Thursday, October 31, 2013

High-Priced or Low-Priced Stocks?

All things being equal, I prefer high-priced stocks with few exceptions. While this may run contrary to popular thinking, as a financial farmer I prefer to own fewer shares of a company I deem to be a better potential investment than many shares of a less-promising investment.

There are several advantages to owning shares of high-priced stocks, although there is one significant disadvantage; the higher the price, the more room it has to fall. I've seen this scenario play out during several sell-offs over the years, where the point drop in high-priced securities typically falls more on a percentage basis than low-priced stocks. That is a risk of high-priced stocks, there is plenty of air between the top and the ground! With that caveat though, there are several good reasons to consider purchasing high-priced stocks over low-priced stocks.

High-priced stock, by definition, is priced higher than low-priced stock, and while intrinsically this might sound ridiculous, it actually points to several operations going on outside our normal purview. Generally speaking, there are less shares of high-priced stocks (which I consider an advantage for investors, as we want to own a larger and larger piece of the pie as time goes on) and consequently when you choose to Invest Like A Farmer you are very selective when deploying your seed capital into a handful of carefully researched positions rather then just throwing seeds into the wind and hoping for a winner by chance.

High-priced stocks also play on a theme we have discussed previously, namely momentum. Another seemingly unrelated occurrence begins to happen as a stock appreciates in price; more money is drawn to it. Everyone likes a winner, and there is no truer winner than a stock that keeps a steadily increasing left to right chart. This momentum often leads to one of my favorite events; a stock split!

Although a stock split actually decreases that high-priced stock's numeric standing, it also helps prevent a chart from going exponential, releases some of the pent-up momentum by providing additional shares to fill demand, and, also by definition, increases the share count which typically increases the pool of shareholders. So even though a high-priced stock may do a 2:1 split, say from 200 to 100, it is still priced above 80% of all other securities (the average S&P 500 stock price as of this blog post is about $70/share.)

Ideally, the financial farmer uses his or her seed money to purchase several handfuls of quality seeds that eventually spawn seeds of their own, pay the farmer to own them the entire growing cycle, and wealth is compounded. A high-priced stock "helps" concentrate wealth, causing the investor to focus on several potential successful business models rather than showering the fields with dozens upon dozens of cheap seeds; we want viable crops quarter after quarter, not weeds.

Sunday, October 27, 2013

Why Does Wealth Cluster?

A shared system of beliefs and values prompts, as the saying goes, birds of a feather to flock together, but there are also other significant considerations for the world's wealthy.

Why as a financial farmer should you care? Given that the goal of this blog is to Invest Like A Farmer, it is a very relevant goal to study, learn, and hopefully replicate success. A lot of successful learning can be gleaned by studying and implementing the habits of wealthy investors.  In an earlier post we discussed the blueprint of creating your very own Berkshire Hathaway, today we take a look at wealth clustering. 

The above image is of Washington, D.C. The red dots correspond to Apple iPhone owners and the green dots represent Android owners (image courtesy of MapBox.) The image below is an income view of the exact same area where blue represents higher income, and yellow lower income.

What does this prove? Not much, except that there is a clear overlap between income and general choice of smartphone device. This is one example, and there are many more that can be implied, but the general point being made is that wealth does indeed cluster in certain geographic areas.

Where does wealth cluster? Primary locations are major world metropolises and to a lesser extent remote, pristine sparsely inhabited areas. Why? Shared beliefs and values (ethnic heritage, religion, language, politics), geographic desirability (climate, safety, airports), and resources (education, health care, jobs) help provide the answer.

Is wealth the end result of luck, toil, education or some combination? If we assume it is of some combination, then naturally our initial question of what causes wealth clustering is really a question of why geographically wealth has (re)located itself in a particular area. Furthermore, is it "earned" wealth, inherited wealth, budding wealth, or some combination of that rule set? Oddly enough, they are all usually in proximity!

This proximity derives from the inherent advantages of being close to the prize; there is a reason that more promotions always come from the headquarters of an organization. HQ is a great place to be for an up and coming whippersnapper, these are areas of excellence often in more than one regard; from pure physical beauty to educational infrastructure to engineering know-how and even reputation plays a strong hand. (Consider the frequency Harvard is cited versus nearly any other university!)

Let's face it; everyone loves a winner, and by extension we like to be near winners; whether economically, socially, or politically. The reasons for wealth clustering are complex, but the proximity to excellence is nearly universal. How does this help us Invest Like A Farmer? Excellence is its own momentum, and something we as financial farmers want to replicate as our own personal brand. Sustained excellence becomes a self-fulfilling prophecy.

Saturday, October 26, 2013

Make Hay While the Sun Shines

Record earnings, low interest rates, and at least a modicum of economic certainty has once again led the stock market to near-record 2013 highs. As financial farmers hoping to Invest Like A Farmer, we love favorable economic climates to deploy seed capital. We have now been in fertile ground for approximately two solid years, and given the current conditions, I suspect this will continue for the foreseeable future.

Certain catalysts become apparent during a classic bull run, some of them include the following; significant strength in the IPO (initial public offering) market, increase in margin use by investors to leverage returns, "cheap" money, stability in the housing market, decent unemployment rates, and solid corporate earnings across a variety of sectors. We have all of these in place now, plus what I believe is the most important nutrient to any financial farmer's portfolio; stock momentum.

Day to day, month to month, and even year to year it is almost impossible to predict with any certainty a price target for the Dow Jones, S&P 500, NASDAQ, Gold, Oil, or specific stocks. What I have gleaned, however, is that momentum usually carries until it is broken. I'm a big believer in inertia.

On the radar we have a potential Fed tightening (unlikely due to the debt ceiling/government shutdown debacle), holiday spending (should be up moderately year over year), and February 2014 where we once again debate the finances of our country. I think there is low possible collateral damage to the stock market on any of these outcomes, and consequently, I believe inertia propels us higher with the Wall Street benchmarks tacking up from here. Nonetheless, I will continue to employ my simple rule set as previously posted to help guide my portfolio selection:

1) Boring is undervalued. Look for companies with established brands. If they are exclusive, finite, hart-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.

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.

Tuesday, October 22, 2013

Building the Next Berkshire Hathaway

Frequent readers of this blog well know that one of my favorite "books" is in fact the collected annual shareholder letters of Berkshire Hathaway run by investing legend Warren Buffet. For $20 you can pick up your very own copy here. This should be standard reading for high school students, college students, and anyone else interested in creating a proverbial wealth machine.

Invest Like A Farmer's goal is to help identify macro economic trends that can be implemented by the average investor to potentially garner exponential returns. Mr. Buffet has essentially laid out the entire blueprint in an orderly, step-by-step process. There are, however, several caveats that the average investor should be well aware of; mainly the starting block in this investing marathon is slightly to significantly skewed in favor of those who have either tremendous political or economic advantages. These two factors help push them along the time (x-axis) discussed in yesterday's post anywhere from a decade or more. They have the ability to fabricate time on a scale the average person does not. Those are just the facts, nonetheless is quite possible for an ordinary person with interest in investing, a hunger for education, and a decent salary to build his or her very own wealth machine. This is how Mr. Buffet did it, and I think any reasonable financial farmer can also create a sizable wealth machine over time too.

One of the key tenants in creating a wealth machine is how it is structured. Mr. Buffet ran in all respects a successful precursor to today's hedge fund; it was an investment partnership that netted the manager a hefty personal return. This investment partnership then purchased a publicly traded company that became the investment vehicle which purchased many, many other assets over the ensuing years. The average investor does not and probably will not run a hedge fund, and that's just fine.  The lesson to learn from this initial "start-up" scenario is that rather than draw personal taxable income, the investor runs a company that becomes a wealth machine. That's the first step, buy or create an entity that will house your potential compounding wealth. The genius in this is the compounding effects generated by "saving" unrealized gains that compound themselves. Let me repeat that because it is vital; the genius is not taking passive, unrealized gains. The business or businesses themselves are bought or started for a reasonable price; they hopefully increase in value (passive gain) and increase earnings (taxable income) to the owner(s) over time. 

After creating the correct "housing" structure for the wealth machine, the next step is either creating, buying, or otherwise acquiring additional business(es) that generate significant cash flow, and ideally profits. The insurance business was Mr. Buffet's big coup; it allowed him to control large swaths of capital, termed "float," which in turn let him invest in multiple other assets. Essentially the company became an asset grabbing machine that acquired and successfully integrated winning businesses, product lines, and additional market share in the respective existing businesses.

The effectiveness of this business model cannot be overstated; proper execution, however, is vital. It requires excellent management and diligence, but creating the next Berkshire Hathaway is completely possible, even for an average investor. I encourage readers of this blog to pick up a copy of the annual shareholder letters and read through them. What you will see unfolding is probably one of the greatest wealth creation systems ever successfully executed. What's really cool about this process is that it is repeatable. For $20 you get the proverbial receipt for success, and that's tough to beat!

Sunday, October 20, 2013

Time as an Asset Class

The most valuable asset is time, yet it is rarely ever mentioned as a distinct asset class. For those of us who plan to Invest Like A Farmer, labeling time as an asset class is vital. This concept is important because time is one of the key elements in conjunction with portfolio selection and investing knowledge that helps generate compounding returns. As financial farmers we loathe static returns and love exponential returns, especially if there is any chance of leap-frogging along the time axis.

The value of time to one who chooses to Invest Like A Farmer is tremendous; as financial farmers we think in terms of seasons, in years, in decades. That is where the exponential portion of the growth charts develops if we have invested prudently and also where, by definition, we find the greatest real returns.

I've often heard the analogy of Wall Street to a casino, but I would argue whereas the longer you stay at a casino the more likely you are to loose, the longer you stay in the stock market with a prudently constructed portfolio, the more likely you are to win. The primary reason for the former is that the odds are stacked against the player and remain static for the vast majority of games; the reasons for the latter result are that a number of variables sway in the investor's favor including innovation, efficiency, and population growth to name a few. This is precisely why young investors (think very young, like just born) should have a tremendous advantage in beginning their investment careers.

The sooner seed capital is deployed in a prudent investment portfolio the better, there is no better time to begin when the time curve is in one's favor; ideally investments are planted, grow, and compound as soon as possible. There is tremendous power for a newborn to have an investment portfolio established, funded, and invested frequently during the early years. The advantage of time is to ratchet up along the compounded rate of return chart as soon as possible, this is why time should be considered an asset class.

It is preposterous to ignore the significance of time; the seconds, minutes, hours, and days are all around us for the taking; even harnessing a fraction of the time provided during a statistically average lifetime is massive, over succeeding generations the wealth that can be created is basically limitless.

If early investing years have escaped the financial farmer, then he needs to fabricate time. How is time created? Simple, one needs invent, create, or buy compounding assets. These assets can come in multiple forms, from stocks, to real estate, to even patents. The greater efficiency of the asset, the greater potential in "creating" time or moving smartly across the spectrum of time.

There is a reason why children of wealthy parents often have significant advantages; many have been investing, whether they knew it or not, since birth. For older investors, the ability to fabricate time will boil down to finding and deploying seed capital in efficient portfolios that have assets capable of producing compounding returns, and the sooner those assets generate exponential returns the better. If one has time, then make the most it; if one is lacking time, make time.

Thursday, October 17, 2013

Walter White aka Heisenberg
Breaking Bad

If you want to Invest Like A Farmer, it is important to know when to plant and when to harvest. So when is a good time to deploy seed capital? As a general rule of the green thumb, it is a good time to deploy seed capital when monopolies "go on sale" (what Wall Street typically refers to as a sell-off, correction, or adjustment.) Having a grocery list of stocks you'd like to buy handy is helpful; it helps identify in advance these empires that can be had for a discount. 

A great example was found today in a major transportation company that controls significant land routes west of the Mississippi. Remembering one of the fundamental guidelines, mainly that boring is underrated, this proved to be a nice time to buy. By definition, a monopoly is an empire with branding, scale, scope, moats, pricing, and a variety of other advantages over its competitors.

As financial famers, we always want to have reserve seed money and a shopping list available of potential buys at our disposal; a significant return can often be made on a purchase of a distressed monopoly that is then held and has its dividends reinvested. Boring, and potentially very sexy with our goal of securing a compounding rate of return that ultimately goes exponential. The opportunity of a lifetime usually crosses a financial farmer's plow twice a month, be prepared to sow those seeds.

Wednesday, October 16, 2013

Health Exchanges

Utility and Scale. When we think of the next best, best thing in terms of the evolution of a new company providing a new service or product we need to think utility and scale; the corporations of past accomplished this via product cycles that literally took decades (some often centuries), but the new paradigm is a content-based platform that accomplishes some utility on a massive scale.

Along those lines, I wanted to illustrate (via the image above courtesy of Milward Brown) how NOT to capture scale, even with arguably a very, very good utility. What can we learn from this as financial farmers? Well, if you truly want to Invest Like A Farmer then you MUST have an understanding of utility and scale. On the Oct. 2 blog post we touched on this subject as the next best website or business being one that can capture the economies of scale that the web offers by providing a utility. We further went on to discuss the viability of having a DNA or health-based solution. should have been the Next Big Thing; why did it fail (at least initially?) Sadly, it didn't mimic the ease of enrollment of nearly every other massive-scale website; think about the large online auction site, the social networks, the retailers, etc. ALL of them require approximately 5 minutes to enroll. 5 minutes. They are masters of utilizing a lean enrollment process to secure the largest, and fastest, exponential growth of a platform. A user wants to access the utility (see Oct. 2 post for further detail) as soon as possible otherwise interest is lost.

Utility and Scale; to Invest Like A Farmer we want to identify and consider putting capital to work with companies that have an effective process in place to rapidly acquire new customers and provide them with a useful utility immediately. This can be accomplished with a strong brand, accessible price point, and proven utility to the buyer; any impediment to the purchasing cycle ultimately drives buyers to alternative, more effective sellers; whether in automobiles, soda pop, or health care. The system that provides superior utility and scale wins.

Monday, October 14, 2013

Batten Down the Hatches!

One of my favorite Wall Street books is The Greatest Trade Ever which chronicles a group of traders who had the foresight, capital, and luck to both predict the fall of the mortgage market and trade on it. They all bet against the sustainability of the mortgage security market in one form or another (mainly through derivative contracts); they were all successful because despite the proverbial writing on the wall, no one else was betting that this could ever happen. I think we're in a similar situation right now.

As financial farmers we want to Invest Like A Farmer for some very practical reasons, a really good one is not to go broke. This is what is referred to as the risk of ruin. There is one goal that is paramount to every farmer; avoid ruin. This simple goal, frequently overlooked or ignored, bears repeating: Avoid Ruin.

Young or old, we all have different tolerances to risk. We should pay particular attention, however, to the risk of ruin. Broadly defined, the risk of ruin is the point of no return, that place or situation you've reached where your finances, and in particular, your farm is bust. You can't squeeze another nickel from the fruit stand. All your other options are seemingly impossible as well. Essentially there is no way out. Amongst the farmer's many concerns, the risk of ruin must always run paramount. Losses can be sustained, opportunities missed, leverage overdone, and a host of any other problems survived, but we want to avoid ruin at all cost.

Ruin can be devastating and possibly unrecoverable. For those who have clawed their way back from the brink it can be a valuable life lesson, but I've never heard it described in terms of nostalgic fondness. With full respect to Nietzsche, who wrote: "that what does not kill me, makes me stronger," ruin is painful, and regardless of your age or circumstances, the true financial farmer wants to avoid the risk of ruin. It is far too celebrated amongst the entrepreneurial elite who have never tasted true ruin; they had and have back-up plans and resources that are never revealed. Keep your farm well-tilled, planted, and enjoy every harvest even if it is at first meager. Your goal should be a lifetime of sustained financial farming, a lifetime.

A lifetime of farming is sustained by not being overextended even when everyone claims we (the USA) could never default. October 17th is fast approaching, but that date doesn't necessarily scare me. What I'm concerned about is the process that led up to this point, and in particular November 1st. The tax revenues are in place for continued short term operation, but beginning on the 1st we have significant outlays; I truly wonder as a country if we're ready to have a hard conversation of what we fund and what we don't. Do we pay the debt obligations, do we pay Social Security, Medicare, the military?

I maintain the prediction of a 50/50 chance of default; at this point every financial farmer should have cash on hand as well as either a fully or partially hedged portfolio in the event of October 17th passing without a deal. In the event of a deal getting passed, I suspect it would be a short term extension at best and ultimately we'd still be left with the same systemic problems in the federal budget. The "good" news, regardless of whether a deal is cut or not, I don't see any possible chance of the Federal Reserve tightening monetary policy; not at the next meeting, the one after, or even well into 2014. The economic recovery is still too nascent and obviously there are far bigger political problems that need to be solved. The two charts below help illustrate the challenge this country faces ahead; how do we bridge the spending and revenue gap while sustaining our yearly outlays?

Wednesday, October 9, 2013

The Grand Canyon is...closed?

Indignities of indignities, the Grand Canyon is closed? How is this possible? Resources are being spent to arrest "trespassers" (i.e. U.S. Citizens) hiking in their own National Parks? Yikes! What is a financial farmer to do?

Well for one, we can take a historical look at the other 17 shutdowns for some clue to what has happened in the past. Typically after several days, a compromise is reached and we go back to business as usual.

My major concern is the possibility of escalation. What I mean by escalation is that the government shutdown leads to a default which triggers several possible butterfly effects; but rather than the soft beating wings of a pretty butterfly causing ripple effects in the slightest of air currents, we see a cataclysmic pulse wave.

The way I can best relate to this is with a stock trade gone bad; at first the volume to exit the trade is low, and then everyone wants to get out; the probably being by that time there is no counter-party buyer. If you haven't had a chance yet to read The Crisis of 1837, now would be a good time to check it out.

A default would gravely affect the global financial system. The fact that the largest mutual fund company in the world, Fidelity Investments, has liquidated ALL of their short-term U.S. Government debt is very telling. These are smart people. What is the lowly financial farmer to do? Long-term holdings of the oft-discussed "boring" equities should wait out the storm; inevitably just when things look the worst, there is a recovery. Nonetheless, given my current prediction of a 50/50 chance of the U.S. defaulting, the fact that the National Parks are closed to U.S. Citizens, and other weird behavior on behalf of our government, rounding up some cash is a good idea. Will there be value in that cash? At least initially there should be as it is the de facto standard for conducting trade.

I see several outcomes if we default on the debt, none of them are good. Interest rates will undoubtedly spike (who wants to lend to a deadbeat?), the electronic funds transfer systems may lock up, and probably the most damaging and sustained effect will be a reputation hit to the United States. If things get bad enough, i.e. no Social Security payments, Medicare, etc. I see the situation quickly devolving.

Although we have been given a drop date of Oct. 17th, the reality is probably November 1st, as that will be when a majority of payments will come due. The first chink in the armor was on October 1st, the next test will be on the 17th, and if we don't have some type of resolution by the 1st of November, watch out. As it stands now, considerable political damage has been done to both sides of the aisle, and we're about a week away from triggering some very unpleasant consequences.

PS--A new Chair of the Federal Reserve was announced today; Dr. Janet Louise Yellen. She will be replacing Dr. Ben Shalom Bernanke whose appointment expires in January (assuming we still have a functional government in 2014!)
The Good, The Bad and The Ugly

The Dow’s down almost a 1,000 points since this government shutdown began, but who’s counting? For movie buffs, and budding financial farmers, there’s a classic scene in The Good, The Bad and The Ugly aptly termed a Mexican Standoff which puts our current situation in context. Clint Eastwood, Lee Van Cleef, and Eli Wallach each have the other in his sights, yet no one can make a move. This is what our economic, political, and social situation has devolved into; a true Mexican Standoff, and as anyone familiar with the movie knows, whoever shoots first loses.

What’s so troubling about our current dilemma is that just two weeks ago we had seen the Dow near all-time highs, the NASDAQ had recovered nicely to just under 4000, and the S&P 500 had climbed over 1700. All were very important metrics to the investor's psyche. Interest rates remained low, inflation was tame, and while not altogether spectacular, unemployment was creeping down. There was absolutely, undoubtedly, positive progress since the dreary days of March 2009 when as any investor can attest, even your puts were loosing money! All of this has come to a grinding, gridlocked halt just when many Americans were starting to see the light.

This is what makes investing so challenging, knowing that we’d probably be better off liquidating our entire portfolio and then waiting out the next couple weeks in cash; yet the problem arises of predictability. It is usually just about that time where you feel like throwing in the towel that the market makes a dramatic comeback. It’s a double whammy, you end up selling at the recent lows and are too cautious going back as the rally goes further. This scenario has played itself out time and again, and is precisely why I’m a champion of the Invest Like A Farmer philosophy.

By definition, when you Invest Like A Farmer your seeds are planted for the long-haul and the capital you invested is not rent, mortgage, or emergency savings. It is seed capital you have deployed in the expectation of compounded returns years, many years, into the future by specifically investing in companies with special characteristics. They are boring in the sense that boring is sexy; they are typically monopolies with significant barriers to entry selling products that are exclusive, finite, hard-to-get, vital, and/or addictive. These companies also typically pay you to own them, and usually every quarter. Generally they are high margin, high volume going concerns with a steadily moving higher and higher left to right stock chart. These are the type of assets we like to buy and let grow.

Sadly, even the best companies with the cleanest balance sheets and most promising products, brands, and customer base are no match for a government that fails to function. There is little remedy for a stalled democracy except patience and the next election cycle.

Tuesday, October 8, 2013

3 Traits of The Forbes 400

What differentiates you and I from the Forbes 400 list of the most wealthy Americans? Probably several, in fact, MANY millions of dollars. Indeed, the "cut-off" this year to make the list was nearly 1,600 million dollars!  That's right, the short-hand version of $1.6B.

From a percentage perspective, the vast majority were "self-made"; from a net worth perspective (that is, the relative average of their net worths) a large number of the members inherited their wealth.

Without taking away the accomplishments of the "self-made," let's briefly put that in perspective; "self-made" to the average American implies relatively little starting capital and few life advantages (i.e. having a powerful political figure for a father, or inherent back-up seed money, or simply what the Chinese refer to as guanxi) probably disqualifies many of the Forbes 400 immediately from flashing the "self-made" business card.

In fact, of the Top Ten, only Larry Ellison fits the "self-made" profile to a tee. So be a little wary of the term "self-made," that moniker can be deceptive when there are inherent advantages to starting life with the right guanxi. With that said, though, let's take a close look at what has sustained  the presence of the Forbes 400 members and also what it took to get there. I have dubbed these "The 3 Traits of The Forbes 400"

First, there is a consistency of purpose present. A member of this elite group has either held, or whomever they inherited their wealth from, a lasting and sustained consistency of purpose on building as what Walter White termed "an empire." Go through the list and next to the accompanying person you'll see a very distinct desire to be the best at whatever field they were in; from candy to software to automobiles. Rarely do you see a member that founded a conglomerate; they focused on a niche and grew rich.

Second, to a man (or woman) they are ruthless in pursuit of excellence; whether in the form of advantage, branding, market share, taste, material, logistics, etc. Virtually every aspect associated with their company is pursued with a ruthless passion. They are driven to be the best; extreme personalities are commonplace, as is eccentricity in thought and speech. Fitting the norm is not prized, or even pursued for that matter.

Finally, they all benefited from being prepared for luck; good or bad luck, multiple calculations and scenarios seemed to be in place which often resulted in a significant paradigm shift that benefited their net worth (a hostile takeover, sale of a division, an IPO, a funding event, etc.) Imagine a field general that has a written plan, but in reality has fifty mental plans at his disposal, and that is your Forbes 400 member. If not master strategist themselves, they have paid the expense of hiring the best tacticians.

Consistency of purpose, ruthless pursuit of excellence, and being prepared for luck. Those elements sound just like the goals of someone planning to Invest Like A Farmer!

50/50 Chance of a U.S. Debt Default Presents Perfect Black Swan Scenario

I've raised my estimate of a U.S. debt default from a 0% unthinkable chance to an even 50/50. We're a week into a government shutdown with no compromise in sight. Nearly every pundit has the debt default scenario pegged at 0% (including me, up until last night.) This brings to mind all the elements of a black swan event.

Popularized by the philosopher/poet/economist/trader Nassim Nicholas Taleb in his 2001 book Fooled by Randomness, a black swan event "is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme 'impact.' Third, in spite of its outlier status, human nature makes us concoct explanations of its occurrence after the fact, making it explainable and predictable."

These elements seem to correlate well with where we're at right now in regards to the debt ceiling. With nearly every expert predicting a 0% chance of a default happening and a political system that is behaving ineffectual at best, the days tick by and nothing is accomplished. What has materialized is the slow motion proverbial train wreck you can't take your eyes off of, but this potential disaster has a significantly wider zone of destruction.

I think the two most meaningful impacts are going to be a major hit to the reputation of the United States and the second is a direct hit to investment portfolios because Wall Street cannot stand uncertainty; the latter I think will recover promptly as the catalysts of a bull market are still firmly in place and I would like to believe our elected officials wouldn't ruin the republic. The reputation hit is another thing though, as it builds on what has become an increasingly stalemated government system. 

Sunday, October 6, 2013

"One must learn to be rich."

--Gustavo Fring

Alas, Breaking Bad is over; but the lessons from one of my favorite characters will resonate well into the future. As readers learning to Invest Like A Farmer on this blog, Gustavo Fring offers some very telling advice when he says to Walter White at dinner: "One must learn to be rich. To be poor, anyone can manage." Rarely have I heard such a more poignant and truthful piece of advice. 

Becoming wealthy, for the vast majority of people, is a process rather than an event. Part of Walter White's fall, in my opinion, was that he became wealthy TOO quickly. There is such a thing, and we see it all the time with lottery winners who burn through their stash and long for the the "good old days." Thomas J. Stanely has written extensively on the attitude, lifestyle, and spending habits of the typical millionaire in his seminal book The Millionaire Next Door.

My advice for today? Pick up a copy of this book and study it. The vast majority, think along the lines of 95%, of all millionaires fit the demographic profile Stanely identifies rather than The Forbes 400 members. Even many millionaires approaching the billionaire status could be classified as a "Stanely Millionaire."

Although Gustavo Fring was a criminal mastermind who "hid" in plain sight, he definitely fit the mold of a "Stanely Millionaire." The characteristics of these millionaires, albeit not criminals like Fring, are indicative of people who Invest Like A Farmer. The mindset, the methodology, and ultimately the end result speak well of the process that made them rich.

Saturday, October 5, 2013

Financial Thoughts for Young Couples

I had the pleasure of attending my cousin’s wedding yesterday afternoon and after the ceremony I started thinking about some of the financial considerations young couples face. Given that the majority of problems in a marriage ultimately stem from disagreements over money, I thought in today’s post it would be a good idea to touch on this subject. Please note, however, if as a newlywed you and your husband have just purchased a $10M apartment in New York, and you make comments like “I’m not fundamentally interested in making money,” please just close this internet browser now. Doing so will save you the confusion of many of the terms below like “work,” “mortgage,” and “embracing risk.” If you do not fall into the above category, good for you! The challenges facing a young couple are tremendously rewarding and if approached in the right manner will, I guarantee you, be some of your fondest memories in years to come.

Almost all the successful couples I’ve had the pleasure of working with over the years generally have many similarities; they have discussed their financial goals together, they have written these goals down, and they have acted on these goals. The REALLY successful couples have embraced risk. We’ll get back to the last point later, but I wanted to start with discussing, writing, and acting.

As a financial farmer, we know the value of discussing our plans aloud to provide our thoughts and also to hear what others might have to say. In a marriage, this is vital on the financial front because each spouse may have a different role in the relationship, different experience with money growing up, and drastically different goals than the other spouse. This is why going over expectations of income, housing, entertainment, lifestyle, etc. are so important. Talk all of it over and see what you’re each expecting.

Any couple, young or old, should be aware of the financial landscape, which segues nicely into writing down a summary of where you stand currently and also where you would like be down the road. Writing a goal down is very valuable, it sets in motion a whole chain of events. This financial snapshot should accurately capture as thoroughly as possible the complete situation; assets, liabilities, income, goals, etc. This experience usually isn’t done overnight, and it usually shouldn’t be done just once; financial planning in a relationship is an on-going element in your marriage.

The next, and critical step, is to act on your plan. If you want to buy a house immediately or in the next couple years, do your your research; understand the home buying process, understand financing, interest rates, and down payments. If you plan to rent an apartment and invest the difference, what type of monthly budget are you planning to use? When you’re a young married couple the runway is long and even minor advantages you implement early can have a meaningful impact on your net worth over time. The same, of course, can be said of mistakes. If you’re lacking in financial planning, talk with several financially successful older couples you respect and pick out what they did to succeed, and also if they’re willing to share, ask them about their financial failures.

As briefly mentioned above, this process of discussing, writing, and acting is not a stand-alone event; both of you need to be involved in laying the foundation of your future wealth.

One final note I’ll make today, and it is this; embrace risk. I’ve only seen lasting wealth created in a handful of ways, below are three of the most common that I’ve seen repeated often enough to make copious notes on the subject:

1. Steadily rising income that is squirreled away into a portfolio of investments that have the possibility of compounding exponentially, and rarely, if ever, touching them. Squirreling-away implies living below your means for a sustained period of time.

2. Being crafty, prudent, adventurous, careless, or whatever else in picking the RIGHT piece(s) of real estate at the RIGHT price (the money is made on the purchase, even if the sale is made decades away), at the RIGHT time. Buy the RIGHT real estate. When done correctly, real estate is the IDEAL (Income, Depreciation, Expense, Appreciation, and Leverage) investment vehicle.

3. Determined that a profession and real estate are both ridiculous, the entrepreneur chooses to spend every waking moment creating a (fill in the blank) company that does (fill in the blank) better than any other company. The success of that company then sustains everything else in life.

Now there’s a flip side to this coin, presented almost perfectly in a recent article I read titled “Failure to Launch” (hyperlinked) which bemoans the situation of the “New Lost Generation,” more often referred to as the Millennials.

Some generalized findings from the report: there are no good jobs, there are no good industries, there is a paradigm shift, and basically Millennials will probably earn less than their parents and work longer. And die younger. And listen to worse music. And not laugh as much.

So what? Life is a struggle. For each of these findings I can list ten advantages the Millennials have over previous generations. Here are a couple; it has rarely ever been easier to start your own business, interest rates are at historic lows, there are abundant entry-level jobs you can work to learn a trade, skill, or profession. Millennial computer skills far, far exceed the average of any other generation. Productivity in a creative environment is almost unrivaled. The list goes on and on.

So what am I trying to say? The field is fertile with opportunity, especially for young couples that have discussed their financial situation, written down their goals, and are taking effective actions to accomplish them. If you’re reading, you also probably have a pretty good understanding of one additional almost unquantifiable element, embracing risk. Go forth and do likewise!

Thursday, October 3, 2013

The Business Cycle

"Farming looks mighty easy when your plow is a pencil and you're a thousand miles from the field."

-- Dwight D. Eisenhower, 1890-1969, 34th U.S. President

DJIA: 15,133.14   S&P 500: 1693.87   NASDAQ: 3815.02   OIL: $104.10   GOLD: $1,320.60  10-YR: 2.62%

I like Ike. In many ways, the agricultural cycle of planting, nurturing, and ultimately harvesting is similar to the business cycle. To readers who are unfamiliar with the business cycle, the premise is that our economic system is based on a boom and bust paradigm. This theory identifies the cyclicality of the economy in terms of growth, credit availability, profits, losses, booms, and busts.

Historically, the business cycle was facilitated by the primary function of credit; if there was ample credit to be had at a reasonable rates, then the economic conditions would generally improve or grow. When credit became too easy, the economy then entered a far faster growth spurt than could be sustained. This became known as the boom part of the cycle. Inevitably, and history is replete with numerous examples, this boom ultimately led to a bust. Credit availability tightens. Real asset prices fall. Typically when this "adjustment" occurs it is swift and extremely disruptive, a herd mentality prevails where every investor heads for the exits simultaneously.

In the the bust period, there are few bids on assets as the herd is trying to sell at any price. Farmers flush with cash need take note of this scenario. This is the proverbial "bust" period. I repeat, as the heard is trying to sell, often at any price, there are few bids on assets. A prudent financial farmer always has boring old cash handy, he knows full well purchasing during a bust may have exponential returns in the years and decades that follow. That last sentence is worth your time to read twice. Historically speaking, busts (those intense periods of rapid, unmitigated dumping of assets) are usually short-lived. And that makes sense, because intense periods of volatility in-and-of themselves are very unstable.

The boom and bust cycles are at constant odds with "the average" or mean, which is why the term "reversion to the mean" is so powerful. This average can apply to a host of scenarios, from real estate, stocks, and yes, of course, farming.

Investing like a farmer implies an understanding of both the above-mentioned business and agricultural cycles. The value of understanding, respecting, and acting on the cyclicality of events is vital. The reason why literally hundreds of millions of dollars are spent each year on research is that investors are constantly seeking some foresight into what will happen next. Crystal ball or not, fortune-telling is big business. Although by no means perfect, understanding the cyclicality of events, the business seasons, is akin to having a trusty farmer's almanac handy.

With an appreciation for what might happen next, the financial farmer needs to act decisively. What to plant. How to plant it. Why to plant it. When to harvest it. A whole host of questions need to be answered, but they need to be determined far ahead of the actual planting. It is this very thought process that this blog will hopefully help you develop.

Wednesday, October 2, 2013

The Next Most Valuable Website on Earth?

What makes the most valuable website on Earth the most valuable website on Earth? (And which one of the over 650 million sites holds that distinction?) Currently, I think a strong case can be made for either the social networking one or the search one (you can probably guess who I have in mind!) But I think the NEXT big thing is going to be someone or some company that can integrate the complexity of health exchanges; and looking beyond that, a personalized roadmap of tailored DNA-specific medical coverage. 

Both of the two website examples above (social networking and search) are instantly recognizable by their functionality, yet both make their revenue on advertising. Interesting, yes? Which leads us to today’s blog thoughts, identifying the next big website.

Just because we Invest Like A Farmer doesn’t mean we don’t get off the financial farm once in a while and do a little surfing! In our quest to find promising seedlings to plan in our farm it has proven extremely profitable to pick some website-based companies, and also extremely painful to pick others. Why don’t I name names? Well, for one this blog is dedicated to looking at macro (large) investing principles and hoping to catch the swell before it builds and crests; rather than name names, I’d prefer to focus on the specific DNA that seems time and again to succeed. If you connect the dots you’ll soon see some very specific options emerge that follow the general template listed today.

This actually leads us to two discussions; the public company method of purchasing a piece of web property (i.e. you purchase publicly traded common stock in a major corporation whose major business is run through the website) and/or the alternative investment method of purchasing your own claim.

In regards to the latter, for those of you who missed the past two decades starting with the fixed monopoly of Network Solutions owning the sole right to register “.com”, “.net”, and “.org” to today’s widely dispersed method of registration (well somewhat widely, as a handful of registrars still control the bulk of website registration) this has been a proverbial "land rush."

A significant reason why you see so many neologisms is that many (some would say all) of the standard words are gone, registered long, long ago. So now you see three consonants in a row followed by five vowels, or some fashion of its anagram. All the boring, grammatically correct words are gone. Boring? We like boring don’t we? If you didn’t catch it the first time, here is Invest Like A Farmer’s first general guideline:

  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.

Hmmm...substitute out “companies” for “words” and I think we have a match! An EXACT match, meaning having boring regular word domains can be lucrative, especially considering the relevance placed by the the search engines on word selection.

Will Rodgers once said in regards to land “they ain’t making any more of it.” Although, they (there are AT LEAST 10 organizations “administrating” the internet) are adding different extensions seemingly by the year, I argue that “.com” extension will always carry a premium and have intrinsic value simply because of their very foundation in the internet. Plus, in terms of uniqueness, there really is only one “.com” per word in existence.

What does this have anything at all to do with being a financial farmer? The financial farmer is always looking for potential investments to help compliment his or her equity holdings. And to me it seems prudent that a basket of common word “.com” domain names hooked up to some type of advertising platform might well produce a steadily increasing source of revenue as the both the underlying physical population and the corresponding population of internet users grows. That’s a bag of seeds most financial famers wouldn’t mind having!

But if we want to look at the MOST valuable website on earth, rather than an exact word match, it is vital to focus on utility and mass appeal. To become the most valuable website on earth you need both; utility and mass appeal. A simple recipe for success.

Look across the web and I think you’ll find the most successful websites fulfill a basic utility perfectly and offer mass appeal. Let me write that again, a basic utility is fulfilled (networking, a payment, search, a retail purchase) and it is done seamlessly which leads to mass appeal. When you use the site you never ask yourself why, it is apparent by the very fact you are there; from a mass appeal standpoint, the website does what its utility intended as perfectly as possible. There usually is tremendous vertical integration as well to fulfill the utility and mass appeal. Nothing is left to chance and nothing should interfere with the utility. Everyone loves a winner, and everyone loves a website that accomplishes what he or she wants effectively without any problems.

So we mentioned social networking earlier, there are a couple companies doing that right now. Let’s brainstorm for some others; retail, check; wholesale, check; medical, hmmm?

That’s where I think the greatest opportunity to create the next big thing is; health exchanges. Keep an eye out for early movers and also established companies as they might move to lock up the social utility of health exchanges. Going forward, however, I think the implications to medicine, specifically a DNA-based solution to health care, has real promise. Along with that comes infrastructure build-outs like bandwidth, processing power, security is a big concern, and the health care providers themselves from the HMOs, drug companies, device companies, and even the various payment processors. 

But enough about my speculation, what is important is the framework to predict where we’re going from where we are; a pragmatic farmer needs to keep an eye out on the world as well as the fields to determine where the various seeds of wealth can be purchased, at what price, and ultimately their true potential. Focusing on utility and mass appeal are great starting points.

Tuesday, October 1, 2013

Capital and Butterfly Effects

Lights out? It sure looks that way! Without an approved legislative proposal, the U.S. Government shut down today for the 18th time in history. While I’m actually fine with this situation, as long as the IRS is shut down first, what can be gleaned from this situation? All kidding aside, something very, very farmer-like; namely, without capital and self-discipline, little else matters.

It is also crucial to consider the potential butterfly effects this shutdown generates. Aptly pulled from chaos theory, these “butterflies” often result in unanticipated, and consequential, results. In the social pecking order, what is going to be shut down first? Why? And what repercussions may arise or opportunities present themselves? 

Let’s see what the coming days bring, because the reader who wishes to Invest Like A Farmer knows well enough that some of the most meaningful changes to his or her portfolio actually occur thousands of miles away from the farm; a speech, legal change, or regulatory movement can all have significant long-term impacts on your portfolio and underlying capital. Which by the way, is a very nice segue into talking about about the first thing any investor who wants to Invest Like A Farmer learns about; capital.

Chapter 1
“Capital is that part of wealth which is devoted to obtaining further wealth.”
--Alfred Marshall, English Economist, 1842-1924

Capital is capital, from whence it is obtained varies greatly.  Maybe you’ve inherited a large sum of money.  Perhaps you’ve worked your entire life putting aside money every month.  Or maybe you’re just starting out and wondering what to do when you DO make some money.
Capital in our discussion will refer to a very specific type of money.  Planting money.  Planting money is money in excess of your day-to-day living money.  Some people call it “disposable income” and that’s just what they use it as; but I see it for much, much more than that pejorative description.  I see it as seed money.  The proverbial seed money that hopefully you’ll be able to plant using some very farmer-like techniques to eventually harvest a much, much larger crop.  Throughout this discussion, let’s remember the definition of planting money.  It is money that is largely in excess of your day-to-day expenses.  It is not rent money.  Mortgage money.  Emergency savings.  Vacation funds.  My friend, it is none of those things.  Planting money is money that you are going to use for building wealth, and it might be tied up for some time.  Months, but more likely years.  Many years.
Take pause for a moment, and even reread the above paragraph.  A fundamental and truthful understanding of capital is of utmost importance.  Having the understanding also implies having the self-discipline to utilize capital correctly.  A breakdown in self-discipline can and will cause serious, even disastrous, effects on your investing farm.  This theme, of self-discipline, will run its course throughout this book and hopefully impart its value.  In regards to capital, self-discipline often dictates whether capital is increased or decreased, how it is used, and probably most importantly, how long you as an investor can withstand a downturn.  It has been said the markets can remain volatile far longer than an investor can remain liquid, and that is true.  And it is also precisely why the concept of capital, an understanding of its use, and associated constructs, are so important.  Self-discipline, consequently, is of utmost importance to the investor at all times.  At all times.
With a sacrosanct understanding of what capital is and its value to the investor, and possibly its holding period as well, let’s start thinking about what type of farm, or more specifically, what type of farmer you plan to be.  There are all sorts of considerations for the modern gentleman farmer; soil, seeds, knowledge of weather, farming methods, and a host of other concerns.  But this all can get pretty complicated.  Let’s go through a couple of these thoughts in the upcoming chapters step by step, row by fertile row.

That my fellow financial farmers is a brief description of capital; at least that’s how I define it. Hopefully this concept of capital can help you run your own financial farm efficiently and profitably.

Although the lasting economic effects from the previous 17 shutdowns have been dubbed "negligible" by the major media outlets, I wouldn’t be too sure that they have had “no” influence; a well-oiled and running tractor plows many acres on the field, while the idle machine accomplishes nothing but to till the smirks other farmers.