The Bell Curve

The bell curve is a common type of distribution for a variable, also known as the normal distribution.

The normal distribution is a continuous probability distribution that is symmetrical on both sides of the mean, so the right side of the centre is a mirror image of the left side.

The area under the normal distribution curve represents probability and the total area under the curve sums to one.

Most of the continuous data values in a normal distribution tend to cluster around the mean, and the further a value is from the mean, the less likely it is to occur. The tails are asymptotic, which means that they approach but never quite meet the horizon (i.e. x-axis).

In investing, especially in the stock market, we try to beat the “market”. The market is the average or the overall turn by the whole stock.

So investors, retail and institutional investors alike, boast of pursuing the alpha through different means. The alpha means the edge used in active trading to beat the market.

Now, from the normal distribution, it can be deduced that most investors don’t beat the market. They hover around the mean - the market. 

For retail investors, the mean is usually the less risky option. Investing in ETF’s that track the S&P is a way to protect one’s wealth from unnecessary risks.

This form of the normal distribution can be seen in the Power law (Pareto Law). A small 20% brings in 80%  of the returns.

20% of the market participants generate 80% of the returns. Everybody else gets a slice from the 20% left.

An example of this is the S&P 500

The top 5 stocks by contribution to the movement of the S&P 500 are responsible for more than a third of that movement. The top 25 stocks contributed more than half, and the top 50 stocks contributed more than two-thirds.

These stocks, not in any order, are:

• Microsoft Corp. (MSF)

• Apple Inc. (AAPL)

• Alphabet Inc. (GOOG), which owns Google

• Amazon.com Inc. (AMZN)

• Tesla Inc. (TSLA)

Most activities in life tend to follow the same principle. A few things move the needle. Most things are peripherals. Identify things that move the needle and do them, ignore the peripherals if possible.