Our Guiding Investing Principle
“You cannot sow something today and reap tomorrow! A seed has to go through the various seasons before
it turns into a fully grown tree. So is the case with Investing.” – Parag Parikh ( Author & Value Investor )
Law of Farm
The Law of the Farm states that a farmer will have a good harvest only if he plans and works diligently over a period of time in the farm. He has to perform many tasks at the right time in the right order if he wants to get a bumper crop.
The farmer has to take up multiple tasks
- Prepare the field
- Nourish the soil
- Plant the seeds
- Water the field
- Protect from Insects
- Protect against stray animals and birds
- Weeding
- Watch over the crops regularly.
This will help him get a good harvest. If the farmer just plants the seeds and expects them to grow on their own, he is mistaken.He is going against the ‘Law of the Farm’ and cannot expect to reap good results.
Similarly, this law also have application in study of investment planning. We have to plan our finances, take different steps at different times, monitor and review our progress to achieve financial freedom.
People who are successful investors have worked on their investments for many years and are able to delay gratification and do not believe much in quick successes.
Let us look at how farming and investing are similar.
1. Prepare your financial Plan
Just like a farmer tills the land before cultivating it, you should prepare your financial plan stating your objectives, steps to achieve your objectives and parameters to measure your success.
2. Execute your plan
Once the land is ready, the farmer sows the seeds, similarly once the financial plan is ready execute your plan (Unpredictable factors of weather conditions and that of market conditions are alike).As he should constantly cultivate and fertilize the field to plant seeds and take precautionary measures, similarly as an investor, you need to take calculated risks to get optimum returns. You need to research before you invest.
3. Protect your finances
For a farmer, it is important to protect the crops from pests and insects which he can control, similarly you need to protect your capital by using risk management tools and techniques such as in depth investment research not relying on the tips & trends which are deceitful. Another important factor is time. As a farmer has to plant right crop at right time by studying the seasonal patterns, similarly a good investor needs to have a right mix of assets at right time by studying money flows in various asset classes.
4. Diversification
Even farmer tries to sows two crops to avoid losses due to price fall of one item due to cyclical nature of food prices. Similarly hedge your investments too, a good investor invests his capital in diversified assets and sectors.This helps to mitigate losses and protect investments from the downside.
5. Be Patient (Time is virtue)
After sowing seeds he can’t expect bumper harvest overnight, it takes time and patience.
It takes time for investments too, to give good returns. Similarly, Stocks and Mutual Funds units will not rapidly increase in value overnight. You have to be patient to reap the rewards of a good investment plan.
6. Keep working towards your financial goals
A farmer has to keep working in his field. He also gives a break to the field from cropping so that the soil gets replenished. But even then, he takes care of the land and soil. Similarly, you have to keep working towards achieving financial independence. If you are not actively doing anything with your investments, you should take other steps like getting your documentation in order or checking if nominations are in place. You can update your financial knowledge as well. These steps will help you in easing the way to reach your financial goals.
Though it seems easy, it is not easy to follow the Law of the Farm as we want shortcuts for everything including financial success. One might make money in a few quick trades, but that will not work in the long run and nor will they help you achieve your financial objectives.
Do remember that, in investing just as farming, you need to focus your efforts on the goal and work with dedication and discipline to generate good returns. You need to make the right efforts, take the right decisions at the right time in a continuous manner to get successful results.
These points may sound so simple but in reality most of the investors fail to follow the ” Law of Farm “.