The 80/20 Principle by Richard Koch

The 80/20 Principle by Richard Koch

The 80/20 Principle is a business book first published in 1997 that quickly became a best-seller. It’s written by the self-confessed ‘lazy entrepreneur’ Richard Koch who was also one of the key early investors in Betfair.

The basic principle is that 80 per cent of our results come from 20 per cent of our actions. You will also find the principle names the Pareto Principle after the Italian engineer Vilfredo Pareto. The Pareto Principle is what is the basis of another more recent best seller “The 4-Hour Work Week.”

We tend to expect that all causes will have roughly the same significance.

p. 10

Each individual can be more effective and happier.

p. 11

What J-B Say called the work of entrepreneurs, modern financiers call arbitrage. International financial markets are very quick to correct anomalies in valuation, for example between exchange rates. But business organizations and individuals are generally very poor at this sort of entrepreneurship or arbitrage, at shifting resources from where they have weak results to where they have powerful results, or at cutting off low-value resources and buying more high-value resources. Most of the time, we do not realize the extent to which some resources, but only a small minority, are super-productive – what Joseph Juran called the ‘vital few’ – while the majority – the “trivial many” – exhibit little productivity or else actually have negative value. If we did realize the difference between the vital few and the trivial many in all aspects of our lives, and if we did something about it, we could multiply anything that we valued.

p. 12

A few things are important; most are not.

p. 17

The few things that work fantastically well should be identified, cultivated, nurtured and multiplied.

p. 20

Who you work for is more important than what you do

. . .

Are you working to make others rich or is it the reverse?

. . .

Wealth from investment can dwarf wealth from working

p. 26-28

The 80/20 Principle turns conventional wisdom upside down

▷ celebrate exceptional productivity, rather than raise average efforts

▷ look for the short cut, rather than run the full course

▷ exercise control over our lives with the least possible effort

▷ be selective, not exhaustive

▷ strive for excellence in few things, rather than good performance in many

▷ delegate or outsource as much as possible in our daily lives and be encouraged rather than penalized by tax systems to do this (use gardeners, car mechanics, decorators and other specialists to the maximum, instead of doing the work ourselves)

▷ choose our careers and employers with extraordinary care, and if possible employ others rather than being employed ourselves

only do the thing we are best at doing and enjoy most

▷ look beneath the normal texture of life to uncover ironies and oddities

▷ in every important sphere, work out where 20 per cent of efforts can lead to 80 per cent of returns

▷ calm down, work less and target a limited number of very valuable goals where the 80/20 Principle will work for us, rather then pursuing every available opportunity

▷ make the most of those few “lucky streaks” in our life where we are at our creative peak and the stars line up to guarantee success.

p. 40

the information revolution will help to destroy the profession of management itself, thus enabling much greater direct value creation by “doers” in corporations for their key customers

p. 52

The 80/20 Principle applied to business has one key theme – to generate the most money with the least expenditure of assets and effort.

p. 53

Events cannot be predicted, although predictable patterns tend to recur.

p. 58

1. Strategy
2. Quality
3. Cost reduction and service improvement
4. Marketing
5. Selling
6. Information technology
7. Decision taking and analysis
8. Inventory management
9. Project management
10. Negotiation

p. 125 Top 10 business applications of the 80/20 Principle

▷ The doctrine of the vital few and the trivial many: there are only a few things that ever produce important results.

. . .

▷ Most good events happen because of a small minority of highly productive forces

p. 126

What you need are intuition and insight: to ask the right questions rather than getting the right answers to the wrong questions.

p. 127

Finally, when something is working well, double and redouble your bets.

p. 128

First, simplify the task.

p. 132

Faced with an impossible time scale, [project members] will identify and implement the 20 percent of the requirement that delivers 80 percent of the benefit. Again, it is the inclusion of the “nice to have” features that turn potentially sound projects into looming catastrophes.

p. 132

Impatient people don’t make good negotiators.

p. 135

Success is underrated and underfêted

Success is undervalued, undercelebrated and underexploited. Often it is dismissed as a lucky streak. But luck, like accidents, doesn’t happen as often as we think. “Luck” is our word for success that we cannot fathom. Behind luck there is always a highly effective mechanism, generating surpluses regardless of our failure to notice it. Because we cannot believe our “luck”, we fail to multiply and benefit from value-creating virtuous circles.

p. 140

Change is necessary for survival. Constructive change requires insight into what is most effective and a focus on that winning way.

p. 140

The biggest wins all start small

. . .

Small causes, small products, small firms, small markets, small systems: all of these are often the start of something big. […] Fortunes are made by the very few who latch on to growth when it is still small and accelerating. Even those who are experiencing the growth rarely realize its significance or potential to make a fortune.

p. 141

▷ Expect everything – your time, your organization, your market and every person or business entity you come across – to have a quality 20 per cent: its essence, its power, its value, a small part with substantially all the goodness hidden away by the mass of mediocrity. Look for the powerful 20 per cent.

▷ Look for the invisible 20 per cent and the subterranean 20 per cent. It’s there – find it. Unexpected successes are one give-away. If a business activity succeeds beyond expectations, that is a 20 per cent activity – and it will have much further to run.

▷ Expect tomorrow’s 20 per cent to be different to today’s 20 per cent.

▷ Exploit 80/20 arbitrage. Whenever you can, move resources from 80 per cent activities to 20 per cent activities. The profit from this is enormous because it is highly leveraged arbitrage.

p. 141-142

80/20 Thinking is strategic

To be strategic is to concentrate on what is important, on those few objectives that can give us a comparative advantage, on what is important to us rather than others; and to plan and execute the resulting plan with determination and steadfastness.

p. 152

Choice can always be exercised.

p. 153

Imagine, and then create, the circumstances that will make you both happy and productive.

p. 153

A much more attractive, and at least equally attainable, combination is that of extreme ambition with confidence, relaxation and a civilized manner.

. . .

Insight comes when we are feeling relaxed and good about ourselves. Insight requires time – and time, despite conventional wisdom, is there is abundance.

p. 154

▷ Our lives are profoundly affected, for good and ill, by a few events and a few decision.

. . .

▷ Everyone can achieve something significant. The key is not effort, but finding the right thing to achieve. You are hugely more productive at some things than at others, but dilute the effectiveness of this by doing too many things where your comparative skill is nowhere near as great.

▷ There are always winners and losers – and always more of the latter. You can be a winner by choosing the right competition, the right team and the right methods to win. You are more likely to win by rigging the odds in your favour (legitimately and fairly) than by striving to improve your performance. You are more likely to win again where you have won before. You are more likely to win when you are selective about the races you enter.

. . .

▷ . . . People who achieve the most are selective as well as determined.

▷ Most people spend most of their time on activities that are of low value to themselves and others. The 80/20 thinker escapes this trap and can achieve many more of the few higher-value objectives without noticeably more effort.

▷ One of the most important decisions someone can make in life is their choice of allies. Almost nothing can be achieved without allies. Most people do not choose their allies carefully or even at all. The allies somehow arrive. This is a serious case of letting life happen to you. Most people have the wrong allies. Most also have too many and do not use them properly. 80/20 thinkers choose a few allies carefully and build the alliances carefully to achieve their specific objectives.

▷ . . . 80/20 thinkers know what generates their happiness and pursue it consciously, cheerfully and intelligently, using happiness today to build and multiply happiness tomorrow.

p. 156

▷ Most of what we do is of low value.

▷ Some small fragments of our time are much more valuable than all the rest.

▷ If we can do anything about this, we should do something radical: there is no point tinkering around the edges or making our use of time a little more efficient.

▷ If we make good use of only 20 per cent of our time, there is no shortage of it!

p. 160

▷ Our current use of time is not rational. There is therefore no point in seeking marginal improvements in how we spend out time. We need to go back to the drawing board and overturn all our assumptions about time.

▷ There is not shortage of time. In fact, we are positively awash with it. We only make good use of 20 per cent of our time. And for the most talented individuals, it is often tiny amounts of time that make all the difference. The 80/20 Principle says that if we doubled our time on the top 20 per cent of activities, we could work a two-day week and achieve 60 per cent more than now. This is light years away from the frenetic world of time management.

▷ The 80/20 Principle treats time as a friend, not an enemy. Time gone is not time lost. Time will always come round again. This is why there are seven days in a week, twelve months in a year, why the seasons recur. Insight and value are likely to come from placing ourselves in a comfortable, relaxed and collaborative position towards time. It is our use of time, and not time itself, that is the enemy.

▷ The 80/20 Principle says that we should act less. Actions drives out thought. It is because we have so much time that we squander it. The most productive time on a project is usually the last 20 per cent, simply because the work has to be completed before a deadline. Productivity on most projects could be doubled simply by halving the amount of time for their completion. This is not evidence that time is in short supply.

p. 162-163

Make the difficult mental leap of dissociating effort and reward

. . .

Hard work leads to low returns. Insight and doing what we ourselves want lead to high returns.

p. 165

Whenever I am tempted to do too much, I remember Ronald Reagan and Warren Buffett.

p. 166

Nearly everyone who has become rich has had the added bonus of becoming rich doing things they enjoy. This might be taken as yet another example of the universe’s 80/20 perversity.

. . .

Those who achieve the most have to enjoy what they do. It is only by fulfilling oneself that anything of extraordinary value can be created.

p. 166-167

The 80/20 Principle shows time and time again that the 20 per cent who achieve the most either work for themselves or behave as if they do.

p. 168

Top 10 low-value uses of time

1. Things other people want you to do
2. Things that have always been done this way
3. Things you’re not unusually good at doing
4. Things you don’t enjoy doing
5. Things that are always interrupted
6. Things few other people are interested in
7. Things that have already taken twice as long as you originally expected
8. Things where your collaborators are unreliable or low quality
9. Things that have a predictable cycle
10. Answering the telephone

Top 10 highest-value uses of time

1. Things that advance your overall purpose in life
2. Things you have always wanted to do
3. Things already in the 80/20 relationship of time to results
4. Innovative ways of doing things that promise to slash the time required and/or multiply the quality of results
5. Things other people tell you can’t be done
6. Things other people have done successfully in a different arena
7. Things that use your own creativity
8. Things that you can get other people to do for you with relatively little effort on your part
9. Anything with high-quality collaborators who have already transcended the 80/20 rule of time, who use time eccentrically and effectively
10. Thing for which it is now or never

p. 176

When thinking about any potential use of time, ask two questions:

▷ Is it unconventional?
▷ Does it promise to multiply effectiveness?

p. 177

Save and invest. That is what capitalism is all about.

p. 187

You need a few key allies

. . .

The key allies are few in number.

p. 197

Trust cements relationships.

p. 200

But mentors must be rewarded or else they will lose interest. The mentee must provide fresh ideas, mental stimulation, enthusiasm, hard work, knowledge of new technologies or some other attribute of value to the mentor. Wise mentors very often use younger allies to keep them up to date with emerging trends and potential opportunities or threats that may not be apparent from the top.

p. 201

There are only four types of officer. First, there are the lazy, stupid ones. Leave them alone, they do no harm . . . Second, there are the hard-working intelligent ones. They make excellent staff officers, ensuring that every detail is properly considered. Third, there are the hard-working, stupid ones. These people are a menace and must be fired at once. They create irrelevant work for everybody. Finally, there are the intelligent lazy ones. They are suited for the highest office.

~ General Von Manstein on the German Officer Corps

p. 204 The saying that the lazy intelligent ones are suited for the highest office reminds me of the Office Space movie with Peter’s interview with the Bobs

The key to becoming a star is to simulate, manufacture and deploy lazy intelligence.

p. 205

Winners takes all is a modern phenomenon

p. 208

1. Specialize is a very small niche; develop a core skill
2. Choose a niche that you enjoy, where you can excel and stand a chance of becoming an acknowledged leader
3. Realize that knowledge is power
4. Identify your market and your core customers and serve them best
5. Identify where 20 per cent of efforts gives 80 per cent of returns
6. Learn from the best
7. Become self-employed early in your career
8. Employ as many net value creators as possible
9. Use outside contractors for everything but your core skill
10. Exploit capital leverage

p. 211 10 Golden Rules for career success

Serving customers is key, but they must be the right customers for you, those whom with relatively little effort you can make extremely happy.

p. 216

▷ You are more likely to become wealthy, or to obtain the greatest increase in wealth, from investment income rather than from employment income.

. . .

▷ Because of the compounding effects of investment, you can become rich either by starting to invest early in life, or by living a long time, or both. Starting early is to the most controllable strategy.
▷ As early as possible, develop a consistent, long-term investment strategy, based on principles that have worked well in the past.

p. 226

1. Make your investment philosophy reflect your personality
2. Be proactive and unbalanced
3. Invest mainly in the stock market
4. Invest for the long term
5. Invest most when the market is low
6. If you can’t beat the market, track it
7. Build your investments on your expertise
8. Consider the merits of emerging markets
9. Cut your loss-makers
10. Run your gains

p. 227 Koch’s 10 commandments of investment

buy when everyone else is pessimistic

p. 231

Cut your losses, but do not cut your gains. […] Resist the temptation to take profits too early. […] Nobody ever went broke by taking a profit, but many people never got rich by following the same procedure!

p. 235

We can intelligently change our exposure to events that make us either happy or unhappy.

p. 243

Daily happiness habits

1. Exercise

2. Mental stimulation

3. Spiritual/artistic stimulation/meditation

4. Doing a good turn

5. Taking a pleasure break with a friend

6. Giving yourself a treat

7. Congratulating yourself

p. 249

Medium-term stratagems for happiness

1. Maximize your control

2. Set attainable goals

3. Be flexible

4. Have a close relationship with your partner

5. Have a few happy friends

6. Have a few close professional alliances

7. Evolve your ideal lifestyle

p. 251

If you want to be happy, choose to love a happy partner.

p. 253