Pareto's Law, Miller & Moore

Otherwise known as the 80/20 rule, Pareto's Law states that 80% of outputs comes from 20% of the inputs. For example, you are developing an investment portfolio of early stage companies. Given an appropriate filtering process you back five companies. Pareto's Law states only one in five will probably really fly. But which one? The managers among you want to eliminate the 80% and concentrate on the 20%, but which 80%? Pick the wrong 20% and you will be out of the money. So is it better to simply try to screen investments better and buy into Pareto's Law?

Bill Miller, an investment manager state side, has beaten the S&P 500 for the past 13 years. He has a stock screening system that flags up investment opportunities. He's bought into Pareto's Law and four out of five of his investments end up bombing, but the one in five that succeed pay him back in spades. He is a successful investor, but readily admits he has no idea which of the investments that get through his screen will be 'the one'.

Law's Moore is associated with the microchip speeds, but more generically says that in a competitive situation, the imperative to improve is constant. So maybe we should be seeking to improve our screening process (which is what Connect Yorkshire tries to do). Pareto's Law is omnipresent and we have to embrace it, but we can all raise our game as much as we can to load the dice in favour of being in the successful 20%