How The Farmer is a Hedge Fund Manager … But Acts Like A Casino Gambler (Part 1 of 3)
Are Farmers REALLY Like Hedge Fund Managers?
Farming is a tough business. I may be a bit biased, but there is no other profession in the world that requires the business owner to wear so many different hats at the same time … all while knowing that there are so many variables outside of your control. The main one: Mother Nature. The weather plays a big role on the growing season.
But I’m no weatherman, so I focus on what I know best: grain marketing.
Where it all began
All of my family comes from the farm. Before starting out in Canada, they were farmers in Europe in places like Scotland and Germany and what is today the Ukraine. Like many other families, my family immigrated to North America for better opportunities and to avoid the limitation of their success. If you’ve ever seen the movie Doctor Zhivago, my maternal grandfather’s family basically lived that: the farm operation broken up by the Bolshevik Revolution; the family split up by the political conflict; and a forced move to find untapped potential in the soils of Canada and America (I’ve got 3rd cousins farming a bunch of land in North Dakota!).
Growing up, I loved being around the farm and my dad’s fertilizer company. From seeding through spraying to harvest, I was amazed by the ability of a barren black landscape to produce huge fields of gold or yellow or purple.
My father will tell you that at the mid-point of the growing season when the canola was blooming or the wheat and barley was heading out, I would refer to these crops as mustard and relish (and was always asking why there was no ketchup crops). As you age, though, you learn what these crops really are, including the challenges of growing them, what they’re used for, and, ultimately their monetary value.
Hockey provided the avenue to a priceless education, first paying my way at the storied Athol Murray College of Notre Dame in Wilcox, SK (which produced more NHL players and draft picks than any other high school by a long shot) and then to the prestigious Yale University. Even though I left university after my 3rd / Junior year, I completed by degree in Economics by taking 4 summers-worth of classes. It was during that time that I started to track the commodity markets, starting first as a personal interest as the financial markets were reeling after the U.S. sub-prime mortgage crisis. Eventually I joined many of my classmates on Wall Street, as an intern with Hedgeye Risk Management while still studying for my degree a few hours a week.
I learnt A LOT under the tutelage of the likes of Keith McCullough (you have to read his book: The Secret Diary of Hedge Fund Manager) and Daryl Jones (current FarmLead advisor), both Canadians who played hockey at Yale and had made their own names on Wall Street. It was in New Haven, CT and NYC that I started to grasp the concept of risk analysis, risk exposure, and risk management.
Most importantly, I started to understand that these trade crafts were not restricted to ‘the suits’ and guys you see on CNBC or Bloomberg.
Where my Hedge Fund Theory Started to Click
While working at Hedgeye, I started to see some parallels with farming. It took me a few more years to finesse the idea, but I could see a little of the hedge fund manager and the casino goer on the farm.
Just like a trader or hedge fund manager, a farmer has many variables they weigh before getting into a trade. A trader or hedge fund manager will look at different financial statements to understand what the potential upside (or downside) for an asset could be, regardless if it’s a company, commodity, bond, currency, or other tradeable security.
What really matters to a risk manager is what return on investment (ROI) they’re earning.
Further, much like a trader or hedge fund manager who have teammates around them, so too does a farmer. Be it a father, mother, uncle, aunt, brother, sister, son, daughter, hired help, or likewise to assist them in their management of their operation. A Wall Street player understands that that there are many factors which they cannot control and try to minimize the negative effects those factors can play. Similarly a farmer will use tools like precision ag, fertility plans, chemical applications, and other equipment to manage their assets that are also growing (although theirs are literally growing out of the ground).
However, where I find the biggest differences between the Wall Street players that I used to stand side-by-side with and the farmers that FarmLead works with today is how they understand market risk and manage their exposure against it. A hedge fund manager admits that they don’t know what the market is going to do, but they weigh upside potential against downside risk and make calculated bets to take profits when they are available and minimize losses. “I sold at $XX” means nothing to a hedge fund manager, whereas for farmers, it’s practically the only thing I hear. What really matters to a risk manager is what return on investment (ROI) they’re earning.
Do you know what the ROI on your crop is? Your break-even? A risk manager knows theirs.
Join me next week for Part 2 of the Hedge Fund Farmer Vs the Gambler post where I’ll walk through a mathematical example of managing risk.
