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To Manage Risk - Be Like a Farmer

The other day I decided to take #3 highway instead of the usual 401 from London, Ontario. As you drive in the country, you quickly notice that many farmers have a number of different crops on their land. Corn, soybeans, wheat, oats, hay, and other specialty crops such as blueberries dot the countryside. There is a very good reason why farmers do this. Crops are very sensitive to climate and moisture. If it’s a late spring, it could hurt corn when sometimes the seed rots before it emerges from the ground. A dry year requires a certain type of corn seed that wouldn’t thrive in a wet one. So farmers control what they can by planting different crops on their fields, and if they can on farms that are apart so that the micro climate also provides some protection from what they can’t control. Corn seed has many different varieties for example, so farmers plant different types to account for wet or dry years, warm or cold ones. One will thrive, the other not so much, but the farmer will be able to make a modest profit and continue into the next year regardless of most weather conditions.

Successful farmers know how to make money. Farmers will also sell some of their crop to lock in prices before they even harvest them. It is also a risky strategy, but most farmers do this only with part of their crop in case they have a crop failure and can’t fulfill the order to minimize that risk. A great farmer, my father-in-law, once told me “there is nothing wrong with taking a profit,” which was all the advice I needed to help shape my own investment philosophy. It was unbelievable how hearing those words changed my investment life.

Farmers don’t wait for an academic or “research” to tell them they have a problem. If a cow suddenly dies or gets sick, the farmer acts quickly seeking out the cause, investigating every aspect of what could have happened. Academics might say that 1 cow out of 200 isn’t statistically anything to worry about, but a farmer would go on instinct and experience, know that it is out of character for a young cow to die suddenly, and take action. With confidence, a farmer would act.

Farmers are also often very stubborn. They know what they know and aren’t easily swayed to adapt new ideas of thinking that go against what they believe. Technology is only embraced after it can be “shown” to effectively replace a current practice or farming tradition.

In summary, farmers focus on what they can control, work hard and smart, diversify in many ways and hedge their bets in case of disaster. They know how to manage money and take a profit.

The next time you are faced with a crisis or unpredicted outcome ask yourself what would a successful farmer do? How would a farmer have prevented this from happening? Likely the answer to your problem can be found by watching a farmer in the field, in the barn, or learned by taking a drive out to the country. It may be the best advice you ever take.

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