Saturday, September 28, 2013

DJIA: 15,258.24   S&P 500: 1691.75   NASDAQ: 3781.59   OIL: $102.87   GOLD: $1,339.20  10-YR: 2.63%

Yikes! Well after a week of getting trounced in the markets over concerns over a possible government shutdown, it is always valuable to take a step back and look at the big picture. Continuing the theme of investing like a farmer, I wanted to provide some historical reference so today’s investor can take a meaningful look back at current events and put them into an accurate context (a financial farmer's almanac!)

For me, a lot of my investing experience has been influenced by Warren Buffet’s annual Berkshire Hathaway shareholder letters, Edwin Lefevre’s “Reminiscences of a Stock Operator” chronicling the life of trading legend Jesse Lauriston Livermore, and finally the Crisis of 1837.

As Livermore famously said, “Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street.” To that end, I think it is vital to read arguably the best account of the Crisis of 1837 by Edward M. Shepard. This literary gem reads like it could have been published just yesterday, but recounts events over 175 years ago. I think you'll find we could substitute out many of the names and dates of the Crisis of 1837 with nearly EVERY other crisis, panic, crash, or recession. The similarities are too numerous to be taken for granted. If you don't have time to read it all today, print it out and bring it with you to read over the coming week (consider it a homework assignment.)

The combination of the above influences, along with personal trading experience, has led me to form the Invest Like A Farmer theory. This theory is loosely based on a “Buy and Hold” concept, but I refer to it more as a “Buy and Grow” approach to investing in which an individual investor’s core portfolio is built along the following general guidelines:

1. Boring is undervalued. Look for companies with established brands. If they are exclusive, finite, hard-to-get, vital, addictive, and/or monopolistic, so much the better.

2. I prefer companies that pay me to own them. Specifically, I want to buy companies that pay quarterly dividends that have historically risen over time.

3. Of the four possible outcomes; high margin, high volume is best.

4. A steadily moving higher and higher left to right stock chart is a good thing. The inverse is not.

5. Inevitably, and by definition, more time is spent holding a losing position than is necessary. Don't be afraid to cut your losses; the financial farmer has a healthy understanding and respect for the risk of ruin.

In summary, I look for boring, dividend paying companies that have a high margin, high volume business with steadily increasing left to right stock charts. I’m not afraid to cut my losses early to help avoid the risk of ruin.

Don't let the word "boring" fool you; boring is the new "sexy" in terms of potential portfolio earnings power. Spectacular earning results come from "boring" companies all the time.  In regards to dividends, I'm a big believer in getting "paid out" on your investments on a consistent basis; this is a big part of investing like a farmer. These dividends are literally your crop yields and a large part over time of your total return.

High margin, high volume revenues typically translate into what a financial farmer is looking for; profits! The combination of these two elements is generally a healthy sign for your financial farm (portfolio.) The high margin and high volume company usually transforms its profits into a higher and higher left to right stock chart, which is an indication of both success and momentum. I'm a strong believer in historical chart growth and expansion, it visually helps us recognize success.

Finally, cutting, trimming, and slashing losses from a portfolio can be hard to do, especially if we have an emotional tie to the respective company; the financial farmer needs to value his or her farm, however, over any one particular crop. There is a reason for crop rotation and also for letting fields stay fallow on occasion. The guideline I typically like to use is a short-term drop of a pre-established percentage would trigger either an outright sale or partial reduction. There is nothing to say you can't buy back a position in the future; time, winds and weather are always changing. With that said, however, the financial farmer who indeed wants to Invest Like A Farmer has a healthy understanding and respect for the risk of ruin. The risk of ruin, simply defined, is the point of no return. It the point where your financial farm (portfolio) ceases to exist because it is bust. It is paramount to avoid the risk of ruin.

All of these themes are going to be discussed much further in the blog in the future, but I wanted to provide a general overview today to help the reader navigate further posts with the help of a little historical background and context of the Invest Like A Farmer theory.

I hope you've enjoyed today's post and that it helped add to your understanding of the Invest Like A Farmer theory that I espouse.

Enjoy your weekend!

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