You're listening to the “REI Marketing Nerds” podcast, the leading resource for real estate investors who want to dominate their market online. Dan Barrett is the founder of AdWords Nerds, a high-tech digital agency, focusing exclusively on helping real estate investors like you get more leads and deals online, outsmart your competition, and live a freer, more awesome life. And, now, your host, Dan Barrett.
Dan: Hello, and welcome to this week's episode of the REI Marketing Nerds podcast. As always, this is Daniel Barrett here from AdWordsNerds.com. How are you, my wonderful friend?
By the way, before I get into this week, because this is going to be a fun week, I'm very excited to talk about this topic because it's something I find fascinating. Let me throw this out here. I've been talking to you, I don't know, going on, man, how many episodes is this? Eighty-two episodes of this podcast. This is going to be the 83rd one that you're listening to right now. [01:12.0]
I've been talking to you probably for a very long time. If you're a new listener, welcome. If you are an old listener and have been around since the beginning, I cannot tell you how grateful I am.
Many of you actually don't know what I do, so I'm putting this out here. I run a company and it's called AdWordsNerds.com. All we do is find motivated seller leads for real estate investors. That's literally all we do. We do it online. We do search engine optimization, online advertising. If you are interested in that, you don't know if that can work for your business, or you're curious about online marketing as a channel and you want to check it out, we do free strategy sessions. You can get those at AdWordsNerds.com/strategy. It's an extremely high-value call, a working call, not like a sales pitch. So, if you are curious, go, jump on there. Piles of podcasts. Pull over, whatever you've got to do. [02:05.3]
A surprising amount of people listening to podcasts don't actually know that that's what I do. So, that's what I do.
This week I want to talk to you about something I am really fascinated by and it's something that is one of these ideas. I'm always on the lookout for these ideas, where once you understand it and you internalize it, you look at the entire world differently. You start to see it everywhere, right?
Have you ever had this kind of experience where you can kind of divide your life into the before and after, like the 80/20 principle, right? Twenty percent of your inputs often produce 80 percent of your outputs. That's one of those ideas where I'm like, I see that everywhere. I think about that all the time. It affects how I work and how I think about what I do. It’s extremely, extremely valuable, right?
This idea that I'm going to talk about with you right now I'm going to apply directly to online marketing for real estate investors. It has been a constant source of just blowing my own mind, this idea, and I bring it up so often in my day-to-day life that it's literally a running joke. [03:14.0]
My wife finds it so irritating. Whenever I bring this up in conversation, she rolls her eyes so hard, they look like they're going to fall out of the back of her head. This is something I talk about in my day-to-day life. If you're curious, hey, is the person you hear on the podcast the same in everyday life? Yes, I am.
So, let's talk about this idea. This idea is regression to the mean. And you may have heard me talking about this before. Maybe not. Maybe you know what regression is. Maybe you don't. I am going to take this idea and I'm going to show you how this is costing you money right now in your marketing. I can almost guarantee it. It's either costing you money now or it has cost you money in the past, and it's going to cost you money in the future. We all fall victim to this.
And once you get this idea and you lodge it in your brain, man, you are going to make better decisions. Your marketing is going to improve. You're going to make more money. You're going to be happier. You're going to be healthier. People are going to like you more. I promise, okay? [04:10.1]
Let's get into regression to the mean.
What is regression to the mean? Let's back up for a second. This is something that you've got to think about before we get to regression to the mean, one of the reasons it's important, and this is not going to be a political thing. We're not talking politics. But, recently, as I'm recording this, the stock market's been going up and down. It's finally kind of down. And so, a whole bunch of people are kind of weighing in on why this is the case, right?
Some people say, It's because right now the Democratic primary, Bernie Sanders, kind of has a relatively strong showing and some people think, okay, that's why the stock market is down. People are spooked by that. Other people think it's Trump and how he's handling the coronavirus or some things that Trump said, or the Federal Reserve cut interest rates and that's why. Okay, anyway, all you’ve got to know is the stock market is down and there are a variety of reasons that people point out as to the reason why that happened. [05:05.8]
I was thinking about this and I was like, let's just say hypothetically, all that same stuff is happening, but the stock market went up, which was possible. Everybody would have a different reason why, right? We would come up with reasons to explain what happened, no matter what.
There's no scenario in which, let's say, the stock market goes up and everybody who's on TV and writes about investment is in the newspaper. There’s no scenario where they all of a sudden say, You know what? I just can't explain it. Didn’t do what I expected. Yeah. I have no idea. No one ever says that. They always have an explanation—and this is just a fundamental part of human nature. We look back at what happened and we extrapolate. We try to explain. We are an explaining species. [06:02.8]
We are a species that is successful largely because we understand cause and effect to an extent that's greater than most animals do, and so we look for cause-and-effect relationships everywhere, especially in retrospect. Right? Stock market went down. Oh, that's because of Bernie. That's because of how Trump handled the coronavirus. Right? Stock market goes up. Oh, maybe people actually think that Trump did a good job with the coronavirus. Whatever the reason is, we always come up with a reason. That's one thing you’ve got to understand. We always look back at what happened and we come up with a reason, and the reason always feels right.
All right, now let's get into things that are partially chance and partially skill.
There are some things that you can think of that are clearly all chance like the roulette wheel, right? If you go, sit at a roulette wheel, you spin the roulette wheel, it's totally random. Assuming you're on a fair table, it’s totally random. You can't lose roulette on purpose, right? You can't lose on purpose. You have to spin the wheel and you either win or lose. [07:06.8]
And there are certain things that are much more skill-based, for example, chess. It's kind of more skill-based. You can deliberately lose a chess. I can choose to kind of throw the game and lose, right? Or I think of mixed martial arts as kind of skill-based. If I just walk around with my hands down, I'm going to get knocked out.
But most things, including chess and MMA are not completely skill. You don't get exactly the same outcome every time, just depending on your skill. There's also an element of chance involved. Same with basketball, same with any human performance. Investment performance is partially skill and partially chance.
And certain things have more skill and less chance or more chance and less skill, but everything is a combination of these two things. Right? You go out on the basketball court. You do what you can do. You have your skills that you’ve built up over practice. You have your athletic conditioning, whatever. But there's also just the temperature that happens to be in the room and something that happens in the audience, and you happened to eat something weird last night and your stomach feels weird. Right? There's skill and then there's chance. [08:17.3]
All right, so you can think of the outcome of anything, whether it's investing in the stock market portfolio or going out on the basketball court, or going into the octagon and getting into a mixed martial arts fight, right? Whatever happens, it's a combination of these two things, the skill and the chance.
So, let's say, you have a really amazing outcome, okay? You get 500 times the average stock market return on your portfolio. You go out and you score 150 points on the basketball court. You go out and you knock out the light heavyweight world champion, Jon “Bones” Jones. You knock him out in the first round, okay? It's an amazing outcome.
Now, here's the thing. Remember, this outcome is partially skill and partially chance, so if you have an amazing outcome, that means that the skill really has to be dialed up all the way and the chance has to be dialed up all the way. [09:13.3]
Chances are that you had to be operating on the highest possible level and things just kind of worked in your favor. All right, cool.
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Let's say you win the light heavyweight belt. You score 150 points. You get the 500 times return on your investment. Everybody loves you. You're the second coming. Everybody thinks you're amazing. [10:05.8]
What is most likely to happen the next time you go out? The next time you build a stock portfolio, the next time you hit the basketball court, the next time you get in the octagon, what's most likely to happen? It's most likely that your performance is going to be closer to the average than your first one was.
Why is this? Because, remember, in the first performance, the skill was dialed up all the way to 100 and the chance was dialed up all the way to 100. It was completely in your favor. The second time you go out, even if your skill is still dialed up to 100, chances are that chance is not going to be dialed up to a hundred. Right? It's possible, but it's most likely that it’s not going to be all the way to the beneficial end of the spectrum. And so, what ends up happening is you perform a little less well.
Make sense, right? The first time all the stars are lined up in your favor and you maximize your skill. The second time, even if it goes well and you maximize your skill, the stars are probably not going to be all lined up in your favor in exactly the same way. [11:13.6]
This is the idea of regression to the mean. Anything that's a combination of skill and chance, if you have a particularly outsized result, good or bad, the next time you measure it, you are more likely to be closer to the average level of performance. So, average level of stock market return, closer to the average number of points scored in the game, closer to the average performance in the octagon. It doesn't mean you're going to go back to average, but you're probably probabilistically going to be closer to the average than you were the first time around.
Why is this important? This happens all the time. It's all around you. I guarantee, if you start to look for it, you will see it everywhere. Really tall parents tend to have kids that are a little shorter than them. Really smart parents tend to have kids that are not quite as smart as them. Really successful parents tend to have kids that aren't quite as successful as them, and parents that are massively unsuccessful tend to have more successful kids, and yada-yada-yada-yada-yada. You'll see it everywhere. [12:11.7]
Now, here's the problem and the thing you need to keep in mind. Remember what I said in the beginning. We are an explanation-seeking species. We are explainers by nature. We look back and we don't usually think about just statistical fluctuation and regression to the mean. Instead, we look back and we think, Why did that happen? And we find a reason.
The unsuccessful parent that has the more successful kid, we say, Ah, you know what happened? They grew up in this really tough environment, and that really propelled them forward and made them really hungry. It made them want to go after it.
And the really successful parent that is the less successful kid, we say, Ah, you know what happened? He's in a really successful environment. He’s kind of spoiled and he didn't have that hunger, right?
You go out and you get 150 points in your first basketball game. Next game, you go out and you get a hundred points, and you say, Ah, you know what happened? It was that all the focus and the attention from the first time around got to him and made him nervous. [13:12.2]
We always can come up with an answer or a reason, an explanation, and the noise feels real. But you have to remember that a lot … I'm not saying those reasons are always false. I'm not saying that at all. But what I'm saying is that a lot of changes in the things that we're measuring are the results of regression to the mean, rather than the result of, for example, some sort of deep underlying reason that we can explain a way.
Here's how this affects your marketing. Let's bring this back to real estate investor marketing. Here's how this affects you. Okay, let's say you are running ads to your landing page. So you've got your homepage. You're sending clicks there and you're watching the conversion rate, which is the percentage of people that contact you after they land on the site.
Let's say, 100 people land on the site from your ads. Ten of them contact you. That means you have a 10 percent conversion rate. A hundred people in a site. Ten contacted you. Ten percent conversion rate. And, let's say, you want to try to raise that rate, obviously because if you can get, hey, 20 percent of the people to contact you, you're going to get double the leads. Same amount of spend. [14:16.9]
That's a huge part of what we do, right, at AdWords Nerds? You're testing the landing page, and you want a test Design A and Design B. Design A is red. Design B is green. And you're testing to see what happens.
Now, let's say, the reason you start to test is because you feel like your normal page, which is Page A, is underperforming. It was okay, nonstop doing super well. It's not getting you the leads that you want. You're going to test something new. You test something new and Version B, the green version, it does better. Amazing, except that regression to the mean can explain a lot of the fluctuation that you see. [15:00.0]
If the reason that you started testing was that Version A was doing poorly when it was doing well, it's very possible that if you just kept running Version A, it would have just come back and done exactly as well as Version B. This is why you have to be very careful with how you establish tests and how you think about the amount of data that you're looking at, because regression to the mean explains a lot of the movement.
This happens with marketing agencies. In fact, this has happened to me. We have come out, worked with investors, gotten them tons of deals, made them tons of money, and then they say, Hey, I don't know what happened. The first two months were amazing. I did a bunch of deals, and then month three it kind of dropped off. And they leave.
Part of the problem is it's very hard to look at that person and say, Hey, a lot of this is just regression to the mean. We had a particularly amazing couple of months. Now it's sort of dropping back down towards the average. Now it's kind of worse than average. It's probably just going to come back up. If you did nothing, it would probably come back up to somewhere near the average. [16:02.2]
Now, what ends up happening is that someone will then say, Hey, you were great in the first two months and Month 3 dropped off. I'm going to switch to someone else. So, they leave. They go hire another agency and their performance improves. It's amazing. Does that mean the other agency is better? Maybe, but it could also just be regression of the mean. What ends up happening then is that, sooner or later, that good performance starts to regress to the mean as well and they’ll say, Oh, now my new agency isn't doing well. I'm going to jump to someone new.
If you know someone who has jumped from service to service to service to service, this is what. They are often reacting to regression to the mean instead of really examining the underlying causes.
This is really fascinating. They did a study with portfolio managers, investment portfolio managers, and what ended up happening is these people would get amazing returns, so 10 times stock market return or whatever, really amazing returns. They would get hired by these high-end firms that were like, Wow, this guy is a superstar. And then, they almost always underperform. [17:06.4]
Why do they underperform? They had a particularly amazing performance and then they regressed to the mean. So, when do you hire someone? When they have an amazing performance. When is their performance most likely to decline? Right after you hire. And it's not because you hired them. It's not because you're in a new thing. It's not because they're in a new culture in the company or whatever. It's just because, again, their original performance was partially chance, partially skill. Everything went their way. They had an amazing performance and now they're regressing to the mean.
So, you have to be very careful with expectations. You have to be very careful with how you analyze data and you have to be very, very careful about jumping from thing to thing, because what's going to happen is you to the thing and you get the immediate hit of like, Hey, my numbers went up. You feel good. But then, everything regresses to the mean sooner or later. What ends up happening is, when you jump from group to group or service to service, or marketing channel to marketing channel or marketing tactic to marketing tactic, you don't learn. [18:07.5]
Every time you jump, you start over. You don't learn from your mistakes. You don't learn from what happened. You don't learn the things that are going to return to the mean sooner or later. And so, what ends up happening is you never end up raising your mean. You don't raise the average performance. You stay average, and in actuality, the more you jump around, the more likely you are to persistently and consistently underperform, and this is a big problem.
It's something that everybody does. It's very hard to spot. But I'm telling you, if you can just think about this podcast, the next time you're looking at numbers, and you're going up and down, you ask yourself, How much of this could be explained by regression of the mean? And I'm telling you, you are going to make way more money in the long-term.
I hope that makes sense. As always, guys, please jump into the Facebook group. It's an AdWordsNerds.com/group. Come and talk. I'm in there every single day, posting stuff, talking to people, investors, sharing tips. It's an amazing place to be. I hope I will see you there. [19:10.8]
This is Daniel Barrett signing off. Until next week, have a great rest of your day. Cheers.
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