Farmers, Hunters, And Investing For Financial Independence
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.
The Drought
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?
[Image Credit: Flickr1, Flickr2, Flickr3]
Cool story, Mr. Tako. It’s a great analogy that I’d never considered. I think for me, I’m about 2/3’s farmer and 1/3 hunter… at least that’s what my assets tell me.
I really like this! Mr. Adventure Rich and I are most certainly in the Farmer category. We may hunt a time or two, but the slow cultivation and diversification is our primary game. Great article!
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Interesting analogy! I’m risk-averse, so I am definitely a Farmer. I thrive on stability. Occasionally, I like to be a Hunter, but I need to know that even if a fail as a Hunter, I still have lots of food to support myself and my family.
Ah I was hoping I was going to be a hunter and this was going to be about minimalism. Alas, it was not the case. The hunter rarely wins. The farmer on the other hand seems boring, but in many ways was the American ideal of the past. Now we have moved into a culture of hunters, seeking quick and easy fixes for life.
Great analogy and thanks for sharing!
I have learned to become a farmer over the past few years, investing-wise, especially after my daughter was born. If you already have a good chunk of capital established why risk a large portion of this going hunting? I have already allocated a nominal (20%) of the portfolio for higher risk (early stage company) investments and that is already too risky for me.
-Mike
Interesting idea! I know many people promote the Hunter version of investing, but I do learn more towards Farming myself. Investing is a game you play in the long-term to see gains, after all.
That’s a great analogy. I’m mostly a farmer too. It suits my personality better. Being a hunter is stressful for me. Recently, I moved some of our US index to International index. I guess that’s a hunting mentality. That’s a rare occasion, though. Usually, I just leave our investments alone.
I hope the “hunt” goes well for you Joe!
Mr. Tako, I’m mostly a farmer! Getting overly confident at times, I though I could “hunt” but ended up getting ravaged by some wild beasts =( I’ll stick to farming. It’s fairly tried and true. And easy prey is a rare sight these days.
Great analogy! Robert Kiyosaki had a similar analogy, with investing dollars being treated as either cattle to be taken to the slaughterhouse (where the investor makes a killing) or as milk cows who regularly produce milk and calves. That analogy stuck with me through the years as I built up my dividend investing “farm” and harvest dividends every month.
Great post. We too are mostly farmers, but we always leave idle cash to make a large purchase when the opportunity presents itself.
Interesting analogy! We are definitely farmers, not hunters (if this were in real life, I’d SO get mauled by a bear). Also, farmer and agriculture is basically what’s allowed the human population to grow and flourish over time. If you have to constantly go out and hunt your food, that’s pretty risky and leaves very little time for anything else. I think the strategy is working out pretty well.
This reminds me of the time I was nearly mauled by a bear in real life… but I better save that story for another day. 🙂
A very nice and interesting story.
Most of the people in the FIRE community of course are farmers. On top of that ~80% go with the “LPG” principle ( google it …I´m just kidding 🙂 ), buy each and every seed of the whole portfolio in weighted amounts for the extra cheap yearly fee, which the “Kombinat” has prepared for you.
Don´t hurt me …I´m not against indx funds etc. ..it just came to my mind 🙂
The only thing that I´m a little bit sceptical of is, if the principle holds for every income class.
The >$90.000 income sector will be absolutely fine with that, especially when it comes to steady and slow growth, combined with other income flows like real estate, pension funds etc.
Also it is a good strategy for highly flexible and low tax regions like the US or Canada.
I guess that´s the primary reason why most of the early retirement blogs are US based.
While there are extreme examples of people being able to reduce their cost of living to insane levels, resulting sometimes in a 60% saving ratio even on a $25.000 income, these are rare cases.
To stay with the analogy : If the godfather of the ancient tribe only gave you a very tiny field on which you are allowed to grow your potatoes, you can do what you want in conventional farming – it will be very, very difficult to break through – unless you use synthetic fertilizers – or go hunting 🙂
To make it even worse : While in the US the farmer is able to sell nearly all of his potatoes, if he can proove that he is farming for a long time, in Europe the “Sheriff of Nottingham” takes away lots of potatoes every year.
Therefore sometimes you may be forced to go hunting more often then you want to.
Love the story and analogy, Mr. Tako. I am most certainly a farmer.
I’m definitely a farmer. In part because the type of work required to be a hunter successfully is not interesting enough to me and I lack the time to implement the strategy well. I hope that with many seasons, I’ll have made a good homestead.
Great analogy Mr T. and a new one for me. I definitely see myself as mostly a farmer (I even named my dividend income reports “Dividend Harvests” lol) but a bit like you, look to snag a wild boar that has wandered out of the forrest or a fat bird that flys overhead. Long term, it’s a good balance between simplicity, sustainability and the occasional feast.
Appropriate post during our 2021 bubble fun. In a sad way of course. At least for some folks.
But, it’s a great analogy Tako. Thanks for the reminder in your recent post about this one. I believe I read it when you wrote it as it was familiar, but I think it’s quite approachable today. Cheers!