The 80/20 Principle: The Secret to Achieving More with Less

by Richard Koch

Money is easy to multiply

You can end up with an expensive lifestyle that controls you rather than vice versa. You might get much better value and happiness out of a simpler and cheaper lifestyle.

WHAT ABOUT ACHIEVEMENT?

There are people who want to achieve—and then there are sane people.

But if, like me, you feel guilty and insecure without achievement and want to increase it, the 80/20 Principle can help with your affliction.

Looking forward, what could you achieve that would make you proud, that no one else could do with the same ease? If there were 100 people around you trying to do something, what could you do in 20 percent of the time that it would take 80 of them to finish? Where would you be in the top 20? Even more stringently, what could you do better than 80 percent but in only 20 percent of the time?

It is important to focus on what you find easy.

12 WITH A LITTLE HELP FROM OUR FRIENDS

At this stage, write down the names of your Top 20 friends and loved ones, those with whom you have the most important relationships, ranked from most important to least important to you.

Next, allocate a total of 100 points between the relationships in terms of their importance to you. For example, if the first person on the list is exactly as important as the next 19 down the list combined, allocate 50 points to him or her.

Take the total amount of time spent with the 20 people as 100 units and then allocate these. Typically, you will find that you spend much less than 80 percent of the time with the few people who comprise 80 percent of “relationship value” to you.

Anthropologists stress that the number of exhilarating and important personal relationships that people can establish is limited.

Apparently, the common pattern of people in any society is to have two important childhood friends, two significant adult friends, and two doctors. Typically, there are two powerful sexual partners who eclipse the others. Most commonly, you fall in love only once, and there is one member of your family whom you love above all others. The number of significant personal relationships is remarkably similar for everyone, regardless of their location, sophistication, or culture.

PROFESSIONAL RELATIONSHIPS AND ALLIANCES

You badly need allies.

Nothing is more important than your choice of alliances and how you build them. Without them you are nothing. With them, you can transform your life, often the lives of those around you, and occasionally, in small or large ways, the course of history.

ACHIEVEMENT ALLIANCES

If you are well into your career, make a list of the people who have helped you the most to date. Rank them from top to bottom and then assign 100 points between the top 10.

The best relationships are built on five attributes: mutual enjoyment of each other’s company, respect, shared experience, reciprocity, and trust.

Reciprocity requires that the relationship is not one sided.

The important thing is that you do whatever you possibly can, consistent with high ethical standards, to help the other person. This requires time and thought! You should not wait until they ask a favor.

IF YOU ARE IN THE EARLY STAGES OF YOUR CAREER, FILL YOUR ALLY SLOTS CAREFULLY

A good rule of thumb is that you should develop up to six or seven absolutely gilt-edged business alliances, composed as follows: • one or two relationships with mentors, people more senior than you • two or three relationships with peers • one or two relationships where you are the mentor.

For both personal and professional relationships, fewer and deeper is better than more and less deep.

13 INTELLIGENT AND LAZY

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

10 golden rules for career success 1 Specialize in 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 percent of effort gives 80 percent 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

You may have no hope of becoming Albert Einstein or even Bill Gates, but there are literally hundreds of thousands, if not millions, of niches where you can choose to specialize. You could even, like Gates, invent your own niche. Find your niche. It may take you a long time, but it is the only way you will gain access to exceptional returns.

Write down all the things about which you are enthusiastic. Then work out which of these could be made into a career niche. Then choose the one about which you are most enthusiastic.

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

There is only one you, but there are a very large number of people whom you could potentially employ.

Capital leverage is using money to capture additional surplus value. At its most basic, it means buying machines to replace labor whenever the machines are more cost effective.

Obtain the four forms of labor leverage. First, leverage your own time. Second, capture 100 percent of its value by becoming self-employed. Third, employ as many net value creators as possible. Fourth, contract out everything that you and your colleagues are not several times better at doing.

14 MONEY, MONEY, MONEY

A key to successful personal investing is to match your personality and skills to one of a number of proven techniques.

Koch’s 10 commandments of investment 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 Cull your loss makers 10 Run your gains

Do not buy when everyone else is and when everyone is convinced that the stock market can only go up. Instead, buy when everyone else is pessimistic.

Use the price/earnings ratio (P/E) as the best single benchmark for deciding whether shares are expensive or cheap. The P/E of a share is its price divided by its after-tax earnings. For example, if a share is 250 cents and its earnings per share are 25 cents, the share is on a P/E of 10. If the share price goes up, in a period of optimism, to 500 cents, but the earnings per share are still 25 cents, the P/E is now 20.

In general, a P/E of over 17 for the stock market as a whole is a danger signal. Do not invest heavily when the market is this high. A P/E of under 12 is a buy signal; one of under 10 a definite buy signal. Your stockbroker or a good financial newspaper should tell you what the current market averag...

Index tracking, also called market tracking, means buying the shares that are in the stock market index. You then only sell shares when they drop out of the index (this happens to underperforming shares), and you only buy new shares when they are first included in the index.

Cull your loss makers

If any share falls by 15 percent (of the price you paid), sell it. Follow this rule rigorously and consistently.

Apply the same 15 percent rule to the new investment: stop the loss after 15 percent.

Run your gains

The best long-term indicator of a great investment is a short-term gain, repeated over and over again! Resist the temptation to take profits too early. This is where many private investors make their worst mistakes: they take nice profits, but forfeit much fatter ones. Nobody ever went broke by taking a profit, but many people never got rich by following the same procedure!

Again, one good rule of thumb is not to sell unless the price falls by 15 percent from its recent high price.

15 THE SEVEN HABITS OF HAPPINESS

In what circumstances are you at your most positive and most negative? Where are you? Who are you with? What are you doing? What is the weather like? Everyone has a wide range of emotional intelligence, depending on the circumstances.

Make the choice that you want to be happy. You owe it to yourself and you owe it to other people too. Unless you are happy, you will make your partner and anyone else with prolonged exposure to you less happy. Therefore you have a positive duty to be happy.