The 80/20 Principle by Richard Koch

Rating & Review - 6-8/10
The core message of the book could be summarized in a blog post about the 80/20 Pareto Principle. 80% of gains come from 20% of effort and one can translate to anything from happiness, wealth, achievement, etc…

The valuable parts of the book are the examples used to reinforce the mindset. Especially when Koch refers to his own career and investments. I also found the various introspective questions he poses on building one’s daily habits, examining past experiences of achievements, goals/visions for the future all quite helpful and it’s worth taking the time to sit down and really think these through.

This made the book more of a reflective exercise rather than something one would just breeze through. I skipped all over the place reading chapters I was more interested in. I found a similar message being overplayed throughout the book and this is where it’s really a blog post played over and over again with different examples.

Although the Pareto Principle wasn’t anything new, it was still a nice book to read through and think about applying it to various aspects of life and also examining businesses. For example, we know there are many kinds of competitive advantages but even thinking about if there was an 80/20 to that list as well.

There are parts of the book where you could easily fall down the route of skepticism and I felt that way towards some examples cited and some studies that seemed to miss the meat of the argument but only referenced points to reinforce the main theme of the book.

At best it would be an 8 depending on the mood and place of the reader. Some chapters made it feel like it could be an 8 but on average it’s probably floating above a 6.


Book Notes:

80/20, Pareto Principle. Simply that 80% of the wealth was concentrated to 20% of people, 80% of results coming from 20% of activities. Tune in the mindset of nonlinearity

Organizing one’s files based on the frequency of use (80%) rather than category. Might be a way to organize apps, folders in Evernote, etc….

First mover advantage. As long as the market is young and the product is 10% better, the company will be able to compound its leading position. This doesn’t mean the first mover always wins but that it has an easier time and the next entrant will need one 10x better.

“The reasonable man adapts himself to the world. The unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.” - George Bernard Shaw.

Embracing the 80/20 may make one appear unreasonable.

80% of most books can be found in 20% of pages. Read the conclusion, introduction, and conclusion. A worthy system to test if you care for the middle.

He references his own portfolio where he had 20 public securities but 1 (Filofax) accounted for 80% of the capital. It had become 18x when he sold in 1995. It seems it may have been 7-8% of the capital as even a starting position. Reminds me of the Buffett/Mungerism of making big bets on a few bets.

For a company, 80% of profits may come from 20%…so they should figure out who they are and focus on serving them. It seems most companies all have their ‘whales’ like in mobile gaming.

In life, one may get 80% of joy from 20% of activities. Figure out what those are. However, I think some activities would benefit from innate scarceness.

Excellence in few rather than great in many. Only doing things we are the best at and enjoy most. Calm down, work less, and have targets. Outsource as much as possible. Choose careers and people to work with extremely carefully.

Simplicity means progress. That’s obtained by ruthlessly subtracting. Quite like essentialism.

Some businesses would do best to cut out 80% of the drag and only keep 20%. Making it simple and smaller.

Probably worth reading in the future is Gunter Rommel’s Simplicity Wins. It examined 39 mittlestands, German mid-sized businesses that fuel its economy, and found the best had a narrower range of products and fewer customers and fewer suppliers. The minimization of the cost from complexity probably attributed but the book doesn’t mention the details of were examined for the conclusion of “best/winning”

However, the hyper-simplization and outsourcing business model has been executed in Semco and I think if that method were followed, there is empirical evidence of a high return on capital business.

Simplify it. If can’t then eliminate. Less is more.

I imagine for the companies that scale and grow large, decentralization is the antidote to complexity.

A strategy to mine insight on possible 80/20 results is to examine past achievements and successes you are proud of. Examining those and seeing how you can replicate it. The idea is to be selective. It’s also important to create an environment that can cultivate insight. Unsurprisingly, this requires one to be relaxed and in a good mental state.

To develop 80/20 insight one cannot rush it. One cannot think they are short on time. Rather, realize time is your friend.

Find where you are a category of one. Don’t compete. We enter too many races we shouldn’t be in.

Consciously pursue happiness. Happiness not spent today doesn’t come tomorrow. Delayed gratification isn’t MECE with happiness. One can be happy while committing the act of delaying gratification funnily enough.

It’s worth reflecting on whether 80% of one’s happiness comes from 20% of time/actions and the same with results. What will happen if one spent more time on activities that generate 80% of achievements?

Assuming one achieves 80% from 20% of activities. There isn’t a shortness of time but poor use of time. If one doubled the amount of time on the 20% activity responsible for the 80% gain one may only need to work two days a week for 60% gain.

A different mentality is to not lament past time but realize it will come around again.

Koch references Buffett in his book as someone who relies on a few insights (which is true) but doesn’t seem to understand how much work was put into building these insights. I think Koch is getting on how one shouldn’t just rely on working hard but to focus on the few things that matter. That is true. However, the chapter on Buffett is misleading in regards to downplaying how much work/learning Buffett compounded to develop such insights.

You won’t create anything of enduring value unless you love creating it. Fundamentally important for any project. You can’t do anything well if you don’t enjoy it.

Just as important as it is to figure out activities that are responsible for the highest moments of achievement and happiness to replicate and focus on…it’s also valuable to figure out areas that are the lowest-value in use of time to eliminate them.

A model for deciding on an action: 1) Is it unconventional? 2) Does it promise to multiply effectiveness? / If it isn’t yes to both then may not be the best use of time.

One would do well to strive to be happy 80% of the time at work and 80% of the time outside of work. A worthy goal.

Another model to ask oneself is to review what you would enjoy more than 95% of peers and be better than 95% of peers and the achievements should fulfill these conditions. You’ve already been successful before and even if they are few in number, focus on them.

A core part of the book seems to be a reinforcement on finding one’s niche. Using the above questions as a guide and past outcomes as possible signals. Given most fields have 20% of the folks running the show, it’s to find the field that fits one’s disposition. This also requires being unconventional…having a unique insight. One can examine eccentric figures of the past for guidance.

I like Von Manstein’s matrix for picking who should be a high-ranking officer. It’s the intelligent and lazy ones. They’ll figure out a way to make everything work via delegation. The hardworking intelligent ones are better as staff officers who execute on the front lines.

The list of 10 questions in chapter 13 is worth reviewing when making career decisions.

Koch’s view on investing resembles cutting losers and watering winners. His rule is to sell anything that falls below 15% of the purchase price (with the exception of really long-term investors). Though all investors should think long-term…the honest length for most seems to be 3-5 years with a few rarely being 10 years. Rather, this rule should tell one more about their psychology so will be a good litmus test for that.

Like Fisher, Koch believes that good businesses will create their own virtuous cycle of consistent out-performance. However, Koch also recommends selling when a price falls 15% below a recent high price. I guess one could play such a game of exiting and reentering in the future but it’s a game of momentum that I’m not well versed in and the book doesn’t further elaborate. Seems contrary to letting winners run though. I guess he is referring to letting winners run while on a tight leash.

On the topic of happiness, it’s mainly about constructing a mindset and environment. Spending time with people that give you energy and ending relationships with people that take it away. Same for activities. Cutting out the commute, spending more time in the sun, etc….

A view that 80% of happiness comes from 20% of activities but happiness is something better to have in small consistent doses since the half-lives are short. Koch suggests having daily happiness habits. He has seven, each should create their own. Includes exercises, mental stimulation, meditation, helping someone, etc….

Between achievement and happiness. Choose happiness.

Seems independence/control is the 80/20 to happiness.

Use the subconscious. One way is to write down one’s goals. Reminds me of Debbie Millman’s 10-year vision essay. It’s letting the mind process insights behind the scenes through exposure. Frequently reviewing goals will cement them into the subconscious so be careful of the goals you set.

Chapter 16 has a list of examples that resemble affirmations worth reviewing to help program the subconscious. It’s about visualizing, writing it down, being detailed, and focusing on being. Ways to reinforce this can be while daydreaming, exercise, and before bed.

Network effects are an 80/20 moat for a business. It’s non-linear as it can grow exponentially without additional capital. Adding capital might accelerate the exponential growth further. They become stronger over time.

The book uses Google as an example with its 66% share at the time….it is around 95-98% market share in search in 2020.

Cities benefit from network effects too. Bigger gets bigger. They also tend to be older cities too. The ones that will probably continue to grow will be the ones that take in more immigrants.

Realized from the Apple example in the book that it’s always had platforms accompanying its hardware. iPods had iTunes, iPhones had Appstore/iOS and Macs had the MacOS. These platforms benefiting from network effects.

Network effect businesses eventually go from 80/20 to 99/1 monopolies if not stopped by regulators.

As a network becomes more valuable, people will see value in paying $$ for increased incremental exposure to parts of it. If one only has ~8% of users see their post on the free version….paying for a few % more (which equates to millions of users) will be worth it.

Network effects lead to economies of scale. Virality can lead to scale too but virality and network effects are different,

Network effects exist if they get better for existing users when new users join. The larger the network the better the product.

Worth it to devote a few hours weekly to find network effect businesses early. Better to even join one early. Network companies feed on positive feedback, an 80/20 thing would be to position oneself inside one of these companies when it’s small.

Implementing the 80/20 framework for employees means creating custom plans for every individual. Makes the industrial psychologist approach to generalizing and making one-fits-all templates obsolete.

The mental model can be summed up as doing what you love, where you can be unique in, that others will find useful and pay for.

Larry Philips said good poker players fold a lot and play the best 15-20% of hands. Probably the same idea for investing but any kind of decision in life. Meaning, ignore most as it should be normal to fold.

Two ways of implementing 80/20. The first is efficiency. To be applied to obligations that aren’t important to us but must be done. Think Maslow’s hygiene factors. The second is life-enhancing. Aka, everything important that we love. It’ll look something like 20% of the time on the efficiency work…for 80% gain. And 80% of the time on life-enhancing for some 200…2000%+ gain.