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.