Editor’s Note: Today, we have another insight from Mason Sexton. For nearly forty years, Mason has been deploying a unique brand of analysis to predict some of the biggest market events in history, including the crash of 1987.
And in that time, Mason has learned there is a big difference between how retail investors and the “big money” see their returns. His suggestion? Wait for the slow pitch.
And if you enjoy Mason’s work, we encourage you to hear from him this Tuesday at 10 a.m. ET. On that date, Mason will reveal his next market “prophecy.” Mason believes an “extinction-level event” is set to hit markets in the weeks ahead. Many investors will be wiped out. But for those that prepare, it could be the opportunity of a lifetime. Reserve your seat with one click right here.
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 that 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 Rain Forest, it is estimated 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. What we will find is that approximately 80% of our returns will be generated by 20% of our holdings. And it is this seemingly simple observation that has created some of the greatest fortunes in history.
My name is Mason Sexton. And since 1984, I have made a career publishing research for my institutional clients. I won’t name names, but I can say that two of my clients were two of 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, we will find that the great majority of their success was generated from a very small minority of their trades.
Warren Buffett – for instance – is famous for a concentrated portfolio. As of February, of this year, just five stocks have made up 75% of Berkshire’s portfolio.
George Soros is reported to have 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 being discussed on CNBC.
But if our goal is to see great returns with our investments – and it should be – there is a much easier method.
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 we were astonished by the results. 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. And it was a year when many investors saw the majority of their portfolio 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. I believe 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.
I believe we are entering a “new paradigm” that many investors are woefully unprepared for. Sometimes I get emotional thinking about the pain that lies ahead for most people.
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