefore, many businesses have an easy access to dramatic improvements in profitability by focusing on the most effective areas and eliminating, ignoring, automating, delegating or retraining the rest, as appropriate.

The question becomes; Will the Energy, Tobacco, and Utilities lead the next leg. We’ll take a look later on this week and next.

Talking Points and How Tech, Social Media Is Changing Crime-Solving:

That’s right, the women are smarter (Robert Seawright)

Yahoo! Posts Modest Profits, Promises More Buybacks (24/7 Wall St)

The plot to kill the password (The Verge)

Investors Trying to Beat the System Invariably Are Disappointed (Sketch Guy)

TurboTax Maker Linked to ‘Grassroots’ Campaign Against Free, Simple Tax Filing (Talking Points Memo)

How Much Trading Should There Be? (Bloomberg)

A case of “risk exhaustion”? (Humble Student)

How to Override Your Default Reactions in Tough Moments (HBR)

On Tax Day, Who Wants the Rich to Pay More? (MarketWatch)

Big Wealth makes a comeback in the U.S. (MSNBC)

Are You Diversified Enough? It’s Doubtful (Servo)

Buy high and sell low, and repeat the process multiple times (Marketwatch)

Economy In Pictures (STA)

In Many Cities, Rent Is Rising Out of Reach of Middle Class (NY Times)

You Pay Higher Taxes Than Boeing (and GE, Verizon & 23 More U.S. Corporations) (Daily Beast)

Why You Should Never Read the Comments (Priceonomics)

How Tech, Social Media Is Changing Crime-Solving

have a great day!