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.