I first discovered this principle a long time ago when I was doing my bachelor’s degree in Finance. While I spent more time playing Tetris than listening to my teachers, I remembered I stopped everything to listen to this part of the class.
The Pareto Principle is named after Vilfredo Pareto, who noticed over 100 years ago that 80% of the land in Italy was owned by 20% of the population. The principle itself was not developed by Vilfredo, but was instead developed by Joseph Juran and named after Pareto based on his initial observation. Although the Pareto Principle is imperfect, it refers to the observation that for any given thing, 80% of the effects come from 20% of the causes. It’s commonly called the “80/20 Rule”.
The Pareto principle was first explained to me in a marketing class telling us that 20% of our clients will generate 80% of our business. I was excited by this principle as I had realized that pretty much 20% of what I do would generate 80% of my results (this is why I used 80% of my time playing Tetris and study hard for 20% of my time… hahaha!).
More seriously, I discovered at that time the solution was simply to focus on the “right” 20% and I would get most of the job done in all areas of my life. I also noticed that most people know about the Pareto Principle or the 80/20 rule from one source or another. However, very few people use this powerful rule of the universe. Most people I know tend to do the opposite as they focus on the 80% generating 20% of the results and tend to forget the efficiency factor in their daily task. This is why I thought of giving a few real life example of this principle in my daily life.
Pareto principle at work
The key to use the 80/20 rule at any job is to focus on value added tasks. One of my managers used to say that it’s easy to shuffle papers around all day, work very hard but not doing anything that matters each day. Take a look around and you’ll notice right away; most people wander around but never get anything done. Even if you don’t work in an office, you can still “shuffle around” but never get to the value added tasks.
When I start my day, I always focus on all value added tasks I can accomplish and leave the rest for the end of the day or for the moments I’m less productive. This is how I get the best value from my “prime time” of the day using 80% of my energy on the 20% that really matters at work. Then, I have 20% of my energy left to work my way through the 80% of non-added value tasks.
Some of my co-workers told me it wasn’t possible. That the “80%” needed to be done and was just as important as the “20%”. That is their opinion, not mine ;-). Once you understand the 20% matters much more, it’s funny how the 80% gets done anyway but in a different manner (and at a different time!)
Pareto principle at home
When I get back home, it is a little bit tougher to make everything run under a “metric rule”. When you have to deal with humans, it’s always harder to apply any strict rules. Being a father of three, coaching soccer along with blogging at night forces me to be highly productive at home too.
The fact that my two oldest children can now take on small tasks helps a lot. They now participate in family life by completing small chores that are definitely part of the “80%” such as taking care of the recycling bin and the trash! Unfortunately, I still have to wait a few more years before I get my lawn done by my oldest son, haha!
It’s been several years that we have a cleaning lady as another example of delegating someone else to work on the 80%. Cleaning a house requires a ridiculous amount of time and it’s not always incredibly productive. This is why we use our time differently and pay someone to clean the house.
Pareto principle on my investing strategy
We all know that taking quick investment decisions can quickly lead to important losses. When it’s time to invest, I never try to cut corners and use shortcuts. On the other hand, one can also spend 50 hours analyzing a company without being done with it. There are tons of metrics, financial studies and financial reports to read, examine and analyze for each company on my watch list. It is not humanly possible to review and digest all the existing info on any sector or specific company.
This is why I came up with my 7 investing principles that I follow religiously. These principles are used to build and manage my portfolio with the maximum efficiency possible. For example, I’ve identified specific metrics that will tell me a lot about the company without having to spend hours to understand in which direction it is going.
By looking at the 5 year trends on revenues, earnings and dividend growth, I can rapidly understand if the company is going pay me more next year or struggle to increase its distribution.
I also don’t jump to see what my portfolio did yesterday or the week before. I wait for the earnings season to read quarterly financial reports on each stock I own and follow and make decision if I should buy/sell/hold my shares. I make a complete review of my portfolio twice a year when I’m on vacation (usually summer time and during the Holidays) and it is enough to keep a good grasp of my investments without having to spend 20 hours on my portfolio each week.
Final thoughts on the 80/20 rules
If you like this principle and are interested in pursuing different ways to manage your life in order to become more efficient, I suggest you read a great book for summer time:
The Four Hour Workweek by Tim Ferris
This book is one step further ahead of this rule. It has literally changed how I work!