Country-Wide asked Andy Macfarlane and Richard Green, two well-known agribusiness professionals and experienced investors, to share their thoughts about investing off and on farm.
Start early, have discipline around saving, be patient, and learn from experienced investors.
These are some of the principles that Andy Macfarlane suggests farmers consider when they are looking at growing their capital base through off- and on-farm investments.
The Ashburton-based farm consultant and director has had many years’ experience in investing on and off farm, both personally and professionally, and offers the following advice.
NEVER UNDER-ESTIMATE THE POWER OF COMPOUND INTEREST
Start early, stay with it and be patient. Starting off-farm investments at 65 is a bit too late – instead farmers should start early and make incremental investments.
In a lifetime of farming there will be just a few opportunities to take lump sums of money off the farm. This money can be spent on on-farm development or off farm, depending on the family situation and relative returns.
Off-farm investments are often preferable where the intent is to generate seed capital for non-farming family members and reduce the burden of succession for family members taking over the farm.
SPREAD RISK
Take measured risks – don’t punt the farm. While farms are a great capital base to leverage off, risks need to be measured and spread, not doubled.
“You want to spread your risk, not increase it.”
ANALYSE INVESTMENT FEES
If the management of off-farm investments is being delegated to a professional then it is important to ensure the fees charged represent good value for money. Select the source of advice carefully.
VALUE CASHFLOW
Cashflow from farm businesses is typically either lumpy or low. Consider off-farm investments that generate more consistent cashflow to complement the farm business.
DEBT IS POSITIVE, AS LONG AS IT IS WELL MANAGED
While it can make sense to borrow money to invest off farm, the farm should not be put at risk. It is important to have a debt-servicing and cash buffer.
DISCIPLINE IN SAVING IS KEY
A small amount of money put away frequently is better than occasional large chunks. Ideally, parents should set up a savings account for their children from birth so the savings record for the first 20 years is already working in favour of the child before they start generating an income.
CASH RESERVES AND BUFFERS
Off-farm investment doesn’t necessarily mean investing outside of the industry. It could be investing alone or collectively with others in another farm, another farming type, or primary industry enterprise.
FIRE BULLETS BEFORE CANNON BALLS
Start with small investments and learn from experienced investors. Every investment needs a succession plan and this means experienced investors need young people coming in behind them. Learn from people with experience.
DON’T BE AFRAID TO BUCK THE TREND
Often the best investments are the ones that are not the most popular on the day. Investors need to be able to cashflow a counter-cycle investment until it proves its worth.
INNOVATION IS CRITICAL
Typically, farms have debt so off-farm investments need to be able to deliver more than the opportunity cost of the interest on that debt. This means innovation is critical to return more than the cost of capital.
THE FLYWHEEL EFFECT
“Keeping your shoulder to the wheel for a long time does eventually reward the hard work.”
People are often at their most pessimistic 10-15 years into their career because they feel they have worked hard without seeing the benefits. Success is often seen after 25 years but this success is built on the hard yards done in the preceding years.
Farm development can be the same. The benefits may not become apparent for some time but, once the momentum begins, it’s away.
DON’T LET OVERCONFIDENCE MASK REALITY AND DON’T LET BAD LUCK DEPRESS YOU
Particularly pertinent in today’s uncertain economic climate. Beware of becoming overwhelmed by unfortunate circumstances and of hubris based on several good calls. It’s a tight balance.
UTILISE THE POWER OF COLLECTIVE INVESTMENT
This enables individuals to achieve collectively what they could not do on their own. Co-operatives such as Fonterra are a great example, as are iwi such as Ngai Tahu. But there are plenty of examples of farmers who have joined together to collectively invest off farm.
“I’m a great believer in the power of scale, shared risk and shared effort.”
TAKE CARE WHEN INVESTING ON THE BACK OF GOVERNMENT POLICY
Keep a close eye on the direction of government policy but remember policies can change. Tax policies are a good example of this.
SELECT THE SOURCE OF ADVICE CAREFULLY
The best advice comes from people who have had first-hand experience in investing and growing capital. Look for the people who have actually done it, the ones with a level of credibility.
“Look for people with a proven track record.”
RECOMMENDED READING
Author Jim Collins. His principles revolve around investing wisely through the cycles.
His books include Good to Great, Great by Choice, How the Mighty Fall.
What I learned about building wealth
Richard Green started his career as an agricultural consultant, worked as a company manager in the pasture seed industry, and is now executive chairman across several of his own businesses including retirement villages/aged care, dairy farming, and honey production and marketing. He also is an Independent director on a range of other boards including farming advisory boards.
- Power of Compounding Interest
$50,000 invested per year for 30 years at 7.5% interest rate = $5.2 million
$50,000 invested per year for 40 years at 7.5% interest rate = $11.35 million
$50,000 invested per year for 30 years at 10% interest rate = $9.04 million
$50,000 invested per year for 40 years at a 10% interest rate = $22.13 million
- Driving your business to create surpluses for investment or re-investment is critical
- Plan on making a profit in your business every year
- Controlling expenditure is often more important than lifting income
- Make sacrifices in your early years to save investment capital
- Your most important years of business are ages 35-45 years.
- Some of the greatest returns can come from reinvesting capital back into your core business to improve profitability. You don’t always have to look at investing in new opportunities.
- Spreading your investments across different asset classes is smart for a passive investor who wants to reduce risk and who believes in compounding over the long term. To build wealth quickly, concentrate your investment across a limited number of asset classes with some form of control.
- My experience is that investing in growing businesses gives the highest return for my efforts. You need to be focused on growing both the profitability and the valuation multiplier of the business. The business must be scalable. Don’t waste energy on “small opportunities.”
- Have the right people around you. People are everything whether as co-investors, management within businesses or in your advisory team. Deal with people-problems immediately.
- Make sure you will be able to hold on to an asset during tough times. Never get caught and have to sell an asset on a down cycle. Have buffers and reserves i.e. liquid assets.
- Investment in ongoing training of yourself is critical. Probably 15+ days per year required. My experience is that a $1 investment in training gives a $10 return.
- Keep building your networks as this is where the best investment opportunities will come from.
- Have some key principles that drive your investment decisions. Long term investment plans and modelling are critical to help guide your decision making.
- Remember money is not the end game, it is just a way of keeping score. Life is about people and what you can give back, not what you can get. Family and health are more important than money.
