I have this great colleague that comes up with these fantastic one-liners. Over the past 10 years or so he has provided some real classics. The other day we were discussing how financial planners should build their practice and he said something so great, which I am sure is not original, but like most great quotes made you stop and think about the simplicity and truth of the statement:
Be the Dairy Farmer Instead of the Cattle Herder
It was so simple and fantastic! While we were talking about building a financial services practice, I immediately thought how it related to investing and retirement. Live off the your investments instead of cannibalizing them and having to start again. While we were talking about building a practice the idea can easily be applied to your investments.
What are the Differences Between a Cattle Herder and a Dairy Farmer?
Obviously most people get the idea immediately, but I figured the google machine can provide a better least I could apply beyond the idea of killing off your investments and having to start over…it did not disappoint. I found this article titled, Dairy Farming vs Cattle Ranching from UTNV Dairy Association which laid out some pretty interesting differences, of which, some can be forced into the subject of investing and/or running a business.
The basic premise is that a cattle herder is eventually going to kill the cow for the steak, while the dairy farmer is going to live off of the cow without it dying in the process.
Harvesting Your Investments for Income May be Better than Selling Your Investments
Cattle ranchers produce the beef that you see in the store or are severed at a restaurant. Dairy farmers harvest milk from their cattle which is sent to grocery stores or made into products such as cheese or sour cream.
When you look at that beef in the store it is clear that the cow probably didn’t make it through the butchering process. While the cow used for milking is probably just fine…maybe even relieved.
I am clearly a dividend based investor with limited experience of options selling. My life long goal would be to have a basket of investments that paid me an income that would cover a large amount of my living expenses. Never having to sell an appreciated asset which would then destroy my asset sounds like a wonderful goal for most investors.
Warren Buffett said in his 1988 Shareholder’s Letter that,
We expect to hold these securities for a long time. In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds.
Consistent Income Better Suits Most Individuals
Cattle ranchers usually sell their cattle one time a year, generally in the fall. Dairy farmers sell their milk consistently throughout the year. Can you imagine year old milk? I’m sure glad they sell it daily.
It isn’t hard to find a story or twelve about a lottery winner or sports star squandering a large amount of money when received in a lump sum. It doesn’t even have to be a large amount – think about how you handle a large one-time bonus or commission check? It isn’t an end all be all rule, but most people operate more responsibility on steady, stable and reliable income rather than large swings in income. I am not sure if that is a function of society, or if it is just the nature of being human, but my guess is the latter.
Without Huge Upswings a Strict Plan Must be Followed
Dairy farmers follow a strict daily schedule. Cows must be fed and milked on a schedule to ensure they produce a high volumes of milk. Cattle ranchers have more flexibility in their schedule. Ranchers may spend their time checking their herd, hauling water, fixing fence, or moving cows to new pastures
A slow and steady investor versus a momentum or penny stock trader is going to have to be almost ritualistic in their goal to build wealth.
Regardless of Your Path Investing and Running a Business Takes A lot of Work
Both cattle ranchers and dairy farmers spend hour providing care for sick animals to ensure that their herd is healthy.
If you plan on living off your investments, whether you are a cattle herder or diary farmer it is going to take a legitimate amount of hard work. You know in your gut that if you see an ad proclaiming triple digit returns without any work it is likely complete and utter bullshit.