A Hasty Site Plan, an Early Windfall, a Lesson in Real World Economics 

Chapter Two of The Challenge of Charity

It was a crude sketch, pencil drawn on the inside cover of a book I was reading. I think it was Mark Twain’s A Tramp Abroad…

It represented our oceanfront lots. A grid of 36 lots in three rows. Twelve lots per row. We figured we could get $35,000 for the first row – the ones that sat directly on the beach. We priced the second row at $30,000, and the third at $25,000.

Thinking back on that now, and considering what those lots are worth today, it’s hard to fathom why we sold them so cheaply. And why we sold some of the best lots – the oceanfront lots – so early in the game.

The answer is that we knew practically nothing about selling this kind of real estate.

We’d each had some experience in real estate. I had even been a limited partner in similar Florida-based projects. But I didn’t run those projects. Nor was I included when it came to pricing the lots.

So, how did we arrive at those prices?

We didn’t look at “comps” – the prices of comparable properties – because there were none. In fact, in the late 1990s, there weren’t any beachfront housing developments within a hundred miles of ours on Nicaragua’s Pacific Coast.

A strategy we might have had, but didn’t, would have been to base our prices on similar lots in the States. US property was considerably cheaper than it became 30 years later, but beachfront lots in Florida or California typically sold for $500,000 to more than $5 million.

I believe what we did – and in retrospect, it does seem naïve – was to price those 36 parcels so that the total would equal the $1 million we had by then invested in the property. (A purchase price of $800,000 plus about $200,000 in development costs.)

How did that go?

From one perspective it went extremely well. We sold all 36 lots in 48 hours, sight unseen!

“Holy mackerel!” we thought. “We’ve struck it rich!”

Our next thought, of course, was, “Gee whizz. We probably could have priced them at twice or three times those amounts and still sold out.”

This was just one of the many mistakes we made in developing that rustic and desolate cow ranch into a five-star residential resort community.

* We never had the property surveyed.

* We didn’t test the soil.

* We hadn’t looked for natural springs or plumbed the aquifer for water.

* We hadn’t figured out how to bring electricity from the road to the building sites (a stretch of about two miles).

* We knew nothing about building regulations in Nicaragua.

* We didn’t even know a single builder.

Hindsight, as they say, is 20/20. And although I do believe we could have sold the 36 lots at a higher average price, what we did by selling them so cheaply was generate the immediate cash flow that was critical to getting our fledgling business off the ground.

And there were two things that, even in our ignorance, we did right:

* We paid a very good price for the property we bought.

* We wasted no time in trying to sell the lots to our International Living subscribers.

From Cow Paths to Graded Roads 

In the first year after purchasing the property, we built a lot of infrastructure.

We built a two-mile long dirt road stretching from the main entrance on the dirt road that went from Rivas City to the ranch. We brought in electric from outside the ranch along the main road, from the entrance down to the beach. We dug two wells to provide water to the 36 lots we had just – to our surprise and delight – managed to sell.

As I said, all that took about a year to complete. It also took every cent of the $200,000 we had put aside for infrastructure.

Next on the agenda was an onsite sales office. Our idea for that was very basic: a 1,200-square-foot structure with an open floor plan, two small bathrooms, and a palapas-covered roof. We located it on a tree-covered bluff overlooking Playa Rosada, the stunningly beautiful beach at the heart of our first phase of development.

This, we finished in about six months.

Over the next 18 months, we added a three-room hotel with a kitchen and outdoor dining room, and a Tiki-style bar beside a small pool looking on to Playa Santana.

That construction was financed by selling additional lots along a cove on the other side of the bluff. These lots were also sold sight unseen to our subscribers.

Our initial capital investment – among the four partners – was less than half a million dollars. Way too small for a project of this size. But because we had a ready market that we could reach for free (by email advertising), I don’t think we ever tapped into that original capital pool.

A Home, a Problem, and a Disturbing Solution 

Encouraged by our progress and stimulated by our growing infatuation with the beauty and culture of this heretofore undiscovered coast of Nicaragua, several of the partners and I decided to build second homes in Rancho Santana for our own families.

We spent a day with Antonio, the local we had bought the property from (and now our partner), riding horses and walking ridges with fantastic views. I found a great spot about a quarter-mile from the first section we had developed. The lots we had carved out there were small – just a quarter-acre each. I claimed two of them.

Ours was one of the first houses built in Rancho Santana. Compared to what came later, it was modest in size, but felt spacious. At 1,500 square feet, it consisted of three small bedrooms, a kitchen, and a large open-air living room with a spectacular view of the northern shoreline and the hills beyond.

The house was completed in less than year. Soon after it was finished, K and I spent a week getting the feel of it.

The open-air living room, which we’d thought would be a brilliant way to take advantage of the views, turned out to be a bad idea. In the heat of the day, it was too hot. During the rainy season, it was cooler, but the rain often came in almost horizontally and soaked everything.

If that wasn’t enough, birds and bugs and bats ensconced themselves in the beams that held up the roof, from which they would occasionally drop down and sometimes settle on the dining room table while we were eating.

In the windy season, breezes blew continually through the open areas, leaving a layer of dust everywhere.

“It’s normal, my friend,” Antonio said with a smile when I complained. “If you want to live outdoors, you must submit yourself to Mother Nature.”

For the rest of that first visit, we tried to be outdoorsy. But the following year, we enclosed the dining and living “rooms.”

Meanwhile, it became obvious that it was going to be impossible to keep the place as neat and tidy as we were accustomed to in the US.

Antonio recommended that we get a full-time housekeeper.

In the US, a housekeeper is something only the wealthy have. We were financially comfortable, but we would never have considered having a full-time housekeeper in the States. When I asked Antonio how much it would cost, I was shocked at his answer.

“I pay $80 a month,” he said. “But for you, as a Gringo, maybe $100.”

But this created another problem that was just as disturbing. I couldn’t conceive of paying a full-time worker only $100 a month. It felt financially abusive – like pure, old-fashioned Colonial-era exploitation.

“Honestly,” I said to Antonio, “I wouldn’t feel at all comfortable with $100 a month. How about $400?”

He put his arm around my shoulders and gave me a little hug. “Sit down,” he said.

I sat.

“Mark, I know you. You are not a bad or a stupid person.”

“Thanks a lot,” I thought.

“You feel that way because you have grown up in America. You have lived all your life in a big, rich economy. But Nicaragua is different. We are a poor country. We want to grow richer, but we know that if it comes, it will come slowly.”

Antonio was not simply a local property owner and an entrepreneur. He also held two degrees, one in agronomy and another in business administration from a US university. On top of that, he had spent several years working in the US.

He understood the employment market in the US and in Nicaragua, and he’d had a few courses in economics. Which made him a good deal more knowledgeable in these things than I was.

More importantly, he had a genuine concern for the welfare of Nicaragua and its people.

My First Lesson in Real Third-World Economics 

Before we started building Rancho Santana, there were very few employment opportunities in this part of the country. It was a subsistence economy. Most people lived in the crudest shacks, with dirt floors and latrines. They literally lived off the land. Rancho Santana greatly expanded the demand for labor.

There had been something of an existing job market. The larger farmers employed some people, and there were a few small businesses that employed others. So, there was an established standard of how much one could expect to earn as a laborer. And that was the government-mandated minimum wage of about $80 a month. Managers and skilled laborers earned about twice that much. And doctors and lawyers earned, on average, about $400 a month.

This was Antonio’s argument to me:

“You are an investor in our country. And your investment will help us grow rich. But you must be thoughtful about the ideas you get about what you pay people. If you pay your one housekeeper four times the going rate, you will cause trouble not only for other homeowners, but for all the local people that would like jobs.

“Keep in mind that we are building a dream here with Rancho Santana – a project that could one day be employing hundreds or even thousands of people, people who right now have no employment.”

Embarrassing Afterthoughts 

The more I thought about Antonio’s argument, the more embarrassed I felt. Without giving the matter a moment’s thought, I had decided to pay my first Nicaraguan employee four to five times the going rate. Even at that rate, I felt like I was taking advantage, because $400 a month was still less than 25% of what an unskilled laborer would make in the States.

But I had never considered the potentially larger impact of what I was considering doing.

It would have made me happy and would have thrilled the housekeeper I would hire. But it would have ignored – at a considerable cost – the negative effect my singular decision would have on the social and economic reality of the hundreds of poor people living nearby.

This wasn’t going to be the last time I made this mistake. As I’ll explain in later chapters, I made it again and again in different circumstances and in different ways.

I was eventually able to understand what I was doing. I realized that, like most of my generation, I’d come to accept an ethos of fairness and justice and charity that felt inarguably true… so long as I didn’t think too much about it.

Lessons Learned 

* When it comes to developing property, the cost of the land is going to be a small part of the overall cost of the development. In the States, it may be 30% to 40%. In areas without a developed central infrastructure, it may be less than 10%.

* Culture is everything. When making business decisions in a foreign country, recognize that the effects of your actions are likely to have different ramifications than the same decisions made at home.

Inertia 

From The 7 Natural Laws of Wealth Acquisition

Let me tell you a story…

During the time I was publishing Early to Rise (from 2000 to 2010), my partners and I held annual conferences for our subscribers. They usually included events where we (the speakers) would sign books of ours that some of the attendees had bought in the pop-up gift shops.

I always enjoyed doing this because it gave me an opportunity to meet dozens of the attendees personally and have, however briefly, chats about who they were, why they had come, and what benefits they hoped to reap from the conference.

Roughly half of those who attended had not yet set upon whatever journey they were planning. They came hoping for some insight or introduction or advice that would get them on their way. And almost invariably, when I asked them if they had found the spark they were looking for, they said they had. And judging from their energy and excitement, I believed them.

A good number of those people returned in subsequent years. And if I asked them what progress they had made since the last conference, I was disappointed to discover that many had made no progress at all.

When I asked them why they were still stuck at Step One, they had all sorts of reasonable explanations ranging from unexpected financial problems to unexpected marital issues.

And the same thing happened again and again, year after year.

What was going on?

It wasn’t laziness. 

Most of these people had challenging professional jobs that required working 45+ hours a week. Some had second jobs to earn extra income. Many spent portions of their leisure time reading and doing research for side projects they were interested in. These were not sluggards. Something else was afoot.

Nor was it a lack of connections and/or resources. 

Among the people that kept coming back without having made any progress, there were plenty who came from affluent families, lived in upscale communities, and had all the money they needed to get working immediately on their goals. In fact, there seemed to be an inverse relationship between the resources people had and their ability to move forward.

Nor was it the “fear of failure.” 

A common explanation for this sort of procrastination is fear of failure, but that never rang true to me. I had started dozens of businesses. I knew that not all of them would be successful, but that didn’t stop me. And yet, I had often spent months planning or talking about starting some new venture that never got off the ground.

So, what was it? What could I learn from my own bouts with procrastination that could explain the inability to move forward on specific goals.

Since I have kept detailed journals of my daily thoughts and actions for more than 30 years, I spent some time looking through the entries I’d made, looking for a common thread.

It didn’t take long to find it. My problem hadn’t been laziness or a lack of resources or a fear of failure. My problem was that that I did not know how to start.

Think about your own dreams. Think about the goals you’ve set for yourself over the years but failed to achieve.

Perhaps you’ve always wanted to write a book. Or learn a foreign language. Or have an exotic adventure. Or start a successful business. And yet, as you are reading this today, you realize that you have not done it.

My proposition to you is that you haven’t accomplished those goals because you knew in some core part of your mind that what has held you back is the realization that you simply didn’t know how to take Step #1.

Let me see if I can convince you of this proposition with a very brief thought experiment.

Imagine this… 

You get a job in the accounting department of a successful company that sells widgets. You work like a demon six days a week and get one promotion after another until, after only three years, you are promoted to CFO, and the next year to COO. At this point, you know everything about how the business works. You know how to manufacture the widgets. You know how to sell them and who the buyers are. But there is something else you know. You know of a supplier that can get you the materials for half of what you are currently paying.

You’ve told your boss about this opportunity, but he’s said he’s not interested. So, you decide to open your own widget shop. You can hire a few key employees you already know from the industry. And you know just which customers would be happy to buy widgets from you.

Question: Would you be afraid to start that business? Of course not! 

On the contrary, you’d probably move as fast as you could, fearing that someone else might do it first!

This illustrates what I believe is the reason most people (like 80%) fail to accomplish their wealth building goals. In business and other forms of human endeavor, we call it procrastination. And it is caused by the very accurate (but often only subconsciously understood) fact that they lack a simple road map to follow.

In science, the tendency of an object at rest to remain at rest is referred to as inertia – which, you may remember from an Introduction to Physics class, is Newton’s First Law of Motion.

And inertia is one of our laws of wealth accumulation.

The Mistake Most People Make re Inertia 

Look at this tennis ball.

It’s just sitting on the ground, not moving. It exerts no energy, and it appears that no energy is being applied against it. Thus, from a physics perspective, we would describe it as being “at rest.” The same is true of a person who is sitting still on a bench.

But, in fact, both the tennis ball and the person on the bench are subject to multiple forces of energy that are negating their movement.

Inertia explains why 95% of those who embark on learning languages or playing a musical instrument never get past the introductory material. It explains why almost all New Year’s Resolutions are abandoned before the end of February. It explains why many new businesses never get off the ground – and why those conference goers came back year after year without making any progress on the goals they had enthusiastically set a year earlier.

Defeating inertia is 80% about “Getting Ready.”

If you’ve tried but failed to increase your income and/or become wealthier in the past, the advice I’m about to give you may prove more valuable than any strategies you’ve tried.

The commonsense approach to getting started on any goal is to do something – read a book or take a class or attend a lecture – that inspires you. And that is why there is an entire industry that specializes in this area of human psychology.

But if you’ve read the books or taken the classes or attended the lectures, you probably also know what follows. You’re busy with the demands of your current life – and so you promise yourself that you will start the following week or the following month or after your next vacation or after your upcoming wedding or after you finish remodeling the bathroom. And then, suddenly, a year has passed, and you’ve done nothing.

Overcoming Inertia as an Entrepreneur 

The first section of Ready, Fire, Aim, my bestselling book about entrepreneurship, provides a step-by-step guide to moving a business from revenues of zero to one million dollars. What I do in that section is provide would-be entrepreneurs with what could be described as an easy-to-understand guide to overcoming entrepreneurial inertia.

It boils down to discovering what I call the Optimal Selling Strategy (OSS). And it’s a simple matter of answering the following five questions:

1. Who are the people most likely to buy the sort of product or service I intend to sell?

2. Where (using what advertising media) am I going to find the largest percentage of them?

3. What sort of offer will be most appealing to them?

4. What kind of pitch will they most strongly respond to?

5. What can I do with my product that will make it 90% the same as the best of my competition, but 10% better?

You will probably see these questions as rudimentary. And they are. Which is exactly the point! But finding the OSS is how you gain the confidence to take action.

Overcoming Inertia to Get Rich as an Investor 

I’ve been in the investing business as a publisher and as an author for more than 40 years. And one of the things I’ve learned is that investing the way most people do it is a formula for failure.

Something like 80% of professional brokers and money managers fail to beat stock market averages over 10 years or more. Even on a yearly basis, the majority fail at this very minimum objective.

What’s worse, individual investors do three times worse than the pros. Over a hundred years, for example, the US stock market has gained about 10%. Yet individual investors, as a group, have made less than 3%.

The reason is similar to the reason most would-be entrepreneurs fail.

They may read financial newspapers or newsletters. They may watch the financial news. But they don’t have the confidence to take the kind of decisive action necessary to succeed long-term because they don’t know the answers to basic questions about how the stock market works and about the individual stocks they are considering buying.

Questions like these:

* What makes the market go up and down?

* What makes certain stocks go up and down independent of what the market does?

* What investment factors are responsible for producing market-beating returns?

* For the stock you’re looking at, which part of the business cycle is its industry in?

* How does this business make money, and what are its prospects for growth in the future?

* Does the company behind this stock reward shareholders?

* Does the company have an enduring competitive advantage?

* Does the company produce a product it can sell 50 years from now, or does it constantly have to reinvest in remaking or changing its product?

* What is the company’s position in its industry?

* What are the risks to the company that could drive its stock price lower?

When I was new to investing, I could not answer those questions myself. So, what I did was assemble three of the best investment analysts I had access to.

That led to the creation of the original Legacy Portfolio, which, from 2012 to 2024, produced a return of 10.4% per year on average. Moreover, the level of risk inherent in the approach we developed for that portfolio was much lower than that of other portfolios that had achieved similar ROIs.

When my personal broker and Sean teamed up to take over managing my Legacy Portfolio, they contributed their knowledge of various sectors of the market to make the portfolio not only safer, but able to invest and trade in categories that I had been afraid to venture into.

With each innovation, I questioned them about anything I didn’t understand. And their answers were always rational and clear. That eliminated the doubts I had. And with those doubts gone, so was the inertia I felt about moving forward.

What I believe we have now in the Legacy Portfolio is the investment equivalent of what I built for entrepreneurs in Ready, Fire, Aim. It is a strategy of stock selection and management that operates out of accumulated knowledge and the confidence that increases every year as the portfolio continues to outperform the markets.

I Went There to Exploit the Property Values 

Chapter One of The Challenge of Charity 

In 1996, six years after the end of the US-backed Contra war, the overthrow of Anastasio Somoza by the Sandinista Party (led by Daniel Ortego), and the democratic election of President Violeta Chamorro, I flew down to Nicaragua.

At that time, Nicaragua had a per capita GDP of $908, the lowest in Central America. It ranked among the three poorest countries in the Western Hemisphere, shoulder to shoulder with Haiti.
Nicaragua was in desperate need of financial aid, but I wasn’t there on a humanitarian mission. I was there to buy a large parcel of beachfront property cheaply, divide it into lots, and sell them to our customers at a tremendous profit.

The Opportunity 

My mission was funded by a business I was partnering with, a Baltimore-based publisher of newsletters and magazines. Several years earlier, I had been recruited from an easy but unchallenging retirement to help grow the company’s profits. At the time, the business had annual revenues of only $8 million. (I was retired from partnering in a similar business whose revenues I had helped grow from $1 million to more than a $100 million in seven years.)

The company was publishing about half a dozen investment newsletters and a magazine-styled monthly publication called International Living, which provided information and advice to Americans interested in retiring or owning second homes overseas.

For years, International Living had been featuring stories and sponsoring tours of Mexico, Panama, Costa Rica, Belize, Mexico, and the Caribbean. These were all countries that its readers felt good about traveling to.

Nicaragua had not been featured for a long time. Not only because of its bellicose past but also because it had tumbled from being one of the richest Central American countries to the poorest.

A benefit of Nicaragua’s dire economic status was that the government at the time was a free market, pro-growth administration. And despite the political violence that had been front page news in the US, it had quickly returned to being a low-crime, peaceful, and even welcoming nation.

But it was that shocking level of poverty that made buying property there incredibly cheap. So, it came as no surprise to me that the editors of International Living ranked it that year as their “best buy.” They reported that its climate was tropical, its people were friendly, its geography was beautiful, and everything was very, very inexpensive.

To supplement subscription revenues, International Living had been sponsoring “get acquainted” tours for subscribers who were intrigued by the arresting photos of the country and tempted by the low prices. They wanted to see for themselves if the magazine’s praise was merited.

The idea of selling tours to International Living subscribers seemed sensible to me. But when I looked at the P&Ls, I could see that we had underestimated the costs involved in transporting and housing them in a style that was even remotely up to US standards.

And there was another problem. When members of the tours expressed an interest in moving to Nicaragua, their International Living hosts introduced them to local real estate brokers, some of whom were selling them properties with problematic titles and leaving our subscribers, quite understandably, upset.

The answer, it seemed to me, was to do our own real estate brokering, which we could properly vet with local lawyers. My partners agreed and the strategy worked. As the months passed, we became more confident with conducting business down there and began talking about a potentially bigger opportunity.

The idea we had was to find large tracts of land on the scenic Pacific coast, divide those tracts into lots, and then sell them at prices that would look dirt cheap to US and Canadian buyers and still provide us with sizeable profit margins.

A Mission and an Adventure 

So that’s why I was in Nicaragua. Not to save the country, but to exploit it.

Because US business and investment in Nicaragua had dried up after the revolution and had not yet recovered (most Americans believed the country was still in turmoil), our interest was welcomed both by the country’s department of tourism and the US State Department, which was looking to promote US business there.

As a result, I spent my first night in Managua, not in a hotel, but at the home of Lino Gutiérrez, the US Ambassador to Nicaragua. The only time before then that I’d been to the home of an ambassador was when I was teaching English Literature at the University of Chad as a Peace Corps volunteer and, along with the other American volunteers and our wives, was invited to dinner at the US Ambassador’s residence. And now, 20 years later, I felt, once again, flattered to have been invited and excited to think that I might be doing something that merited the invitation.

The next day, I was picked up by AG, a local businessman who had oceanfront property for sale. On our three-hour drive down the Pacific Coast Highway, he filled me in on what he thought I should know about the local area.

He told me that Nicaragua was a beautiful country, which – although I was seeing only a sliver of it – was already obvious. He told me that the Nicaraguan culture was complex. It wasn’t just fighting and farming. And although the revolution had fostered its share of violence, the very fact that peace and democracy had been restored after 10 years was evidence of the generally compliant and agreeable nature of its people. He told me that Nicaragua was rich in gold and other minerals, and that before the revolution – even with the worst of Somoza’s tyrannies – it had, compared to its neighbors, a relatively stable and growing economy. “People were poor,” he said. “But nobody was starving.”

An Amazing Grace

The property he showed me was owned by his family – acres upon acres of rolling hills, intersected by a small river and including five coral-colored beaches, one more beautiful than the other. The first beach he showed me would have been enough to seal my interest in the property, but there were four more to be seen.

I spent the rest of the day with AG, exploring it on horseback as he led me up and down the cow paths that crisscrossed the property, moving through dark forests (home to howler monkeys) and sunlit glades, past cliffs and ridges and lush green valleys.

Looking out over the landscape, it was easy for me to imagine estate homes perched upon the hillsides with glorious views of the sea.

This was the Eden my partners and I had been looking for.

The entire property consisted of 1,700 acres. A similar property in the US at the time, in California, say, which it resembled, would have gone for at least $300 million.

We bought the first 1,000 acres immediately and the remaining 700 acres a year later, after we had proven to ourselves that we could sell our concept for the property to our subscribers. And what did we pay for it? I’ll say this: When AG mentioned the price to me, I didn’t even try to bargain. It was less than I had recently paid for a one-story bungalow on a quarter-acre lot across the road from the beach in Delray Beach, Florida.

The decision was, as they say, a no-brainer.

A Business Lesson

As publishers, my partners and I knew next to nothing about real estate development and absolutely nothing about selling property in Nicaragua to Americans.

In the months that followed, we discovered that just the cost of infrastructure (carving out roads, bringing in water, electricity, etc.) was going to be about five times the cost of the land.

But we didn’t know that when we signed the purchase agreement. We made the deal. And as part of it, AG wanted in, so he became our sixth partner.

We were excited. We felt smart. And lucky. But, as I said, we had no idea what we were getting ourselves into.

Lesson #1: When you begin a business that is new to you, know that some of the most important truths about succeeding in that business are hidden from you at the start – even if you have “studied the market” in advance. Success often depends on discovering those secrets before you run out of money, patience, and time.

(Look for Chapter 2 in next month’s issue…)

 

An Astronomical Threat to Your Wealth! 

From The 7 Natural Laws of Wealth Acquisition 

About 20-something years ago, BB and I were in Europe meeting with several entrepreneurs with whom we hoped to jointly launch European offices for the publications we were selling in the United States.

Since BB and I had teamed up 10 years earlier, the business had grown substantially. We were feeling good about that and positive about the future. So positive, in fact, that BB decided, almost impulsively, that the company should buy a chateau in France that we could use when we were there.

The next thing I knew, we were in the countryside of the Dordogne region, shopping for chateaux. It was enthralling to think that I, having grown up in a working-class neighborhood on Long Island, New York, was here on a business trip in France buying a castle.

It was a beautiful day when we set out with a local broker, which probably made us feel that much better about what we were doing and diminished any second thoughts we might have had about its financial sense.

By the end of the day, we had seen half a dozen properties. And that night, at dinner, we talked about our preferences. I had fallen in love with a newly refurbished chateau that looked like a miniature Versailles. He had fallen in love with a gothic castle that had been neglected for decades.

The benefit of “my” chateau, I argued, was that it was ready to furnish and use. BB, a weekend handyman, saw its condition as a deficit. He didn’t say so directly, but I’m pretty sure he was already daydreaming about how he could fix up “his” castle. The deciding factor turned out to be the price. We could acquire the castle for about a million dollars, while the chateau cost four times that much.

So, we went with the castle. And soon thereafter, BB was working on notes and drawings that he could use to oversee its reconstruction.

He soon discovered that the repairs and improvements he wanted to make had to be approved by the local historical preservation board. And that is when he recognized that the job was going to be more complicated and perhaps more expensive than we had imagined. So, he did the right thing and bought the place from the company.

Over the next 10 years, he improved all of the buildings on the property to the point where his family could live comfortably in them or, when they weren’t there, rent them out.

But the cost of the renovation, in terms of time, was enormous. And the cost in terms of total dollars spent on it ended up being as much as or greater than “my” chateau would have been.

BB’s struggle to overcome the erosion of that property illustrates one of the most important concepts in business, investment, and wealth building.

Understanding Entropy Is Understanding Everything 

In physics, entropy is associated with randomness or uncertainty. In the natural world, it manifests as the inevitability of a decline into disorder. Or, as Paul Simon said in one of his songs, “Everything put together sooner or later falls apart.”

Monuments are built and crumble. Empires are won and lost. Cultural fads surge and then taper off. Human beings grow strong and then weaken and die.

The entire universe and everything in it is subject to entropy. And that includes business ventures and everything we human beings do to become successful in life and leave the world with something of value after we die.

You book a room in a hotel that looks brand-new. You arrive and are unpleasantly surprised to discover that the rugs are worn and the bathroom fixtures are old.

You want to learn how to play the guitar. You buy one and enroll in an online course. For the next several weeks, you spend all your spare time on this new and exciting hobby. Then, several months later, something happens. Something work-related or family-related or financial or purely accidental. It could be anything. But it takes all your attention. And then, almost without noticing, a year passes and you realize that you haven’t picked up your guitar once.

Or something else happens. Something seemingly inconsequential but disturbing. You get a flat tire. Your pen runs out of ink. You pour yourself a glass of milk, take a gulp, and spit it out because it’s sour.

Things go bad. Things wear down. Things fall apart.

There is a term in business that parallels entropy. It’s called “incremental degradation.”

Incremental degradation is what often happens when, for example, the leadership team tries to increase the bottom line by indiscriminately cutting costs.

The most common story told to illustrate this point is about an imagined food product containing, say, 27 ingredients. To reduce the cost of producing this product, the team decides to eliminate three of them and see if customers notice.

It turns out that they don’t notice. So, the team eliminates another three ingredients. Once again, they don’t seem to notice. But the third time the team tries to boost the bottom line by reducing the number of ingredients in the product, customers do notice.

Almost overnight, sales drop dramatically. Not by a small fraction but by 50% or more.

Because of how gradually the ingredients were withdrawn, the steepness of the drop doesn’t seem logical. But studies done on this phenomenon have proven that is exactly what happens. What’s more, they’ve proven that once customers have abandoned a once-favorite food product, the chances of getting them back – even if an attempt is made to add back all the original ingredients – is very small.

Understand Negentropy – the Opposite of Entropy – and Harness a Universal Force for Repair & Growth 

Scientists and mathematicians use the term “negentropy” (a portmanteau of “negative” and “entropy”) to refer to the difference between the energy and the potential energy in a system – which translates to efforts that can be made to keep things from falling apart.

When I consult with senior executives, incremental degradation is one of the first “laws” I teach them. I explain why the popular aphorism “If it ain’t broken don’t fix it” is a recipe for eventual failure. I then encourage them to employ a contrary practice – what I call “incremental augmentation.” Which is, very simply, the continual improvement of the quality of their product or service.

I look for examples of incremental augmentation wherever I go.

When I’m staying at a particularly nice hotel and they give me a welcome gift when I check in… or I’m impressed by a creative flower arrangement in my room… or by a clever design for a menu at the hotel restaurant… I make note of it and take a photo of it and send it to the director of Rancho Santana, our five-star resort in Nicaragua.

When I visit a botanical garden, I’m always on the lookout for something, anything, that I like and that we don’t have in our garden, Paradise Palms, in Delray Beach. When I see it, I make note of it and take a photo of it and send it to our property manager.

There are very few days that have passed since I started working in the direct-response publishing industry 40+ years ago that I’m not scanning my competitors’ publications and advertisements, looking for something that I can send along to people that can somehow make good use of it.

And in that time, I’ve discovered a few things worth mentioning.

1. Incremental augmentation applies to every sort of business and every sort of institution and organization – public, private, or non-profit – that I’ve tried it with. And it applies to every sort of product or service I’ve used it for.

2. When I first began employing this tactic – and it was years before I had heard of incremental degradation or had given incremental augmentation a name – I assumed that sooner or later I would exhaust all possible ideas for small improvements and enhancements. What I discovered was quite the opposite. The more ideas I found, the more new ideas I noticed or, in some cases, invented by putting two disparate ones together in some novel way.

3. Incremental augmentation is not only a limitless resource for negating the thousands of detrimental forces pushing against your success (many of which may be invisible to you), its power grows exponentially… just as the negative power of incremental degradation does. In other words, it has the power to suddenly grow your business by leaps and bounds when the market comes to understand how much better your products and services are than those of the competition.

Negentropy and Personal Wealth Building 

When I began to make more money than I needed to support my family, I also began to explore passive and semi-passive opportunities to increase my wealth.

These began with investments in stocks and bonds, then moved into rental real estate, then into extending mortgages and other private lending businesses, then into taking partial ownership of certain kinds of start-up companies (those that I understood and could control), and then finally into fun wealth-building activities such as collecting investment-grade art.

I’ve given you a brief account of how incremental augmentation helped me extend the lifespan of the businesses I’ve owned and run, while also expanding their value for my customers and shareholders. But I’ve learned that the same concept, applied creatively, works with the more general objective of building personal wealth.

One example: When, in or about 2010, I developed (with some expert guidance) a stock investing strategy based on some of Warren Buffett’s experience, I recognized that to equal what Buffett had done in the past, I had to tweak his strategy to reflect the current realities of the stock market. I did it by including a tranche of fast-growing social media businesses in my portfolio – but I selected them, with the help of my advisors, to reflect Buffett’s core concepts of market domination and “moats.” I also tweaked my strategy by replacing dividend reinvestment plans (DRIPs) with a reinvestment strategy based on value investing, which I discovered by simply understanding DRIPs better and more deeply than I had before.

These incremental augmentations of a strategy that had already been proven to work resulted in the Legacy Portfolio, which is now almost 15 years old and has outperformed the market, both in terms of higher ROIs and considerably less volatility.

I used the same approach in my real estate investing. When I began buying small, single-family houses, I followed the rules of that industry. But I was always looking for ways to earn better ROIs by improving the deals I made, the properties themselves, and the quality of service provided to renters – which paved the way for gradually higher rent increases and fewer maintenance and repair costs. I did the same thing when I began investing in larger commercial and residential and resort properties.

On another level, I put this idea to work in my general approach to wealth building by consciously developing multiple streams of income through half a dozen market sectors, with the goal of eventually generating in each one of those sectors enough to cover all my future financial needs even if all the others failed for reasons I could not control or understand.

That, too, I’m happy to tell you, worked. Not with every one of them. And some worked better than others. But three hit the mark, and the others are still sound and profitable.

I see this concept of developing multiple income streams as a conscious exercise in negentropy. It is grounded in the very real fact that entropy affects every business and investment asset class. And if you try to pretend otherwise – that your one core source of income will always be there for you – you may very well wake up one day and discover that you are getting poorer instead of richer!

For someone beginning their wealth-building journey, success can seem monumental and impossible. But really, it just needs to be built by one incremental augmentation at a time. Not by comparing how far you are from where you want to be but by focusing on the next small thing you can do.