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These types of returns and their distribution are surprisingly seen across every industry, no matter the scale you're looking at. For example, if you had inves

These types of returns and their distribution are surprisingly seen across every industry, no matter the scale you're looking at. For example, if you had invested in all the top car companies that existed in the early 1900's, you'd have lost money on most and only gained money in Ford, GM, Dodge, and overall you would only make a reasonable about of money. Warren Buffett points out that this type of behavior can be seen across every revolutionary business in the past 100 years - automobiles, airlines, radio, television, computers, and now we're seeing another example of this. On a larger macro-scale, this type of return distribution can be seen in the S&P 500. Over the past 20 years (1990 - 2009), the S&P 500 returned 8.2%. However, if you had pulled your money out of the market on the 10 best single days of those 20 years, your return would drop to 4.5%. If you took out the best 30 days from the past 20 years, you'd have a 0% return! Imagine that, 30 days out of 20 years, and it would cost you all your gains. The same pattern can be seen over any time period for the S&P. The lesson in all of this is that diversification is the key to consistent returns.

blacksmythe 16y ago
>> you'd have lost money on most and only gained money in Ford, GM, Dodge, and overall you would only make a reasonable about of money. That is an argument in favor of the efficient market theory. The car companies were correctly priced, based on the market size that resulted and not knowing which car companies were going to make it. The efficient market theory certainly breaks down. For example, at the height of the dot-com bubble, many of the dot-com companies were valued as if it were likely they were going to take a very large share (if not most) of their intended market.
- anamax 16y ago
  The efficient market theory doesn't say that the market predicts winners. It says that the market reflects all known (or knowable, depending on version) information. Actually, it doesn't say exactly that either, it says that prices reflect valuation (which is affected by knowledge) and resources. Sometimes "we" don't know, or the people who do know don't have enough resources to push the rest of us to the appropriate conclusion.
anamax 16y ago
> However, if you had pulled your money out of the market on the 10 best single days of those 20 years, your return would drop to 4.5%. If you took out the best 30 days from the past 20 years, you'd have a 0% return! Imagine that, 30 days out of 20 years, and it would cost you all your gains. I suspect that the 10 and 30 worst days had comparable effect, albeit in the other direction. You can't win if you don't play, but neither that nor the dominance of "big win days" implies that you should play every day.
- bluedevil2k 16y ago
  Exactly right. You remove the 10 worst or 30 worst days, your returns would be way above the 8.2% average. The point is, no one knows ahead of time which days will be one of the 10 best, and which will one of the 10 worst. Same thing with angel investors - you don't know which startups will be home runs and which ones will be strike outs. The data suggests you should play every day.

blacksmythe 16y ago

>> you'd have lost money on most and only gained money in Ford, GM, Dodge, and overall you would only make a reasonable about of money. That is an argument in favor of the efficient market theory. The car companies were correctly priced, based on the market size that resulted and not knowing which car companies were going to make it. The efficient market theory certainly breaks down. For example, at the height of the dot-com bubble, many of the dot-com companies were valued as if it were likely they were going to take a very large share (if not most) of their intended market.

anamax 16y ago
The efficient market theory doesn't say that the market predicts winners. It says that the market reflects all known (or knowable, depending on version) information. Actually, it doesn't say exactly that either, it says that prices reflect valuation (which is affected by knowledge) and resources. Sometimes "we" don't know, or the people who do know don't have enough resources to push the rest of us to the appropriate conclusion.

anamax 16y ago

> However, if you had pulled your money out of the market on the 10 best single days of those 20 years, your return would drop to 4.5%. If you took out the best 30 days from the past 20 years, you'd have a 0% return! Imagine that, 30 days out of 20 years, and it would cost you all your gains. I suspect that the 10 and 30 worst days had comparable effect, albeit in the other direction. You can't win if you don't play, but neither that nor the dominance of "big win days" implies that you should play every day.

bluedevil2k 16y ago
Exactly right. You remove the 10 worst or 30 worst days, your returns would be way above the 8.2% average. The point is, no one knows ahead of time which days will be one of the 10 best, and which will one of the 10 worst. Same thing with angel investors - you don't know which startups will be home runs and which ones will be strike outs. The data suggests you should play every day.