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much larger net worth.
    As Chapter 14 will show, 80 percent of the increase in wealth from most long-term portfolios comes from fewer than 20 percent of the investments. It is crucial to pick this 20 percent well and then concentrate as much investment as possible into it. Conventional wisdom is not to put all your eggs in one basket. 80/20 wisdom is to choose a basket carefully, load all your eggs into it, and then watch it like a hawk.
    HOW TO USE THE 80/20 PRINCIPLE
     
    There are two ways to use the 80/20 Principle, as shown in Figure 5.
    Traditionally, the 80/20 Principle has required 80/20 Analysis, a quantitative method to establish the precise relationship between causes/input/effort and results/outputs/rewards. This method uses the possible existence of the 80/20 relationship as a hypothesis and then gathers the facts so that the true relationship is revealed. This is an empirical procedure which may lead to any result ranging from 50/50 to 99.9/0.1. If the result does demonstrate a marked imbalance between inputs and outputs (say a 65/35 relationship or an even more unbalanced one), then normally action is taken as a result (see below).
     

    Figure 5 Two ways to use the 80/20 Principle
     
     
    A new and complementary way to use the 80/20 Principle is what I call 80/20 Thinking. This requires deep thought about any issue that is important to you and asks you to make a judgment on whether the 80/20 Principle is working in that area. You can then act on the insight. 80/20 Thinking does not require you to collect data or actually test the hypothesis. Consequently, 80/20 Thinking may on occasion mislead you—it is dangerous to assume, for example, that you already know what the 20 percent is if you identify a relationship—but I will argue that 80/20 Thinking is much less likely to mislead you than is conventional thinking. 80/20 Thinking is much more accessible and faster than 80/20 Analysis, although the latter may be preferred when the issue is extremely important and you find it difficult to be confident about an estimate.
    We look first at 80/20 Analysis and then at 80/20 Thinking.
    80/20 ANALYSIS
     
    80/20 Analysis examines the relationship between two sets of comparable data. One set of data is always a universe of people or objects, usually a large number of 100 or more, that can be turned into a percentage. The other set of data relates to some interesting characteristic of the people or objects that can be measured and also turned into a percentage.
    For example, we might decide to look at a group of 100 friends, all of whom are at least occasional beer drinkers, and compare how much beer they drank last week.
    So far, this method of analysis is common to many statistical techniques. What makes 80/20 Analysis unique is that the measurement ranks the second set of data in descending order of importance and makes comparisons between percentages in the two sets of data.
    In our example, then, we will ask all our 100 friends how many glasses of beer they drank last week and array the answers in a table in descending order. Figure 6 shows the top 20 and bottom 20 from the table.
    80/20 Analysis can compare percentages from the two sets of data (the friends and the amount of beer drunk). In this case, we can say that 70 percent of the beer was drunk by just 20 percent of the friends. This would therefore give us a 70/20 relationship. Figure 7 introduces an 80/20 frequency distribution chart (or 80/20 chart for short) to summarize the data visually.
    Why is this called 80/20 Analysis?
     
    When comparing these relationships, the most frequent observation, made long ago (probably in the 1950s), was that 80 percent of the quantity being measured came from 20 percent of the people or objects. 80/20 has become shorthand for this type of unbalanced relationship, whether or not the precise result is 80/20 (statistically, an exact 80/20 relationship is unlikely). It is the convention of 80/20 that it is the top 20