Episode 060 - Entropy

The enemy to owning and deploying assets to generate rent or dividend yield is the eventual destruction of the asset itself. Per the second law of thermodynamics (Entropy) eventually everything turns to dust. Having a solid strategy for handling long term asset management is critical to Smart Income. In this episode, Myles gives you all the details on how to think about entropy in regards to your assets.

Click on the player above to listen to the episode or download it.  You can subscribe to the RSS Feed here.

Show Notes

Asset management is the core of Smart Income and Financial Sustainability
You rely entirely on assets over a boss
We teach to embrace assets that are in your control - Self reliance
By removing counterparties we can have direct control of our future
But when you are relying on assets to generate you income, you must have reliable assets
This applies both to the income production from assets, but also the liabilities of your life - home, cars, etc.

First let’s understand the difference between assets & liabilities
- Kiyosaki rule applies here

Understanding entropy to be the biggest opponent to asset management

Everything has a lifespan - a “use by” date
This includes anything “physical” in the world
It also includes you

In order to maximize the yield from anything it must function efficiently and last for the longest time period 
This includes you

When you are relied upon by others for their existence (ie. they see you as a counterparty to their success), it gets even more critical.  This is particularly true if you are a breadwinner, or a “leader” in your family.  They all rely on your efficiency and well being for their own well being.  If you are a self-responsible person, then you probably see that as a negative, but try telling that to a 5 year old.

Just as we have to physically be efficient and long lasting, so too must all the things that we rely on for our smart income

I will break those into two categories:   Physical assets and Digital assets

Physical asset entropy
-  Things that are external (ie. facing nature and weather directly) will have the shortest life expectancy 
   - Buildings
   - Land
   - Crops
   - Solar panels
   - Irrigation systems
   - Paint & Sealants

- Things that are mechanical (have moving parts) will have a short life expectancy
  - Motor vehicles
  - Machinery
  - Pumps 
  - Fans
  - Mechanical hard disk drives

- Things that are exposed to other humans can have shorter life expectancy
  - Theft
  - Vandalism
  - Breakage due to incorrect operation
  - Misuse and abuse

Digital asset entropy
- Things that are technological will have an uber short life expectancy
  - Obsolencense
  - Reliance on leverage of other technologies (interconnected nature of systems)
  - An industry that relies on constant re-investment
  - Human expectation of form & function - performance matters more when you rely on it
    -  Try to exist without the Internet, or use older technology for modern day tasks

- All assets have human perceived obsolecense
  - Human desire based on “newness”
  - New model comes out that is cheaper and more efficient
  - Cheaper to replace than repair

Calculating the true cost of entropy
- Most people fail dismally with budgeting for entropy
- No factoring in the annual cost of asset entropy mitigation
  - Determine realistic lifespan
  - Correctly assess the cost of maintenance
  - Correctly budget for all asset entropy mitigation costs over time
  - Amortize both the capital acquisition costs of something + the entropy costs
  - This is why sometimes using a counterparty for high entropy assets makes sense
    - Buy vs. Lease for vehicles
    - Monthly subscriptions for service with counterparties vs. ownership & control

Some good news
- Tax authorities typically allow you to expense maintenance costs on entropy of assets
- The concept of “depreciation”

Some great strategies to combat entropy
- Know first that you can’t win here
- Start with you & your family first
  - Embrace the 3 levels of health care and actively engage with each
    - Preventative - Diet, choice of foods, vitamin supplements, exercise, boost immunity
    - Elective - Don’t let anything that is failing continue - it will get worse.  If you take advantage of this while you have choices, you have some way to embrace free market principles and save 90% of the cost - Ie. my experiences in Mexico
    - Adverse - These will happen when you least expect them.  This is when you only have the option to rely on counterparties
       - If the risk of adverse is high (due to your biological age), consider moving to a place that will provide more accessible, higher quality and affordable counterparty coverage

- Break your assets into those that are exposed to natural elements
- Buildings can outlast you if they were built correctly
- Never attempt to go with the cheapest option because it won’t be
- Eco-friendly building is great - reduce day to day ownership costs, increase longevity
- Consider buildings in Europe that have been around for thousands of years - aim at that target
- Keep on top of new discoveries and invention
  - Infrared paint for building discovery
  - Low-E windows
  - Roof sealant evolutions
- Don’t over-pay
  - New inventions are expensive for early adopters - sometimes waiting a year or two saves 50% of the cost
Consider weather as a core factor to strategy
- Climate change is real - don’t stick your head in the sand like an ostrich
- When buying something, consider weather exposure
  - Properties adjacent to the ocean are great, but not when the ocean levels rise 1 meter
  - Harden for natural adverse events - fire, earthquake, flood, tornados & hurricanes, drought, etc.
- Install monitoring technology 
  - Measurement of water, electricity
  - Surveillance against human theft & vandalism
  - Know that early response can typically save 10x vs. finding a water leak days later
- Don’t forget that we live with other species
  - Create a less likely target for any species
    - Don’t invite theives
    - Don’t invite bears
    - Don’t invite rats & pests

- Place a realistic lifespan on your digital assets
  - Websites will give you 5 years before they look old, tired and “not cool”
  - Hard drives have an 8% annual average failure rate
  - Fans in power supplies wear out and stop things from working - heat matters
  - New inventions will make your assets obsolete well before their physical entropy occurs
  - Try and embrace open source to save money, but know the cost of upgrading due to programmer exhuberance is higher than proprietary
- Just as we have physical threat of external exposed assets, we have the same for digital
  - Any public facing website will have the risk of a bad actor attack
  - You can get caught up in nation state attacks
     - DDOS 
     - Widespread attacks by Botnets, etc.
     - Extortion through malware, etc.
     - Viruses
- Media wears out
   - CDs don’t last forever
   - Magnetic tape doesn’t last forever
   - You will need to transfer from one form to another periodically to avoid loss
- Backups are necessities but that doubles your hardware needed
- Counterparties go broke and take your assets with them

Can entropy be avoided by just staying with liquid assets?
  - This is a stupid philosophy 
    - By investing in a stock, you are investing in a company that has physical & digital entropy
    - You are just using their risk mitigation skills as a proxy to your own
    - You have no control of their agenda, politics, mission and other shareholders
    - You are exposed to the human perception issues of a mass market
    - Banks go out of business

Whereas a blend of asset control and counterparty risk can work, you must recognize that all of this is your responsibility

Failure to address this will lead to failure of your assets, and consequently failure of your smart income plans

Failure to address & budget for these things will lead to extreme costs


Entropy is the enemy to every plan of every man, woman & child in this universe.  But it is natural and you can’t fight it.  So learn to dance with it as long as you can, and measure your success not in whether you win against it, but how you handled yourself in battle.  The only thing you have true control over is how you react to the world.  Become a better reactor to things around you, and you will find inner peace.

Add Comments
These cookies allow us measure how visitors use our website, which pages are popular, and what our traffic sources are. This helps us improve how our website works and make it easier for all visitors to find what they are looking for. The information is aggregated and anonymous, and cannot be used to identify you. If you do not allow these cookies, we will be unable to use your visits to our website to help make improvements.