(An article based on this post was featured in the Nov/Dec 2015 issue of New River Valley Magazine.)
Everything I needed to know about managing investment portfolios, I learned from my grandparents. As I don’t think either of them ever bought a stock, bond or mutual fund it took me several years to come to this realization.
You see, Sam and Annie were farmers. 
Their parents were sharecroppers and I would guess their grandparents were as well. Like most depression era babies that were raised on a farm, they only went to school until they could be productive in the field. For them, that was 3rd grade. Although both were among the smartest people I knew, I guess Annie was the better student because she could read and write.
As with most noble occupations, you can learn a lot of life lessons from a farmer. Unfortunately, like with most youth, I didn’t know it at the time. Looking back now, had I not had the formal training from grad school and CFP® certification, I may have never realized all the parallels between farming and portfolio management.
Modern Portfolio Theory on the Farm
My grandparents lived in southeast Virginia and they grew 3 primary crops; corn, soybeans and peanuts. They knew from experience (historical performance data) that all of these crops could survive the region’s hot, humid climates and sandy soil. Instead trying to guess which one crop would be the most profitable in a given year (single stock risk), they would plant some of each (diversification). The crops were different enough (uncorrelated) so that if the weather didn’t cooperate, there would still be a pretty good chance at least one would do well enough for the farm to turn a profit. Of course there were a few years when all three had outstanding harvests and a few years where none did particularly well. That was the risk they took just by being a farmer (market risk).
Improving the Odds of a Successful Harvest
Like with investing, beginning with the basics of using historically successful crops and diversifying among them went a long way to helping them be profitable. They could have stopped there and probably have done reasonably well. But they didn’t. Like most other successful farmers, they used a process and some indicators to help them make the most of each year.
First of all, Sam and Annie had a very accurate long-term indicator which let them know when they should be ready to plant and approximately when to harvest. Unfortunately, investors don’t have an equivalent indicator with the accuracy of a calendar. Of course that doesn’t keep some from trying to come up with one.
Additionally, they used a reasonably accurate short term indicator, the weather forecast, to improve their success. In the spring when the forecast was for dry weather, they knew it was time to go on offense and get the crop in the ground. If the forecast called for rain, instead of taking the risk of getting a tractor stuck or having the seed wash away before it could root, they would wait for a more opportune time.
As investors, we have an untold number of indicators to assist us in making investment decisions. Many are worse than the local weather forecast although there are a couple that have stood the test of time. I’ll be discussing those in a future post.
The Farming Channel
Although there was no equivalent to CNBC or Fox Business where Sam and Annie could sit for hours each day and watch farming experts tell them whether corn or soybeans would do best that year, they did subscribe to The Old Farmer’s Almanac (investment newsletter). This publication would, and still does, confidently predict the weather for the upcoming year. Although I don’t think they put much confidence in its predictive abilities, it made for good entertainment and conversation.
Getting Better Each Season
Over the years, my grandparents made use of new products and techniques. A few were easy decisions, switching from mules to tractors for example. Others weren’t as obvious and Sam and Annie had to decide whether to try them. Every year they heard about new and improved fertilizers and seeds that promised better yields. I’m sure they also talked to their local extension agent and heard about promising new techniques from the latest agricultural research.
Being conservative people, it would have been easy for them to not make any changes. I’m sure they knew other farmers who would try out the latest thing and lose money because it didn’t work as advertised. I’m sure they also knew others who never made adjustments, even after they had been put into widespread practice. Sam and Annie took the logical course of waiting for other more adventurous farmers in the area to try out the latest products and techniques. If they worked in the real world of southeast Virginia, then my grandparents would begin using them as well.
Similarly, at every industry conference I attend there are more than a few sessions talking about how to improve portfolio performance. Additionally, I get calls and emails on a weekly basis from companies that have a great investment product I should be using. Through additional research I find that most of these techniques and products are no better, and sometimes worse, than my current process. Every now and then, however, I find a new product or strategy adjustment worth implementing. A lot of time and energy could be saved by not looking for ways to improve portfolio management. However, I wouldn’t be fulfilling my obligation to look out for my clients’ best interests.
Stick to the Process
The most important thing my grandparents did was stick to a proven process. They knew that if they used techniques and products which had stood the test of time, made improvements when warranted, and had patience, they would be successful. Being conservative by nature, following these principles would keep them from taking on too much risk. They wouldn’t have a lot of fantastic years, but they also wouldn’t go broke.
I’m sure there were times when they would look back at the end of a season and wished they had planted only peanuts or brought the harvest in a little earlier. There may have even been years where they would have been better off not planting anything. While taking a big risk may have been successful that particular year, doing so would have meant abandoning their process and reducing their probability for long term success.
Managing investment portfolios, it’s easy for me to look back and see where I should have bought or sold a security at a different time. It’s also easy to look back over longer periods of time and see where using a different strategy would have worked better. However, by sticking to a proven process and having the patience to let it work, I know the probability of success over time is much higher than switching to an entirely new strategy every few years.
If Sam and Annie were around today, I would love to sit down with them over a bowl of butter bean soup and homemade biscuits and thanked them for the investing education they provided me. As that’s not possible, this will have to do.
Thank you.