Do you follow the 80/20 rule?

During the past century this simple ratio has developed into one of the most useful concepts and tools of modern-day routine.

In a moment, I’ll show you how you can use a version of the 80/20 rule to help take your portfolio to a whole other level.

#-ad_banner-#First, some background…

The 80/20 rule assumes that most of the results in any situation — sales, finance and even personal relationships — are determined by a small number of events.

The notion of the “vital few” has its origins in 1906 in Italy, where economist Vilfredo Pareto observed that 80% of the wealth was controlled by 20% of the population.

Pareto reportedly developed the principle after observing similar scenarios in everyday life, including the fact that 80% of the peas in his garden came from only 20% of the pea pods.

Then came Joseph Juran, a quality management pioneer in the United States in the 1930s and ’40s. In citing the “Pareto Principle,” Juran postulated that 20% of product defects caused 80% of product problems. Before you can say “supply-chain management,” there emerged a veritable cottage industry of 80/20 maxims.

Some examples:

– 80% of sales come from 20% of the sales force
– 80% of the profits come from 20% of the customers
– 80% of growth comes from 20% of the product line
– 80% of future business comes from 20% of the current customer base
– 80% of your innovation comes from 20% of your employees

The percentages are not precise, of course, but they’re close enough merit consideration.

Why bother? Because the competitive edge goes to those who know how to use this information to their advantage.

Says author and marketing professional Bryan Eisenberg: Instead of giving the best salespeople the most difficult accounts, for instance, “let them focus their talent in areas where they could generate extraordinary volumes.”

Similarly, Eisenberg observes, “The most highly skilled workers are often given the toughest work,” but “concentrating their skills on trouble-free jobs would allow them to produce significantly more than less-skilled coworkers.”

So what does the 80/20 rule have to do with beating the market?

Plenty, according to Andy Obermueller, Chief Strategist for Game-Changing Stocks.

Andy is StreetAuthority’s resident expert in small companies with big potential.

(Note: In case you haven’t heard, Andy just put the finishing touches on his latest batch of astounding predictions. They’re big, bold, and give you a window into the future unlike anything you’ve ever seen. He’s spent hundreds of hours researching the ideas behind them — and his past predictions have returned 92%… 293%… even 310% gains — so I urge you to check them out. You can do so by clicking here.)

Twice each month in Game-Changing Stocks, Andy presents a new technology, methodology or concept that can “change the baseline assumptions for doing business in its industry,” as he likes to put it.

In Andy’s version of the 80/20 rule, there are the “20%” companies — aggressive growth stocks that can juice your overall portfolio even if the other 80% is more conservatively invested.

How does it work? I’ll let Andy tell you himself…

StreetAuthority Daily: Your regular readers are already familiar with your 80/20 rule, but can you explain it for the rest of our audience?
 

Andy: It works like this: Put 80% of your assets into something considered relatively safe. Maybe it’s U.S. Treasuries, maybe it’s S&P 500 companies. That’s a subjective judgment, based on one’s personal risk tolerance, and every investor will be different. This 80% segment of your portfolio goes on autopilot and collects a reasonable return. The remaining 20% goes into the most aggressive growth plays an investor feels comfortable with. These have the potential to deliver knockout results. All it takes is one big winner. In Game-Changing Stocks, my job is to help investors find those winners.

SA Daily: Show us the math.

Andy: OK. Presume that 80% block of assets is allocated to the S&P in a low-cost index fund. What can we expect? Well, history tells us that the average annual return of the S&P is roughly 10.5%. That works out to an 8% annual return when compounded annually. So 80% of your portfolio earns 8% a year on average.

These funds are not to be touched. The market does the heavy lifting. Some years are up, some are down. The average is 8%. And if more dollars are added to the portfolio, 80 cents out of each dollar would go to the S&P as well.

The rest goes into game-changers — the companies that can knock the cover of the ball. And while I’m proud to say I’ve found more triple-digit gainers than any other StreetAuthority analyst, we can’t count on every play returning triple digits. I should also point out that this sort of hyperrational thinking is crucial to this method of investing. So let’s say we’re able to achieve 30% a year in our aggressive growth portfolio.

Even though it accounts for only 20% of the portfolio, the higher rate of return changes the average annual gain to 12.4%. Big whoop, right? But that seemingly miniscule bump, over time, is huge.

If you have a $100,000 portfolio and just earn the 8%, after 25 years you end up with $684,848. Not bad. But if you can earn 12.4%, then your total is $1,858,480. As I said, that’s huge. And remember, 30% is distinctly doable with game-changers. Plus the majority of the portfolio is on autopilot.

SA Daily: You spend a lot of time researching companies like Google (Nasdaq: GOOG). What is your purpose and what were your findings?

Andy: I’ve been thinking about how some companies value innovation and creativity and what that can mean for the culture and the direction of the organization. A bank, for instance, can be a very good bank even if it, as a matter of course, slams the door on any new idea. Lots of companies are like this. They execute well. They do what they are supposed to do.

But that led me to thinking about companies that do what they aren’t supposed to do, and I started bumping into Google almost immediately. Why is Google putting in 1-gigabit Internet service in Kansas City? Why is it funding grad students’ strange theoretical mathematical papers? Why did it build a car that can drive itself?

The answer is, Google is doing all these things because it can. And it wants to. The corporate culture is one of innovation. Its unofficial motto is, “Yeah, let’s try that.” So they get a bunch of really smart people into a room and there’s one word written on a whiteboard: “Think.”

That’s revolutionary. That’s where ideas come from. Everyone talks about how Google does so much for its workers. Free food. Playing games. Massages. They get the works, plus a very nice salary in a nice place to live. That’s sheer genius. Spend a few bucks on lattes and back rubs and get the best minds in world thinking about your corporate priorities… Who wouldn’t do that?

Well, the unfortunate answer is very few companies do. And that’s why most companies miss out on the most powerful force in business — innovation. Innovative companies have about double the annual return of non-innovative companies. I actually proved this in an issue of Game-Changing Stocks using R&D spending data.

SA Daily: You just released your latest “predictions” report. Can you share one of them with us today?

Andy: Sure, but I have to warn you — this one’s a little scary. You see, according to a former president and CEO of the Global Health Council, “We had three pandemics in the 20th century. It’s been almost 40 years since the last one… we do know from history and from the laws of probability that a global influenza pandemic will happen.” He says that while it’s impossible to predict exactly when, “it’s likely to be in the next 10 to 20 years.”

The government knows this, too. In fact, in a rare move, the FDA recently suspended the usual rules regarding the clinical trials of new drugs and fast-tracked a bird flu vaccine. But here’s where it gets really interesting. When I asked my doctor if she had this vaccine, she said I was out of luck. “Sorry, you can’t have it,” she told me. “I mean, no one can, actually. The government’s stock-piling it.” After I did a little research, it turns out she was right.

Governments don’t stockpile millions of doses of medicine for illnesses that are “really no big deal.” And they don’t do it in secret, unless it’s far more serious of a threat than what we’ve been led to believe.

The fact is, these viruses mutate constantly. The world has gotten smaller. And people and goods move faster and can come into contact with more diseases than ever before. That’s a perfect storm in the making.

Presently, the Pharmaceutical Research and Manufacturers Association database shows some 400 drugs in various stages of clinical trials to treat infectious diseases. Of these, 226 are to treat various viruses. Another 124 are for bacterial infections like the plague, which is currently on the rise in the United States.

SA Daily: So how can investors profit from this scary scenario?

Andy: Simple. By considering mainline manufacturers with FDA-approved vaccine products that doctors know and are comfortable prescribing to their patients.

Novavax (Nasdaq: NVAX) is a $2 billion company worth looking into. Not only is this up-and-coming drug developer working on a treatment for H5N1, it is also in the early testing stage for a dozen other compounds for seasonal and pandemic influenza.

This company has quickly garnered so much mindshare among medical researchers that it was seen as a possible first responder for a treatment for the Ebola virus in 2014. Sure enough, by the time Ebola hit the headlines, Novavax was already on the case. And while the Ebola scare has simmered down since then, Novavax’s scientists are still working to come up with a viable vaccine — before Ebola rears its ugly head once again.

P.S. Remember to check out Andy’s brand new report, “The 10 Most Shocking Predictions for 2016.” In it, you’ll discover how to profit from Google’s unexpected new business venture, the secret behind Hillary Clinton’s $15 million payday (and how you can use it to your own advantage), and how a new piece of technology will allow companies to spy on you in your own home. To learn how these shocking predictions could lead to triple-digit gains for investors like you, simply follow this link.