In the late 1800s, economist and avid gardener Vilfredo Pareto established that 80% of the land in Italy was owned by 20% of the population. While gardening he later observed that 20% of the peapods in his garden yielded 80% of the peas that were harvested. And thus was born a theory that has stood the test of time and scrutiny. The Pareto Principle or the 80:20 Rule has proven its validity in a number of other areas such as time management, selling financial planning services, recruitment firms, it has even been suggested as a mechanism for;
A computational model for the distribution of wealth among the members of an ideal society. It is determined that a realistic distribution of wealth depends upon two mechanisms: an asymmetric flux of wealth in trading transactions that advantages the poorer of the two traders and a non-stationary creation and destruction of individual wealth. The former mechanism redistributes wealth by reducing the gap between the rich and poor, leading to the emergence of a middle class. The latter mechanism, together with the former one, generates a distribution of wealth having a power-law tail that is compatible with Pareto’s law.
I’ve spent a good part of the last week restructuring my share portfolio. I’ve concluded from 15 years of trading that Pareto’s Law works as well with investing as it seems to do with many of the most important things in life.
Indeed, while searching for references I came upon this piece that made me even more concerned.
Once the addiction to counterfeit money becomes widespread in a free market economy, the only permanent escape from the boom-bust cycle is going cold turkey: a recession that is overcome, not by another round of monetary debasement, but by a permanent readjustment of prices downward and new era of entrepreneurship based on a stable-money environment.
This solution is unacceptable to everyone except Austrian School economists and their disciples. The universal worship of the State today is manifested by the universal acceptance of the fraud of government-authorized counterfeit money: fractional reserve commercial banking and its guarantor, the central bank.
As a consequence I’ve divided my stock market investments into 80% that are given over to professional investment managers (the like of Chris Cuffe) and 20% that I invest directly in highly speculative shares that seldom, if ever, make it into the media. The last couple of months have been good – starting in March with a brief hiatus in May when I went to Queensland – by spending a couple of hours a day buying and selling ‘penny dreadfuls’, I’ve increased my spec portfolio quite handsomly.
But when I read,
Day traders at heart of action
One patient’s progress sends Ventracor shares through the roof. Richard Webb reports. Shares in artificial heart pump maker Ventracor rocketed last week after news that the first patient to be fitted with one of its heart-assist devices had been discharged from hospital.While this news was clearly the trigger for the huge share gain, sharemarket watchers also reported another phenomenon at work – huge levels of online trading in Ventracor shares, particularly on Thursday and Friday. This showed that day traders were back in the Australian sharemarket and working stocks following the sharemarket rally this year.
Last week’s share gains for Ventracor were remarkable. The stock soared early on Friday to a high of $3.81, valuing the company at $620 million – not bad for a business that a fortnight earlier reported sales worth $6 million for the year to June 30, a net loss of $9.4 million for the year, and had net tangible assets worth only 8 cents a share at balance date.
I know it’s time to get out.
It appears that the boys have short memories;
Day traders run for cover as share trading slumps
The World Today – Tuesday, May 30, 2000
COMPERE:What is happening in Australian investment circles? It’s a long way from those heady days of just a few weeks ago when money was rolling into every dot com in sight on the Australian share market, and day-traders were hard at it. Today the share market is certainly back to earth.According to the Australian Stock Exchange the volume of shares traded on the market has nearly halved and the value of shares traded has sunk by more than 40 per cent since March. So just where is the money going? Finance correspondent Narelle Hooper reports it seems the smart money is either sitting on the sidelines or heading for safer havens.
I bought Micromedical Industries (since changed their name to Ventracor) in 2000 at about 26 cents and sold the last of them during 2002 at 89 cents. I figure a threefold increase should be enough for anybody, and when I see them selling for $3.80 with a NTA of less than 10 cents and based on a $9.4 million loss, I KNOW it’s time to sit on the side, because some one is going to get hurt, big time!
It appears the fault lies at the feet of the guys that haunt the chat rooms sucking up the rumour and bullshit then trading on credit extended by the online brokers.
They’re back: day traders lift volumes
13 August 2003
Day traders are back with a vengeance, illustrated by the increased traffic at online trading sites. It has fuelled a significant rise in both volume and price for a number of resources and technology stocks. Their activity has contributed to a 22 per cent jump in the daily number of transactions on the Australian Stock Exchange in 2003.
There are only about 3,000 traders who make more than 45 trades in a quarter, ACNielsen.consult says, but that number has a hugely disproportionate impact in terms of trading volume. The average number of daily transactions on the ASX has increased from 50,000 at the start of 2003 to 61,000 in August 2003, according to the ASX. This is, however, well under the totals during March 2000 when the high-tech boom was in full sway and the ASX processed 85,000 trades a day.
One day trader says a new pattern has emerged in the past six months based on “trading conglomerates” of up to a dozen young day traders. They come together to collaborate resources and make investment decisions.
Will somebody tell me when the day traders are all broke and I can get back to enjoying my hobby again ?
Can Pareto’s law be applied to blog commentator’s Wayne?
Interesting Wayne that much of the recent gains in the Australian stock market are in the (usually speculative) resources sector. Have a look at the recent graph of the S&P/ASX Materials index (heavy on resource stocks) on the Comsec site. If you’ve invested in industrial/imputation type managed share funds you’ll find they’ve been underperforming of late versus the All Ords.
Time to get out of Resources!
Yes Chris, 80% of the bullshit is generated by 20% of the bloggers – this does not refer to TA of course, the most widely read oz blog by politicians and journalists ! (this week anyway).
does it apply to rugby,
80% of the effort comes from 20% of the players?
If so selecting that 20% becomes pretty important!!
Unfortunately Homer, I think it also applies to selectors.