Investing like Agriculture

There are meaningful parallels between investing and agriculture. The best investments often take time to come to fruition, like Macadamia trees. A friend and his family have been farming sugar cane in KwaZulu Natal for generations. More recently they decided to take their farming in a new direction: Macadamia nuts. “One truck full of Macadamia nuts is worth 6 trucks full of Sugar Cane”, my friend told me.

The problem is that Macadamia nut trees take at least 5 years to bear fruit and over 10 years to reach peak production. The time burden aside, there will be many potential pitfalls to navigate for these trees to reach their peak years. Extreme weather, disease, and insects to name a few. There will be losses. Some of the trees will succumb, but the strongest will survive and ultimately bear fruit.

Good seasons and bad

Some investments are like seasonal fruit trees. There are seasons where certain trees thrive and bear fruit, whilst other trees remain bare. Rather than have trees that fruit only in the same season and under the same conditions, it’s best to have different trees that fruit in different seasons and under different conditions.

There will be years where there are bumper seasons for some of the trees and poor seasons for others, due to factors beyond the farmer’s control. Having different trees that produce at different times of year will allow the farm to continue to move forward. Next year could be completely different, with this year’s losers being next year’s winners. Time, patience, and crop diversification are key to long-term success.

The value of protective assets

There are plants that will aide your fruit trees in overcoming challenges such as disease and insects. Roses are often planted near grape vines as early detectors of disease. Marigolds keep insects away from other plants. Physical commodities such as gold or platinum can serve this purpose in an investment portfolio, often performing very differently to equities or bonds.

Diversify business models, using assets well

Wine farmers in the Western Cape have diversified their businesses by having other complementary businesses operating on their estates. Restaurants, picnic hampers and facilities, coffee shops and breweries are becoming increasingly common, offering additional drawcards for visitors and profitable use of non-arable land. Invest in businesses that have diversified portfolios and are making the best use of their available assets.

Planting a tree

Warren Buffett has said: “Someone is sitting in the shade today because someone planted a tree a long time ago”. Simply, if we never sow the seeds or plant a sapling, we will never be able to reap the benefits. Sow, plant and give them the care and the time they need to grow into big, strong trees. This may take longer than we want, with numerous challenges along the way, but will ultimately be worth it.

Written by Brendan Dunn for Honest Money Podcast

Portfolio Management Support at Galileo Asset Managers