Inspired by Warren Buffet’s ‘Crazy Farmer Analogy’
Written by Stephen L. Hanley, Investment Strategist
Evergreen Wealth Management
I am constantly amazed at the vast array of opinions and approaches to investing. It seems like every year something new is created that will change the investing world forever. Yet, after two huge fairly recent downturns and rebounds, experience has proven that not much has actually changed. Investing remains a process of assigning a current value to a future stream of cash flows.
Imagine for a second you own a farm, and every year the farm produces enough harvest for your family to eat, enough to sell for spending, and even some to store away for emergencies. You know the land and weather patterns well, so you remain confident in your farm’s ability to produce a similar amount for years to come. You are at peace because the farm takes care of your every need.
Now imagine you have a crazy neighbor who also farms, who we’ll call ‘Mr. Market.’ Mr. Market isn’t shy; he comes to your fence every day and offers you a price at which he’ll buy your farm. Some days he yells out crazy low numbers and other days he shouts more intriguing prices. On one particular day, he yells out a number that is so absurdly high that you could sell and buy two more farms somewhere else and produce even more food than you are currently.
Investing in the financial markets isn’t much different than owning a productive farm next to the crazy farmer. As investors, we own great companies at fair prices that produce cash flow or income for our current and future needs. We understand them well, we know they will be around for a long time, and given enough time we will not only have all our needs met but may have a crazy farmer offer us a crazy high price.
This is the beauty of investing and one reason I love the work I do. Every day I get to listen to the farmer (Mr. Market) at the fence yelling out prices. I look at what our holdings actually produce for our portfolios and how the growth and income can be used to meet families’ specific needs. I can either ignore the crazy farmer’s prices (Mr. Market) or accept his offer to sell. Every day I get to see us meeting the needs of our clients so they can live life while ignoring Mr. Market’s erratic behavior.
Over the past 12 months we started to warn of the crazy farmer and the prices he will likely be yelling out sometime soon. When a decline finally does happen, Mr. Market will blame all sorts of things to justify his price. “The weather is gonna be bad tomorrow, disease is gonna kill your cows, government is gonna tax you more…” But we know better because we know that if a cow dies, we have a new calf taking her place. If the weather turns sour, it will clear the next day. If the government changes, we’ll have emergency reserves to buy more farms. As long as we can take care of our family with the available harvest, we can ignore the crazy farmer’s rants.
2017 has proven to be a fruitful year and we are pleased to see plans flourish. We expect the future harvest to build, and no matter what happens, we know your family’s needs and objectives can be realized. Planning was done well in advance to prepare for the many variables of the market and economy. Careful attention to detail has been placed on validating that the necessary cash flow is available at the point in time you need it, regardless of market ups and downs, and even the antics of Mr. Market.