Today, I want to share a story about investing. It’s a fictional story, but it teaches a few good lessons about investing for the long term.
The story goes like this — In this world, there are two people, the Hunter and Farmer. Both inhabit the same corner of the world peacefully.
The Hunter stalks and kills wild game for food. He roams from place to place, following large beasts for sustenance. He is lean and strong, and can move swiftly to kill his prey.
When necessary the Hunter can travel for many miles on foot to find wild game. He takes with him only what he can carry. It’s a pretty easy life, and fairly minimalistic. Most of the time the Hunter doesn’t have to work too hard. When the hunting is good, food is plentiful and the Hunter is full and happy.
The Farmer does things a little differently — he’s tied to one spot. He doesn’t chase his food, he grows it. He plants his seeds on his farm, looking to harvest crops by the end of the season. The Farmer has to be incredibly patient while his crops grow, and entirely focused on their success. He must care for both the plants and the soil, providing water and nutrients for his crops to grow. The effort the Farmer puts in, is continuous until he finally reaps his harvest.
If the Farmer picks a good location, with a little hard work and good weather he’ll do quite well.
One year a tough drought hits the area where the Hunter and the Farmer live. Rainfall is significantly reduced. The ground dries up and many plants die. The large game either dies from lack of water or food, or they simply move elsewhere.
Because of the drought, the Farmer has to deal with some tough farming conditions. Thankfully because he lives in one location, the Farmer has already dug a well for water. He can irrigate some of his plants, but crop yields are probably going to be significantly reduced during a drought year.
Luckily the Farmer decided to diversify his farm into a few different crops. Some crops are going to be more drought resistant than others. The Farmer must also save seeds for the follow year, “reinvesting” in next year’s crop. Generally, he’ll still have a food source during the drought. Things will get a little leaner, but he won’t perish.
The drought situation is a little more dire for the Hunter. His fresh water sources are drying up. The Hunter doesn’t have a store room with food or crops in the ground like the Farmer does. He only carries a little food from his last kill, but both animals and water sources have begun to disappear.
Given these difficult circumstances, the Hunter has a couple choices — he can try to follow the animals elsewhere, or become a Farmer to survive.
In The Investing World
While it might not seem like it, this story is really about investing and the different strategies investors might take.
In the investing world, the Hunter is like a hedge fund or a stock picker. These guys “hunt” for investments in the wild from which to profit from. They seek to buy low and sell high, thereby profiting from the “hunt”. While returns from the “hunting” style of investing can be good at times, they are irregular returns. Unpredictable at best.
Hunting is also fraught with danger — Any investor can misjudge a ‘beast’, and end up losing capital. There’s also significant trading fees that Hunters get charged.
But when times are good, “Hunters” can do very well profiting from rising markets.
The Farmers in our story are buy and hold investors. These guys purchase investments (sowing the seeds of investment), and then hold for a very very long time. Turnover is basically non-existent because the Farmer doesn’t need to “turn” his capital to create profits. The Farmer realizes his profits as the investment bears steady fruit (dividends). As long as the “farm” is well cared for, those investments should keep bearing fruit. This is Phil Fisher style investing… basically buy good stocks (or index funds) and hold them for life.
The Farmer also has tax advantages over the Hunter — as long as the Farmer doesn’t sell his investment, he doesn’t need to pay taxes (other than those on his dividends). The Hunter has to pay taxes on every capital gain (every kill), as he buys and sells.
Done right, both strategies can provide excellent profits for investors… but when recessions or depressions hit, the Hunter gets the worst of it. Few stocks (if any) rise during these periods. The hunter might be able to realize some profits from shorting, but returns are limited.
The Farmer sees lower returns during this period as well. His investments might reduce dividends until the ‘drought’ ends, but he’ll probably survive by tightening his belt.
Mostly A Farmer
While I don’t know who first adapted this idea to investing, the Hunter vs. Farmer hypothesis is a real idea — that burned into all of us are the traits of a Farmer or a Hunter.
I like this little parable because it gives us a model to think about investing for the long term. Ultimately while the investing “weather” is nice right now, we’ll see lean times again. It’s important to think about these different strategies to deal with a changing environment.
If you’re looking to live off your investments during Financial Independence, you might want to consider which of these two models will work best to meet your lifestyle goals.
Both are valid survival strategies, and both sets of genes served our ancestors for a very long time. But when it comes to investing, I believe Farmers have the upper hand because of taxes and patience.
Primarily, I think of myself as a Farmer. When I make an investment, I try to sit on it for a decade (or more) letting my money simply compound. These kinds of investments perform well, and don’t require a lot of maintenance. My income is mainly from dividends, and I only need to watch the investment to make sure the “farm” stays healthy.
But occasionally, I’ll see an opportunity and find myself acting like a Hunter. That large roast beast walks too close to my farm and I just can’t help myself. The prey is easy and the risks are few.
I consider my purchases of preferred shares back in 2009 ‘hunting’. The market occasionally throws exceptionally good deals our way, and I don’t have a problem taking advantage of it. It’s just being opportunistic (which is a fairly successful strategy of its own), but I don’t believe the returns of a Hunter should be used to sustain a life of Financial Independence. It’s too risky, and some day the drought will come again…
So which kind of investor are you? A Farmer or a Hunter?