Tuesday, November 6, 2012

This market is nuts!

The pecan harvest is in full swing right now. I’ve had my best crop ever and so have not had to fight off the crows as much. Even the squirrels don’t seem to bother me as much. As I walk about the yard picking up the nuts, at first by hand and now after a heavier nut fall I use my roller, I get some time to think. Having a major interest in the stock markets has me thinking there are major parallels between growing a crop such as pecans and obtaining long term success with money in the market. Before getting to the commonalities in the market it seems like some time should be spent explaining the different kind of traders and investors. First off, I’ve never directly met someone that became incredibly rich from the market. There have been some people I wondered about, thought maybe they did well in life but have never questioned them to know for sure. So these comments come some from observation, conjecture, and questioning those that I can. The first kind of investor is really not an investor. They have their head buried in the sand, do not think about market returns, do not save money, don’t take advantage of workplace retirement savings, don’t have a 401K. In essence, this kind of person has not even planted a single seed or tree from which to grow there money and financial independence. The next kind of investor actually does a little better. They do have some accounts. They likely do the minimum or a little bit more. They don’t play an active roll in management, likely listen to a parents advice or perhaps a “Fidelity workplace representative” and put their money in a target retirement date fund. These folks will get somewhere, just not as far as they could go otherwise. As they relate to pecans, I picture this kind of investor as one that might buy a house with a pecan tree but not actually harvest the nuts and put them to use. They also might not plant more trees. The third kind of investor is really who I would hope to reach out to with this writing. I’ve been in their shoes, done what they are doing, and hopefully grown. This investor really wants to get ahead in life! They are willing to work hard, read books, put some money to work. They play an active roll in managing money, likely in a self directed brokerage. This is where the analogies with growing pecans really apply. My spouse and I bought 10 acres of land when we knew we wanted more space to grow things. We’d been running with the pack in our half acre subdivision but wanted to break out from the norm. Ideally we would have some things we enjoyed growing on the land in plentiful amounts sufficient to pay the taxes each year. Part of this was to plant pecans (of interest is that we heard pecans can generate more income per acre than any other crop grown). So in our first winter after some research we planted 40 trees spaced up and down our driveway and into the back yard. We rented equipment to dig the holes the correct depth, hauled water from miles away to water each tree, trimmed off 1/3 of the top to allow good root development. To be successful with pecans and investing one needs to do research. You can’t just throw a nut in the ground and watch it grow. Sure it might grow into a tree, but it will be a native without known characteristics. So you have to choose what kind of tree you want with desired characteristics. Stuart, Pawnee, Gloria Grande, Sumner; these are some of the choices I have made. They have desired traits for what I am looking for, have been proven by others. They are also on proven rootstock. A tree of known quality is grafted onto known quality rootstock for control. In the apple world Bud-9 rootstock is used to limit the growth pattern to that of a 8 foot semidwarf pattern. I want the full growth pattern in my pecans and investing, so knowing what will do well for the long term is a key focus. If you take an open pollinated nut it will perhaps have some characteristics of the parents but will have other uncontrollable features as well. In investing, I’d say do your research, focus on that which will get you to where you want to go, stay away from planting nuts in the ground hoping you will get what you want. What has worked in the past? Watching pecan trees grow is exciting albeit on a much longer time frame. It can be difficult to sit still and do nothing as they suffer through youth and problems. It can also be difficult to manage them in ways good for long term growth. Pruning a tree to central leader, needed for structural strength, decreases the available wood to produce nuts. So I could harvest more fast if I did not prune but could lose out on the long term survival of the tree. The same is true of investing: failure to properly handle your investments will decrease your long term success. If you under perform the market by even 1% a year, your wealth in 20 years is compromised. If you engage in risky efforts now and lose 50% of your money, you in essence rip up half of your pecan trees and need to replant. Keep your trees in the ground, tend to them, watch them grow. Another problem with pecan trees is the weather. Frosts can kill off the bud break in early spring. Storms can shake the nuts out of the trees prematurely. I generally have an idea of volatile weather shortly before it happens, but in the long term from year to year I have no idea if or when there will be a problem. So I leave my trees in the ground, they will and do recover on their own. The same should be done with long term investing: leave your money put, you can’t tell when or if problems will come. There will always be rumbling. So what happens over time with a pecan orchard? The sticks placed in the ground over ten years ago have now grown beyond the point of easy pruning and are providing good returns. The wood grown last year provides for this years nuts. The wood that grew this year allows for next years crop so I’ve made sure to add some fertilizer to the soil. As it relates to the markets, this exponential growth in my nut harvests is similar to the exponential growth of investments helped along by compounding of interest. I strive to be grow quality nuts so that I can have aplenty in my golden years. I want to do the same with my investments. I’ve stopped yanking trees out of the ground by eliminating risky market bets. I enhance long term compound growth by cutting back on management fees in mutual funds. I also try to focus on proven methods good for the long term. I want that which can grow exponentially and have to hold through some shaky times to get the growth. Walking about my land and observing the natural world I see these things. I hope you do too.

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