How can an 18th century economist help us become more successful? For one, by teaching us about the natural principles of inequality inherent in the very fabric of our world.
Pareto was said to be in his garden admiring his peas, as we all do, when he noticed 20% of his plants producing 80% of the peas. He found this same uneven distribution in economics. At the time, 80% of the land and wealth in Italy was owned by only 20% of the population.
After publishing the results, people started noticing the 80/20 principle play out in a lot of interesting ways. Roughly 20% of the people in the U.S. hold 89% of the wealth. Microsoft found that 80% of the errors and crashes came from 20% of the bugs. Approximately 76.6% of the world’s consumption comes from 20% of the world’s people. And 12% of real estate agents do 90% of all sales. Ok, so it’s not always 80/20, but the point is that not all things are equal.
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What Does This Have to Do With Investing?
What the Pareto’s principle showed was that wealth and achievement in society tends to be unevenly distributed. If you look around, you’ll notice the same thing. It’s everywhere.
How does this happen? How can one person become a billionaire and another starting out with the same opportunity and number of hours in a day barely make a living? It comes down to actions.
If actions are the only thing that gets results and success follows an unequal distribution, does it not mean that successful people spend a disproportionate amount of time focused on activities that produce disproportionately better results? Could 20% of your actions also produce 80% of your results? I think they can.
As Vilfredo Pareto said, “For many events, roughly 80% of the effects come from 20% of the causes.”
In the past few months, I’ve tested this principle with my own business (real estate) by calculating the time I spent on different lead generation activities and the results each produced. I found that about 75% of my income came from about 10-15% of my activities and time. While all activities produced results, meeting new people outside of real estate was by far the most effective.
Instead of working more hours trying to do everything, as most people do, I decided to stop doing everything that didn’t give disproportionate results so I could focus more on the actions that did. Besides, if you take the best 20% of your activities and up them to 40% of your time, business should double. In just a few months, that’s exactly what happened to me. And I spend a lot less time working.
Another example of the 80/20 rule comes from Warren Buffett, who spends 80-90% of his day learning. That’s right, one of the best investors the world has ever seen spends very little time investing. He understood from the beginning that most of his results would come from knowledge, so he spends a disproportionate amount of time learning. It worked.
Where Do I Start?
“The wisdom of life consists in the elimination of non-essentials.” — Lin Yutang
Just because an activity can produce results does not mean that it’s worth it. Think of the 80/20 principle the same way you think about investing in real estate. Some things are great investments, and others are not. How you spend your time and energy is no different.
The only way to get rid of the non-essentials and start achieving greater success is by keeping track of what you do and how well it’s working:
- How much time do you spend looking for deals, and how much do you spend learning to create good deals?
- How much time do you spend flipping through new properties, hoping to come across a gold mine, and how much do you spend creating criteria and setting up searches to weed out the 80% that’s not worth your time?
- How much money do you spend advertising to find investments, and how much income have you received doing it?
- Does a small portion of your properties consume most of your time and money? Should you keep them or buy something you know works better?
- What property types give you the best return in your area, and is it worth it to invest time and money anywhere else?
- How much time do you spend learning about real estate, and what types of information have given you the best results?
- Do you only read about investing and never take action?
Nothing is equal. Keep track of what you do so you can identify the non-essentials, eliminate them and focus your efforts on what works exceptionally well.
How do you see the 80/20 principle play out in your business? What non-essentials do you plan on eliminating to become more productive and efficient?
Leave your thoughts below!