One of my favorite jokes is about the farmer who won the lottery. When asked if he had any special plans for his lottery winnings, he responded, “Nope. Not really. I’m just gonna keep farming until all the money is gone…”
That joke always gets a few chortles and knowing nods of agreement whenever I tell it at family gatherings (my wife’s family is in the farming business.) Anyone who knows anything about farming understands that it’s a tough endeavor. Even if a farmer does everything perfectly, the randomness of weather, disease or other natural disasters can greatly affect the outcome. Yet, in aggregate farmers produce enough food to feed the nation, satisfy massive export demand and make enough money to buy seeds, fertilizer and equipment to stay in business year after year. As I pondered on this, I realized that investing (at least the way I do it) is a lot like farming.
This month I made 393 equity and mutual fund trades. As I executed these trades, I was struck at the wide variety of outcomes among the names I traded. Some names had been held a long time (over five years); others only a few months. Some were up a multiple of their purchase prices; others lost money. Each name told a unique story from the date of purchase to the day I sold it. As I mused on this notion, I realized that at the time I had bought each and every name, I expected it to make money, probably as much as 30% over some reasonable time frame. The fact that some lost money and some went up 300%, doesn’t necessarily suggest that I don’t know what I’m doing – it simply underscores the uncertainty inherent in equity investing.
Like the farmer, even when I do all that I can do to assure that a name is likely to produce an attractive, above-market returns, I am always subject to the risks associated with investing. Sometime, this risk is company specific. A company can report a disappointing earnings number or be subject to some government inquiry. Sometimes the risk is macro in nature – the market moves up or down on some big development (Fed action, natural disaster, China slowing down, etc.). Sometimes there are just more sellers than buyers (or the other way around) affecting the price of a stock.
Taking the farmer analogy even further, some investors only look at “the “market.” They buy and sell “the market” and talk exclusively about “the market.” This is kind of like a farmer planting only wheat. All he cares about is the price of wheat and the many factors that influence this one crop. A value investor like me who creates well-diversified portfolios using individual stocks, is more like a farmer who plants many different crops, in several locations throughout the world, with varied growing cycles, weather conditions, yield expectations, uses some greenhouses and maybe even tries experimental crops or hydro farming. Because I am not investing in one thing (“the market”), I get to see each of my names mature, grow and blossom at different times. Sometimes, the growth is utterly surprising on the upside. At other times, the fruit withers on the vine or doesn’t even appear. Sometimes, the harvest season comes early; sometimes it seems to take forever. Over time, I expect the sum of all my individual names to generate attractive returns for my clients and me.
The bottom line for me is that it always seems to be a good time to be planting and harvesting. The investor who only owns “the market” is probably worrying about either sellilng or buying – is it time to plant or reap? My way of investing allows flexibility and yields a bountiful cornucopia of diversified fruits of my labors. Worries about the emerging markets, Fed policy, retail sales, government actions, and so forth, can and will impact “the market” and my investments. Yet, taking the longer view and understanding that market declines represent buying opportunities (planting) and that times of euphoria can be selling opportunities (harvesting) makes my job much easier than just buying “the market.” Or farming for that matter…