Who was Pareto and how can he help us?
Pareto was an Italian economist and his law as we call it was more of an observation. He observed circa 1906 that roughly 80% of land in Italy was owned by roughly 20% of the population. He looked at other countries and found the same 80/20 rule applied. He also observed that peas in his garden fell roughly into the same pattern with 20% of the pods holding 80% of the peas.
At first glance this would seem interesting but how can it really help us in any meaningful way?
I see this principle in action wherever I look and here are just a few:
- 20% of real estate agents account for 80% of real estate sales.
- In any company, 20% of the workforce account for 80% of a companies production.
- In any sales department, 80% of sales will be made by 20% of the sales people.
- In any industry, 20% of innovation will come from 80%.
- Great innovation will be created by the 20% of those that innovate.
- 20% for those things on your “to do list” will account for 80% of your productivity. i.e. Do those first.
- Like me you probably wear 20% of your clothes 80% of the time.
How can Pareto’s law help me?
This is how I apply Pareto’s law or 80/20 rule in an area of my life I am interested in:
Example one:
You decide to tidy your wardrobe because it's bulging at the seams. You might start by separating the 20% of clothes you wear 80% of the time on one side, and the 80% of clothes you wear 20% of the time on the other side.
Now look at the 80% you wear only 20% of the time. Now of the 20% of time you do wear those clothes, divide in again into 80/20. Then get rid of those clothes that are 80% of the 80% as you will probably never wear them again.
Example two:
Lets say I am sick of my job and want to try something completely different. I have to ask myself, “What am I better at, or could learn to be better at than the other 80 percent?”
If I want to learn something it is in my best interest to find the tutor that is in the 20% in that field of expertise. That's not hard to do, just search the topic from a number of angles and you are sure to see a few names pop up over and over again.
To be honest their are lots of areas in my life where I am in the 80% and thats ok. We can’t be the top 20% in everything and I am happy with that, but if it’s something that matters to me and I really want to be successful in that endeavour, I either need to learn from those in the top 20% or pay for their services.
In 1999 I became interested in Gold and Silver and Mining companies. I now know I’m am a contrarian.
How I applied the 80/20 Rule in my interest of Investing.
You’re either a victim or a contrarian – Rick Rule.
This is a quote from Rick Rule who I am sure you have never heard of. After lots of reading I decided that the contrarian way of thinking made sense to me. ie. When it comes to investing the crowd often get it wrong. So my next job is to find the 20% in that field.
Rick Rule is someone in my 20% and he may be in 20% of the 20%. But it’s not for me to tell you who you’re 20% should be as we each have to decide that for ourselves. This article is only about me asking you to consider that you find the 20% in whatever it is that you want to do that is important to you.
Gravitate toward the 20% of the 80/20, avoid the 20% of the 80/20.
Here is a list of just some of my 20 in the 80/20. I think that it is a great idea to start your own list, follow those guys and subscribe to their news letters if they have one.
My Short List:
- Rick Rule
- Jim Rogers
- Marc Faber
- Peter Schiff
- Jim Rickards
- Bill Fleckenstein
- Bill Bonner
- Brent Cook
- James Altucher
- Adam Hamilton
- Doug Casey
If you are really interested in something you will probably already know some of those that reside in the top 20% of that industry or interest. My list is comprised of contrarian investors and I am always adding to my list as I discover more.
For me, following the 80% would be the blind following the blind. I know how I want to invest but I can't evaluate companies so I use Pareto's Law and a good strategy to reduce my risk.