TLDR: Short and sweet, the Power Law puts the Mag 7's historical outperformance and high overweight S&P 500 Index composition in a more technical perspective through a scientific lense.
Don't mind reading more, elaboration below. 👇
I'm not smart enough to explain the Power Law as a functional relationship in statistics or it's implications in complex systems.
But applying the principle to the markets, in a nutshell it suggest that the majority of investments will be a waste of capital.
Only a single digit percentage of stocks lead to positive portfolio returns. The others may delist, underperform the broader S&P 500 index, or simply and slowly erode to the hidden tax of inflation.
Below is a lengthy video that provides a more thorough explanation.👇
* Veritasium's YouTube video from a few months ago.
https://youtu.be/HBluLfX2F_k?si=6VlqwO6Gq7o3VmgJ
A heads up to anyone interested, the video is 45 minutes long. The portion speaking to investing starts at 37:00, but the entire video is worth watching for context.
Speaking as someone that doesn't have a science background, although the video was interesting, some parts where too technical and dry.
* 2024 J.P. Morgan Chase research on retail investors
This research doesn't speak to the Power Law. Just found it interesting in its findings on retail investors average portfolio size. I didn't read the entire paper, but did find the table on demographics interesting. Use the search function and type in "hold 7". You'll see the samples average portfolio size in $ dollars and number of stocks held.
To close, whether or not you believe there is an "element of truth" to the Power Law's relevance to the stock market, there is one reality that is hard to ignore. That is the Mag 7. Funny, just noticed a relation to the "hold 7" from J.P. Morgan Chase research paper.
"Power Law", a principle I wish I knew before I started investing.
byu/anonymousfinancial ininvesting
Posted by anonymousfinancial