Like a great piece of land, a good quality share portfolio will just about always do well over the long-term, writes Mark Lister. Photo / 123rf
Like a great piece of land, a good quality share portfolio will just about always do well over the long-term, writes Mark Lister. Photo / 123rf
OPINION
The typical farmer will spend decades overcoming a plethora of challenges to build a successful business.
When the time comes to think beyond the farm, investing in a portfolio dominated by shares, listed property, private equity and fixed income doesn’t always come naturally.
Having lesscontrol and influence is a mental hurdle for some while diversifying far and wide can also be a new concept.
However, farmers who can get their heads around these differences often become very astute investors.
Government policy changes are an ongoing risk, most obviously here at home but also offshore. If incentives or regulations change in other countries, that can impact the cost structure or supply response of other regions.
Factors such as weather are out of farmers' control. Photo / NZME
Then there’s the weather.
Even if you get everything right, a bout of bad weather can torpedo an entire season.
Like farming, investing success is as much about risk management, as it is about picking the right stocks or forecasting where markets are headed.
They know the long-term is more important than the short-term
Keeping your eye on the long game can be difficult, especially when you’re in the thick of a bout of short-term market turmoil, but it’s non-negotiable for any good investor.
The return from US shares since 1945 has been 11.3 per cent per annum (including dividends), with positive returns coming in any 12-month period on 78 per cent of occasions.
However, over short-term holding periods, the variation can be huge. The best 12-month period was a 60 per cent gain, and during the worst US shares fell 41 per cent (that was in the GFC).
It’s not dissimilar to farming. Anything can happen over the short-term and bad years are simply par for the course.
Like a great piece of land, a good quality share portfolio will just about always do well over the long term, which is what most of us are investing for.
The hard bit is keeping your cool when the short term is looking more difficult.
They have a history of innovation
New Zealand is blessed with a climate that lends itself to successful agriculture, but our farmers have also been very innovative over the years.
In part, this was forced upon many after farm subsidies were removed in the 1980s, during a period when other parts of the world benefitted from more generous government support.
This need for constant improvement, innovation and reflection will resonate with investors. If we look at the world’s most dominant companies from 30-40 years ago, few of these would find themselves on the same list today.
The farming landscape will continue to evolve, as will the economy, while sharemarkets and companies require constant scrutiny.
They understand leverage can be a double-edged sword
The financial term for using other people’s money to invest is leverage. When asset prices are rising, leverage can make you very wealthy, supercharging your returns.
However, in a flat or falling market high debt levels can do the opposite, by magnifying your losses.
Many farmers have lived through an era of much higher interest rates, and some will have seen their peers get into trouble by overpaying and overleveraging.
When it comes to analysing companies, balance sheet strength and an ability to ride out a potential downturn are key attributes investors should look for.
They recognise the need for growth assets
Many farmers will remember the 1970s and 1980s when inflation was running at an annual rate of more than 10 per cent.
Even at much lower levels, inflation is still the enemy of investors and those looking to maintain their spending power.
Land has always been a great asset for those looking to insulate themselves from the scourge that is inflation.
Growth assets like listed property, shares and interests in private companies can help continue this after the farm has been sold.
In the past 50 years, New Zealand shares have returned 9.6 per cent per annum (including dividends).
Over the same period, the average inflation rate has been 5.5 per cent (inflation was very high in the 1970s and 1980s, before slowing markedly from 1990 onward).
That means the local sharemarket has provided a real return (which is the annual return in excess of the inflation rate) of about four per cent per annum.
Great companies endeavour to steadily increase earnings and dividends over time, which provides investors with another element of inflation protection.
Mark Lister is investment director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.
