The Gardener’s 4 Rules of Investing
Like many others, I took up gardening as a hobby last year as something to do during quarantine. DIY projects are exciting because they offer a chance to learn about something new in a hands-on type of environment. Gardening has the added benefit of putting fresh produce on the table. I’ve also found that gardening shares some common principles with investing.
Space Your Plants Out Giving them Room to Grow
My first year, I decided to try Square Foot Gardening because of its promise to deliver high yields in a small footprint. In hindsight, I may have gone overboard with the concept as my plants were too close together and didn’t have the room to grow to their full potential. This had the perverse impact of actually limiting my yields. By the same token, when I consider the purchase of an investment I spend a lot of time considering the full potential of the asset. If my research uncovers that a stock has potential for serious upside, I alter my sell discipline to be more patient allowing it room to grow. If the investment was a safer investment with relatively limited upside, I implement a sell discipline taking that into account. Space your plants out according to their growth potential and you’ll have a better chance to maximize your overall yield.
Learn to Identify the Weeds
To an untrained eye, it can be quite difficult to tell the difference between weeds and your intended plant. As a beginner, I was overwhelmed by the variety of vegetation growing in my beds. Even searching for images online was of limited help. I certainly pulled some of my vegetables by mistake and I know some weeds were allowed to grow too long because I wasn’t quite sure what I had. Pattern recognition coming from experience has made this a bit easier, but I still have much to learn. As a beginning investor, I would listen to company presentations and get super excited about their prospects believing they were going to be extremely prosperous. However, a battle-hardened investor is much more discerning. I know there are plenty of weeds and they tend to follow similar patterns. Maybe they consistently overpromise or use accounting metrics that are unnecessarily opaque. They are more likely to have ugly interparty transactions that wreak of misaligned incentives. Learning to better identify the weeds allows you to focus on the more productive members of your garden.
Beware of Pests
In 2020, my garden was overrun by 3 pests: squash bugs, Japanese beetles, and a pesky raccoon. After doing some research, I’ve implemented changes this year to better protect my harvest. Squash bugs don’t like radishes, so I’ve strategically planted a ring of radishes surrounding their desired squash and cucumbers. I installed a trap with a scented lure for the Japanese beetles. Last year these destroyed my broccoli, cauliflower, and corn crop. The racoon has been a constant menace, uprooting my raspberry plants, chomping on tomatoes, and digging through my beds. I’ve installed chicken wire and put down cayenne pepper. Fingers crossed. Investing requires constant research on the risks involved in order to understand the magnitude and strategies for mitigation. Protecting your stock portfolio through diversification with lower correlated assets such as government bonds is similar to using companion plants to ward off pests. Know your pests and plan appropriately to protect your crops.
Figure 1 The traditional Native American Three Sisters Companion Crops of Corn Beans and Squash accompanied by radishes lining the edges.
Plant more than One Seed
I start with seeds rather than using the starter plants. This method is a bit more difficult, but the challenge makes it more interesting to me. Not every seed is going to be productive so I’ve learned to plant multiple and then select the one that looks most promising to grow to maturity. Otherwise, I’d have to continuously replant and risk missing the growing window. Upon researching investments to buy, it is also prudent to examine multiple options. Carefully study each before selecting the most promising option. Too many investors get fixated with the first they see and miss the benefit of shopping around. Plant many seeds for each plant you hope to cultivate.
In Summary
At Aurora, we are always looking for lessons that can help us better understand the craft of investing. Also, please send me your gardening tips! This blog represents our thinking at the time of publication. If you are a DIY investor, use this only as a starting point for your research, and be sure to do your own due diligence. For questions regarding our individual stock strategies, please reach out to us!
Invest Curiously,
Austin Crites, CFA
Austin Crites is the Chief Investment Officer of Aurora Financial Strategies, a financial advisory firm based out of Kokomo, IN. He can be reached via email at austin@auroramgt.com. Investment Advisory Services are offered through BCGM Wealth Management, LLC, a SEC registered investment adviser. This blog does not constitute advice. This is not an offer to buy or sell securities. Advisor is not licensed in all states. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. BCGM Wealth Management, LLC manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. Clients may own positions in the securities discussed.
