The 80/20 Principle, otherwise known as the Pareto Principle, was named after Vilfredo Pareto, an economist who found that 80% of the consequences came from 20% of the causes. He first found 80% of Italy’s land was owned by 20% of the population and when he looked at other countries, he found a similar distribution applied.
So what you might ask?
I asked myself the same question back in university and found it applied to my coursework. Looking at the course syllabus, I saw that 70-90% of my total mark was from 2 or 3 activities: usually mid-terms or final exams. This meant that if I wanted to get an ‘A’ in my course (at the time, 80%), then I should focus on the 2-3 activities that would get me the 80% (where I would typically spend 20% of my total time for the course) and ignore or spend less time on the numerous activities (assignments, labs, etc.) that would only get me 20% of my mark (but took up 80% of my time).
Richard took it further and applied the 80/20 principle to the many facets of life: work, marketing, success, money, happiness, and your subconscious mind. What have I learned from Richard?
Who you work for is more important than what you do. Richard used to be a management consultant, and during this time, he found that 80% of the revenues of the firm came from a few large clients. Therefore, if you’re a partner or even a consultant, you want to be working on those large clients because that is where the bulk of the revenue (and opportunities for projects) comes from.
The majority of the revenue goes to a few in your organization. When Richard was working at the firm, he found that 80% of the profits went to one man (and the one man represented less than 4% of the partnership). Note that having worked for two big four firms, this has been true in my experience as well. So he did what any intelligent person would do knowing this fact, he spun off to create a firm where he and two other partners would do less than 20% of the firm’s valuable work but get 80% or more of the profits.
Through applying the 80/20 principle to work, Richard has found:
- Celebrate exceptional productivity, rather than raise the average efforts (because the small 20% of the workforce produces 80% of the results)
- Strive for excellence in few things, rather than good performance in many (find the few things you are good at and focus more of your time and energy on those rather than trying to be a jack of all trades)
- Delegate or outsource as much of the 80% of the ‘work’ that only produces 20% of the results (and then spend more time on the 20% of the work that produces 80% of the results)
Most people go through life thinking 50-50, things in life are balanced and proportionate. But it’s not.
- Think skewness. Expect 20 percent to equal 80 percent.
- Expect everything in your life to have a quality or important 20 percent. That means that everywhere in your life, there is a 20 percent somewhere so expect to find it.
- Expect the 20% to be different from day to day. Where might there be a 1 percent that will grow into 20 percent and then be worth 80 percent?
- The 80% can be a mental block. You can think of the 80% as the obvious or the prevailing consensus. But where is the 20% you are overlooking?
- When you find the 20%, allocate all of your resources – money, time, friends, your network – to exploit it as much as you can.
- Ruthlessly prune out 80% activities that only provide you with 20% of the returns.
Use the 80/20 principle to your advantage when it comes to time. Conventional advice for time management tells you to delegate, automate, or defer activities so you can spend more time on other things. The 80/20 principle applied to time management tells you to:
- Focus on things that advance your overall purpose in life
- Innovate ways of doing things that slash the time required or multiply the quality of results
- Do things other people tell you are impossible
There are two questions Richard says can help you think about how to use your time:
- Is it unconventional?
- Does it promise to multiply effectiveness?
If the answer to both questions is a yes, it is likely a good use of time.
The 80/20 principle applied to career success means the following rules, according to Richard:
- Specialize in a very small niche; develop a core skill (since the world disproportionately rewards those in the top of their industry / field)
- Identify your market and your core customers and serve them best
- Learn from the best
- Become self-employed early in your career
- Employ as many net value creators as possible
- Use outside contractors for everything but your core skill
- Exploit capital leverage
The reason for becoming self-employed is to capture as much as of the value you can for yourself. If you work for a company or another person, any additional value you create (if you are a star employee) above and beyond what you are paid is not given to you but to the head of the organization. However, when you are just starting out, there is a period where you are learning and developing your skill. The trick then is to make sure you are ‘overpaid’ – i.e., the organization you are working for is paying for you to learn, and then when you get to the point where you are creating more value than you are being paid for, become self-employed, or switch to another role or organization where you can be overpaid to learn.
I’m always interested in how to get more money, so Richard’s 10 commandments of investment were particularly interesting for me:
- Make your investment philosophy reflect your personality
- Be proactive and unbalanced
- Invest mainly in the stock market
- Hold great stocks for the long term
- Invest most when the market is low
- If you can’t beat the market, track it
- Build your investments on your expertise
- Consider the merits of emerging markets
- Cull your loss makers
- Run your gains
Don’t let advisers or money managers manage your money. If you knew how much they charged you to manage your money AND there’s nothing to say that the adviser or money manager can help you get incredible returns (outside of a few that average folks may not have access to).
Do what Warren Buffett does, buy great companies, at a discount, and hold for a long time. Last year, when the market dipped because of COVID, that was the perfect time to put in money into stocks – when people are selling off their stocks because of losses, you are buying to get a discount (though choose wisely).
Typically, when you buy stocks of good companies, you are going to beat the market. But if you find that over a year or two years, you aren’t getting better than 7% returns, you are better off buying an index fund. Richard sets a 15% rule for his investments: if any share falls by 15% of the price you paid, sell it. But on the other hand, if a stock explodes in value, let it run – don’t take your profits too early. Nobody got broke by taking a profit, but many people never got rich because they took their profit too early.
The chapter on happiness did not appear to me to be influenced by the 80/20 principle, but I imagine many of these activities are based on Richard’s life and ones that bring him the 80% of results with only 20% of the effort:
- Mental stimulation
- Spiritual/artistic stimulation/meditation
- Doing an act of kindness
- Taking a pleasure break with a friend
- Giving yourself a treat
- Congratulating yourself
Exercise is one of the very best, in my experience, activities that gives you a ROI on the time you spend. Not only does it improve your health, but it always improves my mood after. Every day, Richard believes that you should stimulate yourself mentally (through reading, doing puzzles, etc.) and spiritually (meditation, journaling, listening to music, taking a walk outside). Doing something kind for another human being is another activity Richard found that has disproportionate rewards: the act of kindness has lasting effects for hours, even days after. Finally, at the end of the day, if you even took part in one daily happiness habit, congratulate yourself.