Saturday, November 9, 2013
Imagine turning a $365 investment into $31,360,000 whenever you want! Well it is being done every day in the United States when we turn on the printing press and turn a 480 pound bale of cotton (currently trading at $0.76/pound) into 313,600 $100 U.S. Bills! Talk about a bonanza, wow!
Below are some other examples of what can be produced from a bale of cotton from our friends at Cotton.org:
The 313,600 $100 Bills takes the cake though, that is one heck of a return. For the average person trying to Invest Like A Farmer, however, this would be impossible simply because one would need to establish his or her own government and then create a fiat currency.
Nonetheless, a financial farmer can glean some very, very valuable insight into the above example. Namely, the nominal value of currency is almost constantly increasing; meaning there is nearly a constant increase in the number of dollars in circulation. The result of this process is the true enemy of investors, and that is inflation.
As a financial farmer, I define inflation as paying more for less. Paying more for a gallon of gas, milk, acre of land, car, etc. Production efficiency over time helps mitigate the effects of inflation in some products, but fighting inflation is like fighting gravity. So what is a financial farmer to do with this weevil?
Buying physical assets and ownership interests is one way to fight the inflation weevil. By definition, inflation results in the buyer getting less for each dollar, euro, yen, or peso. The extent of how much less is directly related to the rate of inflation; the higher the rate, the less you get over time. This is precisely why gold has typically been such a relevant hedge; there is no easy way to get gold except from toil, and toil is usually a very fixed asset. The same can be said of raw land, cotton, and finished goods.
The better the physical asset, typically the higher the demand it currently enjoys, and the higher the inflation protection it may provide. With that said, the financial farmer should always have planting seed capital available, but also recognize it is truly a wasting resource; high quality land, ownership interests, and commodities offer the dual potential of real value and growth.