Law of Large Numbers

If a coin is flipped and the result (head or tails) is recorded, the larger the number of samples, the closer the ratio between heads and tails will be to 1:1.  In essence, this is the law of large numbers in statistics– with more samples, the tendency of the average to be near the mean is higher.

In the financial world, the law of large number states that the larger the amount of capital an investor or company has, the harder it is to gain a large return or grow rapidly.  Of course this does not apply to most individual investors. The law of large numbers starts to hit in when an investor has hundreds of millions or billions of dollars to invest.

Buffett used to say that he could gain 50% annual returns if his capital base was smaller, but as his holding company Berkshire Hathaway’s net assets continue to grow, his returns have become more medicore over the years, despite a stellar track record of growth leading to his being nicknamed the “Oracle of Omaha.”

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