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Farming and investing in the stock market: there are many similarities

Both have randomness and volatility; plus, good management doesn’t always lead to good outcomes

Stock investing and farming entail variability and random chance. Both also create opportunities for profit when randomness and volatility are understood. I introduced the “bell curve” in my last column, demonstrating how portfolios have good and bad outliers, while most stocks clustered around the mean. Does this concept apply to farming?

Say you farm 11 fields of canola (like I had 11 stocks in a portfolio), and your average yield was 50 bushels. The yield in each field would vary. You might have one or two fields close to 60 bushels and one or two around 40, with most clustered around the 50-bushel average, just like the individual stocks in the portfolio. We might credit or blame a specific factor like genetics, but in many cases, differences are simply random chance.

Numerous factors contribute to yield variation. Rain doesn’t distribute itself evenly across all fields, nor does hail. Insects certainly don’t distribute themselves evenly nor do diseases. There is soil variation, with some fields more suited to wet years and others to dry years. Seeding dates vary, which can have a big impact or sometimes none at all. Farming entails a lot of variation and thus individual field yields will be governed by the bell curve. We don’t want to take the fatalistic view that we can’t do anything about poor fields, but it’s important to recognize the role of random chance so we don’t blame or credit the wrong factors.

This brings me to another similarity between farming and stock investing: because of variability, good decisions do not always lead to good outcomes. About five years ago I was helping a farmer determine swath timing. The canola still needed a week, but then an un-forecast weather event occurred, dropping two feet of snow. Swathing pre-maturely would have led to a better outcome, but in most similar situations delaying swathing leads to better yields. In this case, a good decision led to a bad outcome. Weather forecasts are more reliable than market forecasts, but both lack precision.

Now for some technical concepts: When a good decision leads to a good outcome, it’s called good management. When a good decision leads to a bad outcome it’s bad luck, and when a bad decision leads to a good outcome it’s good luck. When a bad decision leads to a bad outcome I call it, “whadya expect?” Some may disagree that luck has anything to do with it but we are always making decisions with imperfect information, which leads to variable outcomes. One of our human frailties is to credit ourselves for good management when we were just lucky, while frequently blaming bad luck for poor outcomes.

While any individual decision can lead to one of the four scenarios, the more good decisions we make over our career as investors or farmers, the better our overall success. While the luck factor can impact an individual decision, over time the good and bad luck evens out. One chapter in my book is dedicated to understanding luck vs. skill.

A desire to tinker with fields or investments is another similarity. There are endless salespeople and endless products we can purchase to supposedly enhance performance. Yet in both pursuits I have found that the less tinkering the better. Success comes from doing the big things well. No amount of tinkering will impact Mother Nature, nor market direction. In most cases tinkering causes stress, increases workload, costs money and provides very little upside reward. However, it often makes us feel better and more in control.

Selling a good stock after a bad year would be akin to selling the land that produced only 40 bushels of canola. We would then buy new fields hoping to get 50 or 60 the following year. With land, this is impractical, but the approach is a regular occurrence among stock investors.

Successful farmers should make good stock investors because of all the similarities.

About the author

Contributor

During a 35+ year career in ag sales and management, Herman VanGenderen became an active investor and stock and real estate, building portfolios in both. His latest book is “Stocks for Fun and Profit: Adventures of an Amateur Investor.” Visit his website at www.you1stenterprises.com or email Herman at [email protected]

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