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Luck Matters a Whole Lot

In nearly all aspects of life it’s impossible to untangle luck from skill. That is doubly true when it comes to investing. Not everything is like that, though.

There are certain pursuits in which skill plays an outsized role compared to luck. Winning the 100-meter dash in the Olympics, for instance, or throwing a football 50 yards into the hands of a sprinting receiver or landing a triple axel in figure skating. All those activities require an immense amount of skill and very little, if any, luck.

Investing is different.

A bozo can make a brilliant investment – purely from luck – and a star mutual fund manager can make a bone-headed investment – also purely from luck…or, more appropriately, misfortune. It doesn’t matter that the mutual fund manager may have 1,000 times the financial skill of the bozo. In investing, idiocy can masquerade as intellect.

You see it all the time in the stock market. A regular-Joe takes a flier on Microsoft or when it first trades on the public market and makes a fortune. Maybe Joe can’t add two plus two in his head, but he looks like an investing genius to the rest of the world.

The same holds true for an investment near and dear to many farmers’ hearts – land.

Luck can play a big role in how well a land purchase works out.

For example, let’s say you are a senior in high school and know you want to farm for the rest of your life. Upon graduation from high school, you decide to buy 80 acres of cropland. Turns out, it matters a great deal whether you graduate in 1971 versus 1981.

Why? The economics of farming changed drastically in those 10 years.

If you started buying farmland in 1971, land was probably selling for $200 an acre, give or take. Interest rates were in the single digits. And the ag economy was about to go gangbusters.

If you started buying farmland in 1981, land was probably selling for $750 an acre, give or take. Interest rates were in the high teens. And the ag economy was about to endure a crisis.

How do those factors all play out? Think about it this way.

If you bought 80 acres in 1971, put 25% down and borrowed the rest, ten years later the equity in your first 80 acres could have come close to purchasing another 80 acres outright. If you did the exact same thing in 1981, ten years later the equity in your land, if there was any left, may have bought 30 additional acres at best, requiring additional debt to finance the rest.

There are a lot of assumptions baked into that analysis, but the take-away is undeniable.

If you were looking to leverage your equity as collateral to buy more land, your experience was vastly different if you bought in the early ‘70s compared to the early ‘80s.

Just buying at the right time mattered a whole lot. A competent farmer who bought land in 1981 had a harder row to hoe than an inept farmer who bought in 1971.

Perhaps everyone should have known in 1981 that land prices were about to implode, that the farm economy was on the precipice of disaster. I disagree. There’s an awful lot of hindsight in making a claim like that. If you were involved in farming in 1981, you had a decade of evidence saying buying land was a good decision. I strongly suspect a good number of those people buying their first farm in the early 1970s would have done the exact same thing in the early 1980s had they been born 10 years later.

When it comes to investing – be that in land, stocks, or anything else – the line between being lucky and good is often indistinguishable.

Sometimes lucky things happen to senseless investors. And sometimes unfortunate things happen to smart investors. That’s what makes investing so intriguing and, at times, so maddening.

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