Saturday, December 26, 2009
The book I read this week was The 80/20 Principle by Richard Koch. What a wonderful book on results-based living. The 80/20 Principle is about inputs and outputs, an imbalance in the world. 80% of the results, outputs, or rewards come from 20% of activity, inputs, or effort. For instance, 80% of accidents on the road are caused by 20% of the drivers, 80% of wealth is held by 20% of people, and 20% of the work you do results in 80% rewards. This principle is used in business... many know it as the Pareto Law... The law of the trivial many and the vital few. The most important take-away is that there is an imbalance in the world... Things are not 50/50. I will help you apply this principle in 3 areas of your life: Business, Investing, and Happiness.
Many consultants will use this principle when working with a firm and it results in enormous lasting effects. Koch was a consultant for Boston Consulting Group early in his career and I am sure he used his 80/20 principles many times in the course of business. How does it effect business? Many ways, but my favorite is that 80% of sales come from 20% of a company's products or clients. This also means that 80% of a company's products or clients only result in a small 20% of sales. So... Focus on the 20% of your products that give you 80%... If you are working with clients, build those relationships up and build on them. Big time clients have relationships with other business' and people like them, so exploit this information and build your sales portfolio with similar clients. If you are in retail, find the 20% of your products that result in 80% of sales and make them more visible. Put them in front of the customer. Too often do I find myself in a store and see a "hot" item tucked away in the back. Why? Most likely a mistake. Use this information to your advantage. Talk to the managers and make your business better. This will surely get you noticed and put you on the fast track to success.
There are many applications within the business world to utilize the 80/20 Principle... just think about your inputs and outputs or effort and results and think about how you can implement a more successful way of doing things. Generally, it comes from simplifying an existing idea. Great examples of this come from Wal-mart, IKEA,and Gas Stations. They have taken an employee out of an operation and it has resulted in increased sales and a simpler operation. In what context? Wal-mart has made it so customers can check themselves out, IKEA lets people build their own furniture, and Gas Stations everywhere let people pump there own gas. This allows the respective business' to take the cost of an employee, the person that once did those services, out of their prices and gives them a huge competitive advantage. In what area could your business trim a service down to save some money? Be different and think simple... it works!
It should be clear to most people that there is an imbalance on Wall Street. Some investments go up while others go down and in dramatic ways. This is why many people encourage having balanced portfolios (like me), however, Koch disagrees with this logic with good reason. Because there is an imbalance you are much more likely to make huge returns if you are heavily invested in one investment, about 80% invested. My thoughts on this is that when you throw all your eggs in one investment you do have a chance at great rewards, but you are heavily increasing your risk. Koch's investment strategy could work for you if you have a lot of knowledge and information of the investment you are putting yourself into. For example, you could invest in the company you work for because you know about the operations and you know whether it is getting better or worse. I encourage everyone to find the investment strategy that fits their personality best and if this one is for you, go for it!
I am a huge advocate of always striving to increase levels of happiness in life. This book declares that 80% of our happiness comes from 20% of what we do. So we should simply analyze what falls within this 20% and do more of it and less of the 80% that only slightly increases our happiness levels. So if going on vacation with your family is in your 20% than arrange your life to do it more. And on the other side, if you have things in your life that you feel are pointless and result in low levels of happiness or unhappiness, then do them less or stop them all together. If its a social event or a meeting and you feel its pointless, you probably won't be missed if you stop attending and if its a chore, assign it to someone else. If this means getting a housekeeper, then do it. Happiness should take a very high priority in your life.
I also want to mention that the 80/20 Principle is not linear. Meaning that it does not have to add up to 100. 80% of a company's profits could be from 5% of products and on the same note 95% of your happiness could be a result of 30% of your activities. The idea behind the book is that there is an imbalance. Once you understand this concept you can start looking for it and use the information to become more efficient in every aspect of your life.
So there you have it. Applications for the 80/20 Principle. I have been asked by many people how I do everything I do: Read a book a week and write this, work on my career, analyze new investments and have a life. Well I guess I use some of the ideas outlined in this book and I didn't even know it. Additionally, I don't see anything I do in my life as "work": I love reading, I love writing this blog and teaching others how to be better, I love my career and the work I do, and I love learning about new investments and using that information to build my wealth. When I don't like doing something I find a way to do it differently so it's enjoyable or I ask someone else to take care of it for me. If you enjoy doing something there is a high probability that you are good at it. If you aren't good at something then giving that task to someone who is good at it, and following the same logic, that person will most likely enjoy it, this means it is the right decision. In fact, if you work on being smart about your delegation of tasks, you simultaneously turn yourself into a better leader.
There is a lot of great information in this book and I think anyone that reads it will improve their life greatly. I recommend it to everyone. If you have any questions on the book don't hesitate to ask. I would be more than happy to help anyone that wants it.
Thursday, December 17, 2009
The book I read this week was The Smartest Investment Book You'll Ever Read by Daniel R. Solin. I loved it. Fantastic ideas that follow my personal investing philosophies.
Solin's book has four sections although I feel like there were really two main ideas. One, that index funds are a more solid investment strategy than stocks or mutual funds because you cannot, nor any "professionals," beat the market. And Two, how to invest in the index funds (the fun part.) Solin provides solid research that shows results of many studys. All evidence points towards using index funds. "Financial Experts" and Wall Street have spent lots and lots of money on marketing themselves. They pitch themselves as having a financial expertise that helps them predict the market. This is false. Marketing dollars have also gone into telling the public that mutual funds will provide a great return because of the diversity and that they are being maintained by a "financial expert" that can beat the market with their expertise. This is also false.
The Truth: You can make just as much or more money than any "financial expert" and you can do this by avoiding mutual funds and investing in index funds.
There are just a couple differences between index funds and mutual funds, but the differences make a huge difference. A mutual fund is managed by a person, this person is supposed to be able to predict what stocks and bonds will rise and fall, so they buy and sell to appropriately position the fund to make high returns... you pay a premium expense to have this "luxury." An index fund is managed by a computer and the computer buys and sells stocks to position the fund in line with the right ratio of the market. This means the index fund will always earn the market average. Now for the great news and another difference.... Mutual funds earn less than the market average 95% of the time. So you have a 5% chance to have a mutual fund that does better than a index fund. Additionally, many mutual funds have an expense ratio of about 1.4% whereas an index fund has an average expense ratio of .3%. So if that mutual fund does beat the market by a whole percent, which is very unlikely to begin with (5%), you would make more money if you had invested in the index fund. Why would you pay a premium to lose money? Great question... You shouldn't.
The book also analyzes the differences between the Smart Investor and the Hyperactive Investor. The Hyperactive investor is the "financial expert"- They spend all day every day trying to beat the market. This is very unlikely, very few individuals have been able to beat the market for an extended period of time. One of these people is Warren Buffet and it is unlikely that he is your financial adviser. The Smart Investor understands that you can not beat the market and also understands that in the long-term, the market makes great returns (9-12%). So this Smart Investor puts his money into index fund which pay the market average. Being a Hyperactive Investor is a great way to spend a lot of time getting no where... I am not a fan.
Can you do it yourself? Yes!
I am confident saying that anyone investing less than one million dollars can do so themselves, with very little oversight (checking in every 6 months or so). Now onto the what, how, and where... I am going to spell it out for you so read carefully. There is a rule of thumb for the ratio someone should use when they are going to be investing. Take your age and subtract it from 100 and that is what you invest in stocks vs. bonds. So if you are 30 years old you will invest 70% in stocks and 30% in bonds. I will use a 30 year old for the example below and we will use what Solin considers the Medium to High risk investor.
Here is your how-to... Write it down if you have to...
First go to either Fidelity or Vanguard and create an account (www.Fidelity.com or www.Vanguard.com) Both companies handle taxable or tax-favored accounts (IRAs and Roths) and both offer funds that have as low as a $3,000 minimum investment. Once you have your account use your ratio and purchase accordingly into these funds
30 year old =
52% FSTMX <---(This is the fund that you will purchase)- This is a domestic stock fund
18% FSIIX- This is a international stock fund
30% FBIDX- This is a bond fund
52% VTSMX- This is a domestic stock fund
18% VGTSX- This is a international stock fund
30% VBMFX- This is a bond fund
The book also goes into investing in ETFs (Exchange Trade Funds) but I don't like ETFs. People invest in these if they want to own a portion in a commodity. If you are going to buy into a commodity, buy into gold and silver, hedging inflation, and don't buy the ETF. Buy the real thing off www.apmex.com.
Well I just gave you a very powerful road map to great fortunes... I highly recommend this book. It's a very easy read and has great advice.
Saturday, December 12, 2009
The book I read this week was Ten Powerful Phrases for Positive People by Rich DeVos. Interesting book, written by the cofounder of Amway and Chairman for Orlando Magic. DeVos has ten simple chapters named by the phrase and then in each chapter he writes about the usage and importance. Although I think DeVos does a great job using examples from his own life, I think it may be slightly boring if I repeat these stories, especially if you intend to pick up this book. Instead, I will give you the phrases and I will give my explanation of importance. Let's get to it!
"I'm wrong"- It's important as a leader to be able to confess when you have done something wrong. If you don't know how to admit when you are wrong you come off as arrogant, and as a result, your team trusts and respects you less. If you admit when you are wrong, you come off as human, and have a great potential to build rapport.
"I'm sorry"- Again, no one is infallible. Once you admit you are wrong, it's alright to tell someone you are sorry. This is usually best served if, in the moment of your arrogance, you argued with somebody. If the two phrases are used effectively, they can stop a storm of a fight and hurt feelings. If you treated someone unfairly or did something "wrong" then it's okay to apologize. I promise you won't come off appearing weak.
"You can do it" and "I believe in you"- Encouragement... everyone wants it. It's a large reason that many people work as hard as they do. Someone encouraged them and they felt so excited that someone cared. It feels really good to have the support of those around you when you are going to pursue a difficult task. Many times when I lose faith in myself to do something BIG, my friends and family are there to give me a few words of encouragement and I gain the momentum to get whatever task done.
"I'm proud of you"- After somebody has done something BIG it's nice to give them this phrase. It's another reason people do great things. It starts when we are little, we get all A's and our parents say "I'm proud of you" and give you a big hug. Attention is very important and everyone craves it. After that child was given that attention they crave that feeling again so they shoot for all A's again. As a leader, it's important to manage people's behaviors by acknowledging that they did something great. If you do it right, the behavior will become a routine and you will have effectively led that person to greatness.
"Thank you"- I think this is a phrase that isn't said as much as it was in past generations. Telling someone thank you is a wonderful way to build that person up, create a stronger relationship, and differentiate yourself from every other person out there. My grandma has stressed the importance of writing thank yous to people. I have been better and better about writing them and now I have the top drawer of my desk filled with thank you cards, envelopes, and stamps. Writing a thank you card is one of my favorite ways to show appreciation, however, the words can be said at anytime, not just in a card. I have made it a habit to always thank people in the service industry. Your waitress, cashier, office staff... thank them all!
"I need you"- If you need something, ask for it. In my post on Never Eat Alone, I write about the importance of asking people for favors. If you tell someone you need them for something, it brings them closer to you and builds up that relationship. Depending on the task you needed help with it might be a good idea to send them a thank you card too.
"I trust you" and "I respect you"- Some people may have the impression that you trust or respect them by the responsibilities you give them. However, they don't know for sure unless you tell them. So, just say the words, it will make them feel great, and probably even make them smile!
"I love you"- Everyone has had these three little words said to them, even if by your parents. They amaze me so much. When someone says them to you, they have so much power. Every family should be built on love, and people close to you may feel that you love them, but they don't know until you say it. Don't hold back, say it...
"I am happy for you"- This one wasn't in the book, but I feel it is especially powerful. My grandpa introduced this one to me when I was young. I can't remember who he said it to or when it was, but it stuck with me. I remember I said it to someone on the phone one day when I was with him within the last couple years. He told me after I hung up the phone how powerful those words were... little did he know, I got it from him!
So there you go... You are armed with a very powerful arsenal of phrases. I want to take this moment to explain the importance of tone. A widely repeated statistic on communication indicates that communication is 7% words, 38% body language, and 55% tone. Woah! 55%! If you are going through the checkout lane in your local grocery store and the cashier is disengaged, looking down the whole time, and monotonically says "how are you today?"... you don't even feel obligated to respond... it's because they are not communicating! Use your body language and your tone of voice to appropriately communicate your message. Make the recipient of your message feel engaged and obligated to respond to you! Communication is the most important skill to master in the business world. After you can effectively communicate, it's all downhill towards wealth and happiness.
This book was good, but I spelled out a lot of the transferable information on this post. If you are interested in DeVos' life, which is pretty fascinating, I recommend you give this book a shot. If you have any questions on the book don't hesitate to ask. I would be more than happy to help anyone that wants it.
Saturday, December 5, 2009
The book of the week was Peaks and Valleys by Spencer Johnson, M.D. Another great book by the same author of Who Moved My Cheese? and The One Minute Manager. This particular book is about making the good time last longer and learning from the bad times quicker.
Johnson likes to tell parables to make a point and so far none of these stories have disappointed me. This particular story was about a boy that lives in a valley (bad times) that looks up and sees a peak (good times) and dreams of being there. One day he takes the walk up and meets a old man. That old man gives him sage advice on how to manage his peaks and valleys. The boy uses this advice and after a couple visits changes his life dramatically.
It is important to know that everyone goes through peaks and valleys in their life. The factor that determines how long we stay in one or the other is how we use our time. For example if you are in a valley, you can use your time to analyze what got you into that valley and do the opposite to get you back towards a peak. If you are on a peak, and brag to all your friends and family about the good in your life and could potentially push them away and land yourself down in a valley again. The peaks and valleys are important in our life because they help us learn and they give us something to strive for. The book offers 5 lessons to effectively use peaks and valleys at work and in your personal life.
1. Make Reality Your Friend- Look for the truth in the situation... Find out why you are in your peak or valley. When you know what is keeping you there, you can manage behaviors to get you where you really want or keep you where you are.
2. Find and Use the Good Hidden in a Bad Time- In every bad time you should be able to learn. If you learn what you are supposed to, you won't find yourself in that same situation again. Additionally, the sooner you learn what you need to, the sooner you will be able to get out of your valley.
3. Appreciate and Manage Your Good Times Wisely- Be humble and grateful. Find out what got you to your Peak and do more of it. And while you are on top, save resources for your upcoming valleys.
4. Follow Your Sensible Vision- This is goal setting. Imagine yourself, with incredible detail, where you want to be. The exact situation... Sipping Margaritas on your 52' yaht on the coast of Florida. Imagine what the air smells like, the heat of the suns rays. If you do this regularly, you will soon be doing that. Read my blog on The Magic of Thinking Big by David Schwartz, once you see yourself doing something, your mind will make subconscious steps toward getting your there. But you must truly believe you can do it!
5. Share it With Others- Very important! Share your knowledge, use every lesson you have learned and teach others so they don't fall in to that particular valley or teach someone how to stay on a certain peak longer so they can feel great longer. Knowledge is a very valuable tool that everyone should share regularly.
Peaks and Valleys are a whole lot mental and if what we are feeling is in our mind, it is very controllable. Johnson says we all have those bad times that we say to ourselves, "in a couple months, I am going to look back on this and laugh." Well, why wait. You can look at that "bad" situation and laugh in the moment. Don't let it get you down, don't let it put you in a valley. Everyone makes mistakes, everyone has bad days. But not everyone lets those moments control them. Enjoy every day, no matter what you are doing with a humble, servant attitude.
These ideas can also get you ahead in your career too. Imagine you are interviewing candidates for a new position. In this economy, with a 10% unemployment rate in some areas, you have a lot of people that are in valleys. Would you be more likely to give the job to a person that has their head held high, that is positive, and enthusiastic about what the future is going to bring them? Or would you give the position to the person that is really feeling their valley, that complains to people around them about how they don't have this or that? Additionally, this attitude stems into our home life. If someone is optimistic and knows their valley will soon be a peak, they can show strength in front of their family and spread that optimism and happiness throughout their friends and family. The same spread can work with pessimism and anger. If you have the ability to choose your moods, why not choose to be happy?
Pick up this book, it makes a lot of sense. I had some great take aways and will continue to manage my peaks and valleys to progress through life with as many peaks as possible. If you have any questions on the book don't hesitate to ask. I would be more than happy to help anyone that wants it.