Nibble, Don't Bite

My advice for beginning investors and those that come into random fortunes is the same; nibble, don't bite. For those individuals who ultimately wish to Invest Like A Farmer, it is prudent to deploy capital strategically, thoughtfully, and over time. Dollar cost averaging works, especially if you are entering the market for the first time or putting a significant sum of capital to work and plan, in both cases, to be in the market for some time.

It is nearly impossible to perfectly time the market; there are obviously better times to buy than others (nearly every correction or depression has proven to be an excellent time to buy for long-term holders), while some peaks has been good, and some not so good. (Imagine "selling on the high" in January 1982, 1983, etc. The bull market ran almost unabashedly higher for nearly 20 years!)

Nibbling offers superior advantages, in my view, to going "all-in" or "all-out" on any particular day, trade, or philosophy. It allows investors to test the water, build positions over time, and gradually construct a meaningful portfolio while still having plenty of seed capital in reserve.

Stock Market Roller Coaster

For those faint of heart, the past couple weeks have not been kind; up, down, spin around, back up, only to fall down again. Yikes!

What's an investor to do who wants to Invest Like A Farmer? Keep the plough steady and keep your eyes level on the horizon that's what!

The fact of the matter is that the volatility index has been particularly quiet through the summer and just as the classic entry into autumn begins the VIX is at it again moving up hundreds of points one day and just as much (or more) down the following day.

In spite of these often drastic movements, dividend flows have remained consistent (and rising.) Positions of monopolistic companies often improve during chaos as the most damage is typically inflicted on small capitalization companies (if you want to see something really scary, take a look at the Russell 2000 Small Cap Index.)

Framing all of this is the concern of a major economic slowdown in Europe (probably true) which will spread to the United States (probably true) that will ultimately derail the recovery and impact the real estate market (maybe true, especially in regards to the real estate market which looks poised to triple dip.)

Blue chips here look REALLY appealing as well as select names in the tech and biotech sectors. It's tough to get bullish on small caps in the face of a slowing economy. With the Fed most likely remaining dovish for the foreseeable future real estate should muddle along, except in a dozen areas where it clearly has extend itself. Pockets of wealth, affluence, and creativity will continue to bloom, get funding, and launch exciting new products and services; that roadmap has been in place for quite some time.

For those who wish to Invest Like A Farmer, keeping the plough steady and your eyes level on the horizon should pay off once again in the months to come.

Be Prepared

For opportunity at hand, it is best always to be prepared. The Boy Scouts have it 100% correct, and their motto should be adopted, practiced, and preached by those who wish to Invest Like A Farmer; Be Prepared. The opportunity of a lifetime usually surfaces about once a month, and having ready cash as a resource can greatly improve your linear rate of return.

A great example was the recent selloff in bonds triggered by the departure of a famous portfolio manager. More money was made over the past 10 days buying on that dip than the annual return for many funds over the course OF A YEAR!

Eagle-eyed investors with cash at hand may be criticized for "wasting their funds" by not being fully invested at all times, but having ready cash--and by ready I mean ready to purchase in an account fully set-up already--can be a massive advantage. 

In my experience, a sharp sell-off in a security is most intense the first day, continues to fall the second day, and on the third day a capitulation point is reached. This should serve as a good model for those trying to time either a "dead cat bounce" or build a position in a quality piece of equity over several days.

Be prepared.

The Rule of 72

The Rule of 72 is an essential concept for investors to master who wish to Invest Like a Farmer; it is one of the, if not THE, most important proverbial "rules of thumb" that can be used on nearly every investment opportunity you'll encounter.

Simply stated, The Rule of 72 approximates your investment's doubling time. It accomplishes this by a rough (yet oddly accurate) approximation of factoring compounding interest which is a logarithmic function by using a relatively simple linear calculation. What? OK, basically if you know your interest rate or rate of return, divide 72 by that number and it will give you an approximate time to double your investment.

Why is this important? As financial farmers we want to know our projected yield ahead of time; it allows us to allocate capital, plan for land expansion, and a variety of other tasks and goals. The "double time" is also important because it helps separate the wheat from the chaff; all things being equal, a faster double time is better (we want the return of principle as soon as possible, with the resulting yield or growth then becoming a matter of self-sustainment.)

Besides "Buy Assets," the next most important tool in your financial farmer work shed is "The Rule of 72"; it quickly and accurately gives a financial farmer a quick idea of the viability of an investment.

Ebola's Impact? If we're Lucky, Only 1% of GDP

Readers of this blog, all five of you, were alerted to the potential dangers of inbound Ebola on September 17th's post. As any financial farmer well knows, there are plagues and pestilence that strike every farmer's fields. The frustrating part of this unwelcome news that hit across the wires yesterday was that it was completely preventible; why this country is receiving flights from West Africa is beyond me.

From a portfolio perspective, 2 weeks ago was a great time to hedge out entire portfolios via either selling covered calls or buying puts. For now though, investors unhedged are in a bind; hedge out after 250 points, 500 points on the Dow? I suspect this will have ripple effects throughout the economy, particularly alarming is the seemingly uncoordinated response from the CDC and more importantly our political leaders.

My thoughts? Dig in, we're probably headed lower, and probably going to sustain across the board damage to the economy. Sectors which offer protection; not many, but your addictive, necessary, branded monopolies most likely offer the LEAST damage. Small Caps? Watch out, they are the most vulnerable with weaker balance sheets and dependent, traditionally, on discretionary spending. Upside? Not the airlines, travel industry, or restaurants. MAYBE niche pharmaceutical companies, especially those that can secure federal funding.

Dig in fellow financial farmers, I think this is the long-(un)awaited correction. The question on this one, though, in a Brave New World, what's the recovery timeline going to look like? For the time being, a full-hedged portfolio with plenty of cash on the sidelines is king.

Let's hope things don't deteriorate from here, but I'm not particularly impressed with our leadership's response or (lack of) planned path forward.

Another Day, Another Dollar

…as the Dow DJIA hits yet another record close. Is the end is sight? Is this mighty bull due for a breather? Probably not. 

Frequent readers of this blog (all five of you) know that I have been bullish from the start of this run and have consistently predicted Dow 20,000 by the end of 2016. I see no reason to modify this standing call; the Fed's dovish tone, the real estate market's recovery, and the job picture all point toward higher and higher closes.

Clouds on the horizon? Plenty. The U.S. involvement in the never-ending Middle East wars is the most obvious concern, particularly to what lasting role this country will play in the region and also the net migration of a clear and present danger to our own shores keep this investor up at night. The response to the conflict in Ukraine was tepid at best, and fading by the day. Finally, the biggest potential danger from a macro-standpoint is an ebola-like (or just actually ebola) jumping in form-factor and consequently delivering a knockout blow to our medical response system.

Of these three concerns, only the last is probably one that can be adequately addressed and communicated with a valid solution to the American public; let's hear the plan to fight an inbound devastating pathogen. Lay out the blueprint Mr. President. The former concerns present no clear solutions, and we will undoubtedly be mired in Middle East conflict for years in one form or another until the utility of oil has been exhausted. The situation in the Ukraine only leads one to suspect it will fester and possibly grow to other regions as there seems to impetus to contain aggressive expansion.

With that said, it is hard to believe the that the path forward will not be up; every couple weeks there is a momentary pullback of several percent which has proven to be an excellent time to add to existing positions. The incremental gains of several years now are compounding both in valuation/dividends and more importantly, even hiring; expect that to continue. The IPO market is robust and technology (thank you Silicon Valley) keeps introducing better ways--both to do things and things themselves.

Make hay while the sun is shining fellow financial farmers!

Truett Cathy

Founder of Chick-fil-A, arguably the finest and fastest chicken sandwich, Truett Cathy died on Monday September 8th, 2014. From many aspects readers of this blog can learn a great deal from this man.

Starting from nothing as a Depression era child, Truett founded Chick-fil-A which is now one of America's largest restaurant chains grossing over $5.5B a year in sales and consistently laser-focused on quality.

Muhtar Kent, CEO of Coca-Cola, had this to say about Truett. He was "an irrepressible optimist…he saw work as a privilege and made a point of enjoying it…he understood, like few others, what it meant to be a steward of a great brand. If a brand is a promise, then a great brand is a promise kept. Truett kept his promises."

For those readers who wish to Invest Like A Farmer, I encourage you to read up on Truett Cathy. His formation of a brand, his devotion to service, and probably the greatest compliment, his faith in God and his fellow man were remarkable. In terms of lasting influence in American business, there are few better.

Diamonds in the Rough

How as an investor can you find a potential diamond in the rough? An asset that is undervalued with the potential for exponential returns? Well, according to efficient market theory, it ISN'T possible because at any given time all assets are considered to be perfectly priced. Reality, however, dictates otherwise.

Efficient market theory does not take into account every possible future scenario based on unique perspective or insight; there are literally hundreds, if not thousands, or as some theoretical physicists believe, infinite distinct, discrete factors that go into determining any future event. It would be safe to say then, that by definition future events are unknown even to the smartest amongst us.

With that said, then, how can an individual investor ever hope to beat the legions of professional analysts on Wall Street and literally pick a diamond in the rough? Einstein said it best when he commented that knowledge was power, and perfect knowledge is not possible to mortals. What is possible, however, is experience.

Malcolm Gladwell's Outliers is a fascinating book based on what factors help influence success. In it he argues that repeatability, or perfect practice as defined by Lombardi, makes perfection (or at least extremely high outlying returns on an endeavor) possible. I believe the same holds true when selecting equities for your portfolio.

Finding companies whose brands are not yet fully established, yet focus on "perfect practice," I believe, offers the best opportunity for discovering those hidden diamonds. Successful branding takes time to take  root, and it is in this time where execution of the business model can help score big points for early investors. The natural result of perfect practice is increasing brand awareness, increasing profitability, and increasing share price.

If it is diamonds in the rough you seek, look for emerging brands laser-focused on perfect practice.