Investing returns tend to come in fits and starts. Some days your investments rise and you feel on top of the world. Other days the market falls and you feel poorer for it. It doesn’t matter what your favorite asset class is, returns are never smooth mathematical lines into financial infinity.
Mr. Market can act very irrational when he’s in the wrong mood. He can also maintain that irrationally for a very long time. How long is a long time? Potentially for decades…
Eventually though, Mr. Market does change his mind. One day he finally comes around and acts rationally again. Was your investing conviction strong enough to wait for him?
I recently had the opportunity to be on the winning side of Mr. Market’s mood swings — one that I want to share with you today.
Approximately 4 years ago, I purchased a few shares of Deere & Company in my IRA. I believed it to be a good investment.
Almost everyone knows Deere, — they’re the company that makes those iconic green tractors. But what you may not know is those green tractors are only part of the business. They actually make a huge array of different equipment — tractors, farm equipment, construction machinery, forestry equipment, lawn mowers, and so on.
Like most equipment manufacturers, they sell this machinery to customers around the globe — It’s a giant global business.
Unfortunately for Deere, Mr. Market has been quite negative about the company’s prospects … mainly because crop prices have been down. When crop prices are down, farmers make less money (and are less likely to buy new farm equipment). This was Mr. Market’s opinion of the business, and so the shares sat around doing nothing for 4 years.
Thankfully, I knew Mr. Market was being very short sighted. I purchased shares shares back in 2013 for about $90 a share.
Going into this investment, I knew several key facts that would allowed me to invest in Deere with conviction:
Fact #1: The global population is growing, but the amount of arable land isn’t growing. In fact, in some countries the land that can be used to grow food is actually declining. This means a growing global demand for food, and a fixed supply of land on which to grow it. Farms must eventually become more productive over time, or prices will rise. Improved farm productivity means lots of fertilizer, and very expensive machines. The robotic tractors from the movie Interstellar aren’t that far off from reality folks.
Fact #2: The number of farmers in the world continues to dwindle. In the 1800’s something like 98% of the population was farmers. Now, that percentage has shrunk to a mere 2% of the global population. It’s a number that’s been shrinking for decades, and yet we rely on those people to feed us. In the United States alone, farmers are about 1% of the population. To produce the same (or higher) level of farm output per person, a farmer must be more productive than ever. To do so, they rely on farming machinery.
Fact #3: Among farming equipment manufacturers, Deere has pricing power. They’re able to set prices higher than competitors, and hold them there. In some cases, a Deere tractor can cost almost double what competitors charge. Maybe it’s brand, or maybe it’s better product quality, but Deere definitely charges a premium for its products. Pricing power is very important for funding innovation, and the long-term rewarding of shareholders.
Armed with these facts, I made my investment in Deere knowing Mr. Market might disagree with me for a very long time — and he did. Deere shares remained essentially flat for 4 years, only paying dividends to shareholders.
Recently though, Mr. Market changed his mind about Deere in a big way. This year, shares skyrocketed to $125 per share, and much of that only in the last month. Better earnings had a lot to do with Mr. Market’s change of heart.
While I don’t consider this investment a massive success, I’ve done pretty well. Shares have appreciated almost 38% from my initial purchase price, along with 2.6% dividends annually. This is a 48% gain in 4 years, or roughly 12% per year.
That’s about what I expected going into the investment, but it took considerable conviction for those returns to be realized.
Investing With Conviction
I brought up my little Deere investment story, not to brag (it’s nothing to brag about), but to talk about investing conviction. How strong is your conviction when you invest?
The market could easily fall into a deep recession tomorrow, and your investments could hang-out in negative territory for decades. Or, like my Deere example, the market might just decide to stay flat for the next 10 years.
Are you prepared to hold investments without gains, until the fateful day when Mr. Market finally and very suddenly changes his mind? I got lucky, it only took my investment 4 years before Mr. Market woke up. One day it could take far longer.
Think this long-term market malaise won’t happen? It certainly can — just look at Japan.
At one point in the 80’s, corporate Japan was “king of the world”. People thought the Japanese would eventually own everything. Then, the Japanese asset bubble popped in the early 90’s. Stock prices tumbled, and investors suffered major losses. Nikkei prices still haven’t recovered to those levels in 20 years, and many people believe they never will.
Extended periods of non-performance have also happened in the United States too — From 1920 to 1942 and from 1965 to mid 1982. It’s something that can definitely happen, and it’s no fault of the investor.
So I ask the question — How strong is your investing conviction? Could you last a year? Two years? Five? Ten? Or, even twenty years without gains?
Twenty years is a long time to wait, I have to admit. If I have to wait 20 years to see returns, I probably screwed-up (investing when prices were way too high). There’s a reason why I consider this scenario my early retirement killer.
Over the years, I’ve noticed something — My largest returns tend to happen when I invest with the most conviction. I get all my facts and figures worked out ahead of time, and then I simply let Mr. Market take his time.
Eventually the planets come into alignment, and Mr. Market has his big “aha!” moment. That’s when the big returns come rolling in.
But investing this way isn’t easy. It takes patience. I always try to remember the famous quote by economist John Maynard Keynes, “The market can remain irrational longer than you can remain solvent.” I don’t get myself into situations where solvency is a problem.
Never bet your last dollar in Vegas, (or the stock market) thinking you’ll get lucky. You won’t.
Instead, find situations where markets are irrational, and then invest with the intention of being very very patient. It doesn’t matter if it’s stocks, ETFs, index funds, real estate, preferred shares, bonds, or even websites — irrational behavior provides opportunity for investors with deep conviction and real economic facts on their side.
If you believe the value of your assets will eventually rise, how long would you wait? How much conviction do you have?