In this column, I’m going to comment on the most common excuses I’ve heard for why farmers don’t invest in stocks. I hope I don’t tick off a bunch of readers with my reactions.
Before I get into it, first let me say that I have been doing taxes for farmers since 1974, plus CAIS forms so I know quite well what is going on in farming. I’ve also been involved with stocks since the early 1960s, but like most people I was “playing” with them, not working them. No one volunteered to teach me how to put good stocks to work until I finally found some information on how to invest after I turned 50. And I fine-tuned my strategy after I retired from Grainews.
So I think I have a pretty good understanding on how farming has been and is and I have a pretty good understanding of stocks. With that, let’s get started. Again, I hope I don’t tick off too many readers.
EXCUSE : THE FARM NEVER MADE ANY MONEY TO INVEST
My reaction: Now let me get this straight. Farming never made any money, but you keep putting all your money back into it? I can understand that you need a critical mass of a farm but that’s not likely possible for most farmers so they should use my five-legged stool (an overall financial plan) to set up a critical mass for themselves with the farm as one leg.
In investing terms, if we keep putting money into a losing stock it’s called averaging down. This is a very dangerous strategy. Yet farmers do it all the time. So it seems to be OK to lose money farming and keep putting more money into it. But lose money with stocks, oh that’s bad.
EXCUSE: I DON’T KNOW WHAT TO DO
My reaction: That’s fair. The investment industry generally is not paid to teach you or anyone else on how to invest. Still I know a lot of farmers who have very nice portfolios of stocks. Many bought stocks in the companies they deal with, so they own shares in Canadian banks, John Deere, Cat, West Jet, PetroCan, Imperial Oil and others. Many lost money on the occasional stock like Nortel, maybe Air Canada, Dome Petroleum, but overall most portfolios grew over time.
Now since I retired from my full time job I teach the strategy on how to sell covered calls, which has made us and many others lots of money. Of course there are other ways to make money with stocks.
On the Internet you can now find free charts for every stock and if you just owned stocks as the chart was going up and sold them when the chart flattened on top, you could have made a lot of money over the years.
EXCUSE : FA RMERS WANT TO PAY DOWN DEBT
My reaction: Paying down debt is an OK strategy, but for most people some debt makes sense. Growing a farm with internal earnings is a hard thing to do if the farm doesn’t make money as many farmers tell me. Yet somehow most farmers make the payments most of the time. And if you don’t know how to make money with stocks then sure, paying down debt on your farm can be a decent strategy. So it comes down to not knowing what else to do with the spare money.
Here are a few statistics: stocks have made around 11 per cent per year over the years. About half of that has been dividends for the past 30 years or so.
For the past 100 years dividends and stocks with rising dividends have made most of the money. For the past 30 years or so, about 25 per cent of the stocks have made most of the money. That means three quarters of stocks did not make money and also that most investors who spread out risk by owning many shares likely didn’t make much either.
I’ll be the first to admit I didn’t always follow these winning strategies, but I did learn. And there is a magic of compound knowl-
edge at work here: the more we learn the easier it is to learn more.
EXCUSE: THE STOCK MARKET IS THE BIGGEST CASINO IN THE WORLD
My reaction: Let me see. The casino is mostly irreversible decisions. Ya poot yur mney dwn and ya tak yur chanses. Hmmm. When you seed a crop you put your money down and you take your chances. That is totally an irreversible decision. And even if it works out, you have to wait four to 18 months to collect from that investment into seed, fertilizer, and fuel each spring.
My decisions with stocks are totally reversible. I can buy a stock and sell it the next minute. I can sell a covered call and buy it back the next minute. Sure it can cost money to change my mind but I can still change my mind. When you put your money down those tubes, you cannot change your mind. So are stocks a bigger casino than farming? I doubt it.
Sure some crop insurance and hail insurance can cushion a loss and the government even subsidizes crop insurance so you have some protection. With stocks there is no loss insurance. We are on our own.
Second, most lenders will lend you up to 95 per cent of the money you need to buy farmland and maybe you need a bigger down payment to buy machinery on credit. And even though debt broke a lot of farmers over the years, the amount of farm debt in Canada rises every year. When you use five per cent down to buy some asset, you are using 95 per cent margin money. If I used 95 per cent margin money for stocks people would call me crazy and I likely would be. Yet using a lot of margin money seems to be OK for the business of farming — a business that farmers tell me never makes any money.
Actually, if I was a buy and hold investor and I made at least 11 per cent compounded year after year, I wouldn’t need much margin money for stocks. And now that I’m a more active investor and know how to make 100 grand a year from $300,000, I don’t need to use margin money even if it would make me good cash flow. I do use some margin money from time to time, but usually it’s between the time I buy a good stock and sell another one.
Since 1972, there really have been only seven or maybe 10 good years in farming. There likely have been that many bad ones too. The rest were somewhere in between. But we get at least three chances a year to buy good stocks when they are on sale and usually 10 or 12 opportunities per year to sell covered calls which bring in cash. Plus we collect dividends from a lot of stocks. So many farmers have one chance a year to get a calf from a cow or to grow a crop. I get many chances a year to make money with stocks.
Again, I hope I don’t tick off too many readers with this article. It just seemed like it was time to bring some of these comments from farmers out in the open and offer my opinion on them. Many people don’t own many stocks. I suppose it’s only natural to be skeptical and afraid of stocks.
Andy lives in Winnipeg and publishes a newsletter called StocksTalk where he tells day by day what he does with his investments. If you want to read it free for a month go to GOOGLE and type in StocksTalk.netand fill out 5 lines. Or send an email to [email protected]