Farmer Ron, the Big Bailout, and the 80/20 Rule
This week, Perry Marshall, one of my mentors sent me this email. Even though economic times seem tough, this is a moment of great opportunity.
Farmer Ron, the Big Bailout, and the 80/20 Rule
My father-in-law, Ron, is a 77 year old retired farmer in Southeastern Nebraska
He had this to say about the Big Bailout:
“The people that stole my cow now want me to feed it. I resent that a lot, but I do not want my cow to die. So I guess we will have to send more cow feed their way. In the good ole days, we could have hung a couple of the rustlers and that would have delayed the next raid by awhile. Now they expect to get rewarded.”
Gotta love that simple farmer common sense.
Gotta love the fact that he’s from Nebraska. (Just like me.)
I’d like to add a few comments of my own.
First, the contrast between the mainstream news media and the entrepreneurial culture online couldn’t possibly be more striking.
Journalists, as a group, are the most financially threatened population in today’s economy.
Not because of the banking crisis, but because the Internet is destroying their business. They’re ALL
THAT is the lens they see the world in to begin with. The grim reaper is pounding at their door and this colors EVERYTHING they say.
Those reporters who are able to perceive opportunity have already abandoned ship to seize it. The ones still reporting are the ones who are still hanging on. Can you hear the water seeping in? Glug-Glug-Glug…
Not only are they paranoid, they are irresponsible and lazy. One time Ken McCarthy said, “Reporters don’t report, they repeat. They don’t investigate, they elaborate.”
You CANNOT trust these people to tell you what is really going on.
On the other hand, entrepreneurs are unanimous in their resolution to gain ground during this next season. Yes, we clearly understand we may witness all manner of turmoil.
But we know that many, many assets will be undervalued, that average thinkers will cut back on marketing and advertising and customer acquisition, that people whose stocks have gone down will do the stupidest thing possible and SELL them in fear of further loss.
Their loss is our gain.
All you have to do is read the emails and watch the videos that are coming out in droves from those of us who are on the front lines working with top performers. I spent last weekend with 65 other entrepreneurs at my Chicago
I fully understand how easy it is to see the good news as a masquerade and the disaster as being fully real. But as far as I’m concerned, the bottom line reality is still this:
1. Crisis ALWAYS creates opportunity. Always. “The time to buy is when blood is running in the streets.”
2. It’s like that old story about the two guys being chased by the bear. One says to the other, “I don’t have to outrun the bear. I just have to outrun you.”
Let’s talk about #2 for awhile.
It sounds so terribly vulture-ish to say that, doesn’t it? Doesn’t it sound so… exploitive? So mercenary?
Oh yes, it most certainly does.
But it’s still true.
One of my other favorite truths:
“In the land of the blind, the man with one eye gets to be king.”
Just about every market I’ve ever seen is a land of the blind. All but the most ferociously competitive niches, anyway. I’d be hard pressed to look at any business in any industry and not be able to find, within 15 minutes, significant holes in their marketing strategy.
If you’ve got holes, baby, this is the time to patch ‘em.
Cuz here’s the deal:
Your market is the land of the blind, and… it might just constrict. (Or it might not. But it might.)
If it does, some vendors will go under.
Your job is to make sure it’s somebody else, not you.
80/20 Rule says:
20% of the businesses get 80% of the business.
That means the members of the 20% make 16X as much money as the members of the 80%. And it also means, if the water level rises, it’s the 80% who drown first. The 20% drown last.
The 20% seldom ever drown.
They plug their leaks, they tighten their ship, they whip their crew into shape. They prepare for the long winter and they get busy. They still drink and sing Irish folk songs at their crazy parties and they still have a good time. They enjoy their good time with resolve and determination.
For a long time we’ve had 5% unemployment. That means 95% employment. That means 95% of people who want a job, have one. Less employment than that surely requires some kind of exception to the laws of the universe!
That means of the bottom 80% - the mediocre people who have no inspiration and little sense of responsibility and can’t follow instructions - only 5% of THOSE are unable to find work.
A 5% unemployment is therefore a virtual violation of the 80/20 rule. A merciful one, but nonetheless a violation. Ah, the luxuries of a society that values equality.
Now…. let’s say the unemployment rate rises to 10% or 15%.
You know what that means?
It means you can fire any deadbeat you want and you’ll be able to almost instantly replace him with a savvy, competent, responsible, hungry person who can follow instructions and genuinely contribute to your bottom line.
If you have the guts to do that, you will pull out ahead in the race.
It means if you have any cash at all you can buy investments at record-low prices and rake it in big time when the market comes back.
Let’s see, a few other implications of the 80/20 rule….
80/20 applies to nearly everything you could possibly measure. It’s not merely a business abstraction, it’s a law of nature. Which means:
80% of the bad debt comes from 20% of the loans. (That’s the part they’re selling to the US
80% of the corruption comes from 20% of the politicians.
80% of the pork is found in 20% of the legislation.
80% of the bills in Congress are written by 20% of the lobbyists.
Now here’s something else I know:
80% of the people on my email list will only effect 20% of the change that they need to make happen.
20% of the people on my email list will effect 80% of the change that is going to happen.
….
One more thing:
There is a top 20%.
There is also the top 20% of the top 20% - the 4%.
There is the top 20% of the top 20% of the top 20% - the 0.8%.
What you should really aspire to is to be a top 0.8% person.
Let’s compare the 0.8% person to the 80% person:
-Every move he makes is carefully chosen because his time is 16X as valuable
-He understands that of all the things on his list of 37 things to do, 4 or 5 of them are more important than all the others put together. The 80 percenter acts as though all items are equally important
-He is profoundly selective about the information he reads, listens to and acts upon; the 80 percenter is ‘open minded’ about almost everything
-He belongs to some kind of ‘good ol boys club’ - which is ‘80 percenter’ lingo for a trusted circle of people among whom there is nearly zero transaction cost. Every successful business person I know has one; 80 percenters don’t have good ol’ boys clubs, they just gossip and have bitch sessions
-He doesn’t care what most people think, and knows that more often than not the masses are tragically wrong; the 80 percenter IS the masses.
Consider yourself privileged for having received this email. Something you did qualified you to get it. And don’t let grass grow under your feet. Survey your customers, find out what they’d like more of than what they’re getting from you now, and sell it to them.
Don’t be the slow guy. Be the guy who outruns him.
Carpe Diem - Seize the Day. Make sure the bear seizes someone else.
Perry Marshall
Welcome back!
October 10th, 2008 at 2:59 pm
This is probaly is one of the best articles I’ve read. It really makes me think. Thank you and Farmer Ron for the wisdom you’ve shared.
Darlene
October 11th, 2008 at 6:16 am
RON THANK YOU SO MUCH …….. THIS IS REALLY THOUGHT PROVOKING…….
JAMES
October 11th, 2008 at 6:18 am
Nice job.
October 11th, 2008 at 6:21 am
I have to say Troy that after exploiting your services to get up on your holiest of entrepreneurial pulpits I can honestly say that you have no idea about how to connect with your fellow man. Remove me from your distribution service immediately. I don’t know what kind of people would want to go to one of your seminars let alone associate with you, but you can count me out. I’ll be sure to never recommend your service to anyone else I come across again; as a matter of fact I’ll make it my mission to see that people like you become like the rest of us 80%, you pompass ass!!! Really, the next time you start pointing fingers at the others and give yourself another pat on the back you should think long and hard about those selfish individuals (like you) who made this economic mess. Most assuredly, you can guarantee that men and women who are fathers, mothers, sisters, brothers, sons and daughters of our great nation (the 80%) just trying to get by in life don’t have the leverage as the upper 1% of this nation do which control the financial market, and don’t even get me started on the administration which were in favor of less government regulation during these past eight years; which I am sure you are an ardent supporter of. After reading your newsletter it is clear to me that you are more unattached than Senator McCain. To dissuade you and your opinions that you are formulating of me; I am currently doing fine and I am not one of those who is suffering in our economy…yet. The fundamental differences between you and I are that I have empathy for my fellow man, and further I know that what effects people in some facet of their life affects me either directly or indirectly as well. I hope you take a good hard look at yourself and ask yourself what did I do to contribute to the problem, or what can I do to help those less fortunate than me!
October 11th, 2008 at 6:22 am
The country could use a few more Nebraskans like your father-in-law and fewer CEOs like Richard Fuld, a man whose brow has never seen a drop of honest sweat.
We need to honor the former and hang the latter.
October 11th, 2008 at 6:24 am
You are singing my song! Bless you I copied this for our small town people. I live in an agricultural town where cows are the main bread and butter as well as corn!
colette
October 11th, 2008 at 6:24 am
Please, please no socialism in my beloved United States of America! I hope your business thrives. Wish me luck. I’m small, but I’m NOT scared!! Marli
October 11th, 2008 at 6:25 am
Way to go Husker
October 11th, 2008 at 6:26 am
LOL!
You just made my day!
Being a photographer and having MAJOR success right now due to the foresight of our marketing team and pricing principles have lent an ear to your 80/20.
Our other friends in the industry are dying as we have grown over 180% this year!
Thanks for keeping us as good landlords and empowered successors!!!
-team f8.
October 11th, 2008 at 3:02 pm
To “Todd” above… you’re comment clearly shows that you didn’t read the post — first, the post was a quote from someone he admires and has learned a lot from. Second, you must not be a property manager or landlord who has concern for running his rentals intelligently. I love the Renting Authority service. Who knows how many thousands of dollars (probably hundreds of thousands) customers have saved by running credit/background checks on potential renters. I challenge you to find a better service at a more affordable price; further, I KNOW you’ll not find a company that is more concerned about their customers than RentingAuthority. Over the years I’ve seen them offer more & more services for an ever decreasing price; all the while, spending personal 1-on-1 time with customers who may need support.
Next time, Todd, please read the post thoroughly.
-Paul
December 19th, 2008 at 6:15 pm
john deere credit…
I found your post comments while searching Google. Very relevant especially as this is not an issue which a lot of peaople are conversant with….
March 10th, 2009 at 10:01 am
That means of the bottom 80% - the mediocre people who have no inspiration and little sense of responsibility and can’t follow instructions - only 5% of THOSE are unable to find work.
So 80% of the people in this country are mediocre with no inspiration. Or is it that you are just another big asshole!!!!!!!!!!!!
James
March 10th, 2009 at 10:14 am
James, thank you for your comment. The 80-20 rule has been around for decades. It is also known as Pareto principle. Here is a basic break down of it from Wikipedia.
http://en.wikipedia.org/wiki/Pareto_principle
The Pareto principle (also known as the 80-20 rule,[1] the law of the vital few and the principle of factor sparsity) states that, for many events, roughly 80% of the effects come from 20% of the causes.[2][3] Business management thinker Joseph M. Juran suggested the principle and named it after Italian economist Vilfredo Pareto, who observed that 80% of the land in Italy was owned by 20% of the population.[3] It is a common rule of thumb in business; e.g., “80% of your sales come from 20% of your clients.” Mathematically, where something is shared among a sufficiently large set of participants, there will always be a number k between 50 and 100 such that k% is taken by (100 − k)% of the participants. However, k may vary from 50 in the case of equal distribution to nearly 100 when a tiny number of participants account for almost all of the resource. There is nothing particularly special about the number 80, but many systems will have k somewhere around this region of intermediate imbalance in distribution.
The Pareto principle is only tangentially related to Pareto efficiency, which was also introduced by the same economist, Vilfredo Pareto. Pareto developed both concepts in the context of the distribution of income and wealth among the population.
In economics
The original observation was in connection with income and wealth. Pareto noticed that 80% of Italy’s wealth was owned by 20% of the population.[4] He then carried out surveys on a variety of other countries and found to his surprise that a similar distribution applied.
Because of the scale-invariant nature of the power law relationship, the relationship applies also to subsets of the income range. Even if we take the ten wealthiest individuals in the world, we see that the top three (Warren Buffett, Carlos Slim Helú, and Bill Gates) own as much as the next seven put together. [5]
A chart that gave the inequality a very visible and comprehensible form, the so-called ‘champagne glass’ effect,[6] was contained in the 1992 United Nations Development Program Report, which showed the distribution of global income to be very uneven, with the richest 20% of the world’s population controlling 82.7% of the world’s income.[7]
Distribution of world GDP, 1989[8] Quintile of Population Income
Richest 20% 82.7%
Second 20% 11.7%
Third 20% 2.3%
Fourth 20% 1.4%
Poorest 20% 1.2%
The Pareto Principle has also been used to attribute the widening economic inequality in the USA to ’skill-biased technical change’ - i.e. income growth accrues to those with the education and skills required to take advantage of new technology and globalization. However, Paul Krugman in the New York Times dismissed this “80-20 fallacy” as being cited “not because it’s true, but because it’s comforting”, as the benefits of economic growth over the last 30 years have largely been concentrated in the top 1%, rather than the top 20%[9].
Other applications
The Pareto Principle also applies to a variety of more mundane matters: one might guess approximately that we wear our 20% most favored clothes about 80% of the time, perhaps we spend 80% of the time with 20% of our acquaintances, etc.
The Pareto principle has many applications in quality control.[citation needed] It is the basis for the Pareto chart, one of the key tools used in total quality control and six sigma. The Pareto principle serves as a baseline for ABC-analysis and XYZ-analysis, widely used in logistics and procurement for the purpose of optimizing stock of goods, as well as costs of keeping and replenishing that stock (Ruston et al. 2000, pp. 107-108).
In computer science and engineering control theory such as for electromechanical energy converters, the Pareto principle can be applied to optimization efforts. (M. Gen & R. Cheng, Generic Algorithms and Engineering Optimization. New York, Wiley, 2002)
Microsoft also noted that by fixing the top 20% of the most reported bugs, 80% percent of the errors and crashes would be eliminated.[10]
In computer graphics the Pareto principle is used for ray-tracing: 80% of rays intersect 20% of geometry.[11]
The Pareto principle was a prominent part of the 2007 bestseller The 4-Hour Workweek by Tim Ferriss. Ferris recommended focusing one’s activities to those 20% that contribute to 80% of the income. More notably, he also recommends firing the 20% customers who take up the majority of one’s time and cause most trouble.[12]
Mathematical notes
The idea has rule-of-thumb application in many places, but it is commonly misused. For example, it is a misuse to state that a solution to a problem “fits the 80-20 rule” just because it fits 80% of the cases; it must be implied that this solution requires only 20% of the resources needed to solve all cases.
Mathematically, where something is shared among a sufficiently large set of participants, there will always be a number k between 50 and 100 such that k% is taken by (100 − k)% of the participants; however, k may vary from 50 in the case of equal distribution (e.g. exactly 50% of the people take 50% of the resources) to nearly 100 in the case of a tiny number of participants taking almost all of the resources. There is nothing special about the number 80, but many systems will have k somewhere around this region of intermediate imbalance in distribution.
This is a special case of the wider phenomenon of Pareto distributions. If the parameters in the Pareto distribution are suitably chosen, then one would have not only 80% of effects coming from 20% of causes, but also 80% of that top 80% of effects coming from 20% of that top 20% of causes, and so on (80% of 80% is 64%; 20% of 20% is 4%, so this implies a “64-4 law”).
80-20 is only a shorthand for the general principle at work. In individual cases, the distribution could just as well be, say, 80-10 or 80-30. (There is no need for the two numbers to add up to 100%, as they are measures of different things, e.g., ‘number of customers’ vs. ‘amount spent’). The classic 80-20 distribution occurs when the gradient of the line is −1 when plotted on log-log axes of equal scaling. Pareto rules are not mutually exclusive. Indeed, the 0-0 and 100-100 rules always hold.
Adding up to 100 leads to a nice symmetry. For example, if 80% of effects come from the top 20% of sources, then the remaining 20% of effects come from the lower 80% of sources. This is called the “joint ratio”, and can be used to measure the degree of imbalance: a joint ratio of 96:4 is very imbalanced, 80:20 is significantly imbalanced (Gini index: 60%), 70:30 is moderately imbalanced (Gina index: 40%), and 55:45 is just slightly imbalanced.
The Pareto Principle is an illustration of a “Power law” relationship, which also occurs in phenomena such as brush-fires and earthquakes. Because it is self-similar over a wide range of magnitudes, it produces outcomes completely different from Gaussian Distribution phenomena. This fact explains the frequent breakdowns of sophisticated financial instruments, which are modeled on the assumption that a Gaussian relationship is appropriate to—for example—stock movement sizes.[13]
To your success,
Troy
Troy Boldt
Director of Sales and Marketing
tboldt@rentingauthority.com
http://www.rentingauthority.com
888-674-9181
March 12th, 2009 at 10:43 am
Good read!
kk
March 12th, 2009 at 11:17 am
Your arguement is weak at best. To equate 80% of the wealth being controlled by 20% of the people to the worthiness of the 20% and the worthlessness of the 80% is a fallacy.
By your logic Paris Hilton deserves her status, her wealth, her position because she is superior while “the (80%) mediocre people who have no inspiration and little sense of responsibility and can’t follow instructions” deserve to go under. What a total crock! You need to get a real job and quit sending out this right-wing propaganda bullshit!
March 12th, 2009 at 11:18 am
James,
I don’t understand why you fight the 80/20 rule so much. I do not feel that those who are in the 80% are any less of a person that someone in the 20% group. The 80/20 rule is factual in most every situation. Since you are an independent landlord, someone trying to get ahead of the norm, you should count yourself in the 20% group. 80/20 is not left or right wing. President Obama is not only in the 20% group, he is in the top .5-1% group.
Everyone should strive to be in the 20% group. If you are complacent in the 80% group, there is nothing wrong with that. How you view life determines what you do or don’t accomplish.
To your success,
Troy
Troy Boldt
Director of Sales and Marketing
tboldt@rentingauthority.com
http://www.rentingauthority.com
888-674-9181
March 23rd, 2009 at 3:53 pm
Haha ^^ nice, is there a section to follow the RSS feed
March 24th, 2009 at 12:07 am
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March 31st, 2009 at 1:35 pm
Thank you. I find it amusing and so true.
Maggie
April 10th, 2009 at 11:29 pm
Such a usefule blog
April 13th, 2009 at 3:51 am
Such a usefule blog
May 12th, 2009 at 1:18 am
Nice post. There’s a similar topic thats related to this in Yahoo answers or Google groups, I think. I’ll find the link and post it back here.
June 21st, 2009 at 11:07 pm
just added your site to my rss feed
June 22nd, 2009 at 10:14 am
thanks for the article!!
June 24th, 2009 at 7:04 pm
I Love the way you write…thanks for posting
June 25th, 2009 at 9:22 pm
thanks for that post , first time foe me on this blog , and i Like it !:P
iam going to link to it from my blog,
thanks and you got yourself a new reader here :))
July 1st, 2009 at 5:08 am
Interesting. I was talking to a coworker about this a few days ago. http://www.pitchmanbillymays.com