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By Richus Nel*
“Farming the markets” originated from the analogy that exists between personal finance (investing) and farming. Investors understand explanations better when practical examples are used. The SA investment market has delivered exceptional returns over the last ten years, prior to 2015, when markets delivered ±19.5% per year. The long-term average for this market is roughly inflation +7-8%…No wonder the relative underperformance over the last two years.
This relatively fresh memory of the “good old days” cause investors to have an unrealistic return expectations. The expectation is that investments will double every five years. This expectation is frequently the main reason for investors making investment mistakes, by risking too much or even risking too little.
Farming vs. Harvesting / Mining
There is a material difference between farming compared to “harvesting” and “mining”. With farming you have to prepare the land, plant and nurture until harvesting. Harvesting and mining are merely reaping benefits that you have not initiated yourself.
Personal Finance can learn from farming
You cannot harvest what you have not planted. In other words, you cannot benefit significantly from market growth, if you have not invested significantly. The return expectations from markets are generally too high and people are planting (saving) too little. If you want your market investments (pensions) to sustain you in later life, you will have to decide early on in life whether you are a “side-line” farmer or a full time farmer.
Farming (investing) requires impeccable discipline. The same goes for investment and financial well-being; financial discipline in the form of investing and spending is required daily.
Any farmer who wants to start farming needs a plan. He or she can rely fully on the advice of consultants, but they must take ownership of their farming operation (personal finance) and execute that advice. The sooner you start farming (investing), the sooner you stand a chance to run a successful farming operation.
Farmers surround themselves with professionals. These professionals provide guidance in respect of legal, finance and tax matters. Farmers, for instance, use tax specialists to ensure tax efficiencies. Many farmers have extreme financial savvy. They investigate and apply themselves so as to understand what they are investing in and how this investment is going to deliver benefits. They know their numbers by heart, whether it is margins, product prices or input costs.
Farmers know their farms and how it is going to deliver a harvest. They also know what they have to do for optimal results. They are realistic about the harvest potential and what good or bad rainfall (investment cycles) results in.
Farmers belong to farming institutes / bodies which provide them with useful practical information, applicable to their farming practices. They continuously upskill so as to stay informed. Investment communities should copy this behaviour.
Farmers understand that investment is paying it forward. A lot of successful farms have been built up over generations. Investing correctly now, carries that benefit forward for generations to come. They are also realistic about how long it takes to become a successful farmer (investor).
Farmers diversify their farming operations as they understand investment risk and that some of these risks are out of their control. Exchange rates, interest rates, inflation, weather, market demand etc. are all uncertainties that are relevant to both farmers and investors.
What successful farmers do
They show resilience during challenging times and focus on the things they can control. They plant / reinvest in their conviction that if they do what they can, nature will take care of the rest. They constantly exercise well-founded farming principles, making sure everything is aligned for success. When the “climate” is conducive they deliver a record harvest which takes them forward into the next year. They do not become overnight millionaires or retire after a short, successful farming career. They reinvest in tomorrow and expand their horizons.
Farmers do not change their farm after an unsuccessful season. They also do not change operations, so as to start over. They adapt to weather conditions, markets and risks. Farmers can only start over and forget what they have learnt if there was not sufficient initial planning done before they started farming. Investors should do the same and not move into cash when markets become volatile and unpredictable.
It is important to note that the worst corn harvest last year, has turned into a SA record harvest this year. It is often the same with investments, therefore do not pull out of productive farming when things are not going according to plan. Farmers understand that farming may take time to come into production in order to contribute to profitability. This they find out doing research. Thereafter they are patient and plan ahead.
Farmers know that everything in farming moves in cycles. They know to be conservative during the good times, to ensure survival during the lean years.
Insurance plays a significant role in most farmers’ lives. The key is to insure the risks you cannot carry individually and protect yourself against risks that can threaten your future.
Farmers plan for succession. They understand that a successful farm can go to waste in just a few years from mismanagement and ill-disciplined spending.
Personal finance is a constant but dynamic discipline and any time as rewarding as farming. Not all of us can be farmers, but we can all take control of our personal finances.
- Richus Nel, Financial Advisor, Brenthurst Wealth Management.
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