Tuesday, 1 October 2013

In the field of investment, are you a Hunter or a Farmer?

That evening on the way to my part-time Master' course in NUS, it came across to my mind that income-driven investors who love their dividends, just like farmers who love their harvest.

Both need to plan, select seeds, nurture them to grow, pray for good weather, buy insurance to avoid epic disaster, and wish for a rich harvest in due time. Every step must be well planned in order. Farmers must know when to sow, how to take care, and when to harvest, just like income-driven investors know when to buy, how to manage and when to expect dividend pay out. Hence, patience, diligence, discipline to resist greed and fear are the keys to slowly accumulate and grow their wealth.

Interestingly, traders are like hunters, aren't they? Both need to focus on sudden-arising opportunities, and act in a short time window, both need the courage to fight with the mightier and the unpredictable, both need the wisdom to know when and how to accept failure and to give up hunting, in order to preserve oneself, and to keep alive in the hunting field for many years, instead of being hunted and eaten by others. Therefore, hunters' results are much less predictable than farmers', and their lives and personalities are also very different from that of farmers.

We know that farming is a great invention in history, and a significant step forward to human civilisation. Why is that so? Why farming is better than hunting? To me, I think farming is better than hunting in three ways: 

1. Farming is less dangerous, or in "Quantitative Financial" terms, has a lower probability to trigger the termination level. Hence one can continue to stand on the play ground and keep farming or keep investing.  While for hunters and hunting-type investors, they run a higher tail risk and are more likely to lose their lives or capital.

2. Farming is more predictable and hence can be better managed, and improved Dividend income investors knows when and how much their dividend will come, hence enabling them to manage their cash flow better.

3. Unlike hunting, farming does not require constant attention to get ready to jump into opportunities that can arise at any time, hence freeing one's mind and time to do other activities to enrich lives and beef up productivity. Think about traders. Although they need not and should not trade all the time, but they do need to diligently monitor the market and wish to discover trading opportunities.  When that occurs, they must be seize it quickly, for the opportunity might be gone very fast. Life, as a result, is obviously unpredictable ( someone likes that, someone hates that, how about u?) Since farming provides higher degree of certainty, so farmers, after their due diligence, have more time to relax and engage themselves with other activities they like. Apply the same logic on a society level, it means that in a society a few farmers can feed all people, thereby non-farmers are free to pursue other activities which may also boost farming productivity in return. This is, again, true on a personal level: we all know that the best rest is not to sleep, but to replace one activities with another.

Of course farming is not without failure, and its failure can be as devastating as hunting, and farming has less likelihood to make people "get rich quick".

With these thoughts, I start to guess that there might be some other people  who had the same or similar thoughts. So I opened my iPad to google...and found that so many sophsiticated acedamic discussion on the topic of "hunter and farmer", mostly about personalities and behavior study, some are related to investment too. 

The following excerpt is from an interesting article I found on line, the original link is copied at the bottom.

Clearly, farming is a very different activity from hunting. Farmers spend time sweating the details, worrying about the weather, making smart choices about seeds and breeding and working hard to avoid a bad crop. Hunters, on the other hand, have long periods of distracted noticing interrupted by brief moments of frenzied panic.

Both groups are worthy, both groups are profitable. But each group is very different from the other, and I think we need to consider teaching, hiring and marketing to these groups in completely different ways. I'm not sure if there's a genetic component or if this is merely a convenient grouping of people's personas. All I know is that it often explains a lot about behavior (including mine).
Some ways to think about this:
  • George Clooney (in  Up in the Air) and James Bond are both fictional hunters. Give them a desk job and they freak out.
  • Farmers don't dislike technology. They dislike failure. Technology that works is a boon.
  • Hunters are in sync with Google, a hunting site, farmers like Facebook.
  • When you promote a first-rate hunting salesperson to internal sales management, be prepared for failure.
  • Farmers prefer productive meetings, hunters want to simply try stuff and see what happens.
  • Warren Buffet is a farmer. So is Bill Gates. Mark Cuban is a hunter.
  • Hunters want a high-stakes mission, farmers want to avoid epic failure.
  • Trade shows are designed to entrance hunters, yet all too often, the booths are staffed with farmers.
  • The last hundred years of our economy favored smart farmers. It seems as though the next hundred are going to belong to the persistent hunters able to stick with it for the long haul.
  • A hunter will often buy something merely because it is difficult to acquire.
  • One of the paradoxes of venture capital is that it takes a hunter to get the investment and a farmer to patiently make the business work.
  • A farmer often relies on other farmers in her peer group to be sure a purchase is riskless.
( From the link: http://sethgodin.typepad.com/seths_blog/2010/02/hunters-and-farmers.html)

Let me add to the list above,  

Dividend-income driven investors are farmers, and traders are hunters. How do you think? 

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