Why I Like Cows: Part II – Managing the Herd (portfolio)

In case you’re one of those unfortunate souls who missed my last Moowsletter – Why I Like Cows, here’s a very quick recap…

Imagine for a moment, you’re the proud owner of a cow and she produces 5,000 litres of milk per year. And let’s say she’s worth $1,000.

Now, suppose the market for cows drops a whopping 50% which means your cow is now worth $500!

Do you think, just because the price on her head has halved, she’s going to eat less grass and produce less milk?

Of course not!

Ironically, this is how most people perceive investments, especially shares listed on the stock market. They think that if the value of their shares fall, it affects how much they pay out in dividends (income). It doesn’t. The two are totally unrelated.

Managing the Herd
The only thing better than having one cow that produces a lot of milk is having a whole herd of them!

A dairy farmer doesn’t worry about the value of his herd because he knows it will always oscillate. For him it’s irrelevant. He’s only interested in how much milk they produce.

The value of an asset feeds your ego, the income it produces feeds your belly.

He knows that if the value of his herd drops, it will always bounce back. Good income producing assets always do.

Equally, he knows his cow’s milk production will be seasonal. Meaning, they will always produce more milk in summer when there’s a lot more feed about than winter.

Dividends are the same. Some distribution dates deliver bigger dividends than others. But over the course of a year, it balances out.

Most importantly, a good dairy farmer doesn’t rely on selling one or two cows each year to supplement his income. Less cows mean less milk, less cashflow. Eventually it spirals downward to nothing.

Sadly, most people treat their retirement the same way. They think that selling off a few cows (assets) every year is how they should fund their retirement. It’s not. It’s the worst strategy of all. If you slowly sell off your cows, you run the risk of outliving your herd.

I’d be shattered if I outlived my cows!

That’s why I disagree with a lot of negative gearer’s. They think the only way to create wealth is to invest like a beef farmer – buy low, sell high. They develop a one-track mind that only serves them well in an upward market, which can take years. Read, Perth and Brisbane

Their strategy constantly relies on buying the right cows at the right time at the right price. Worst of all, it relies on selling them at the right time to maximise their sale price.

Note – this is not a criticism of people who negatively gear. I just think the final after-tax results are not what they’re always cracked up to be.

A dairy farmer never puts himself through this same costly, unnecessary stress. He avoids it by running a herd of high producing cows so that when he wakes up on January 1 every year, he knows within close proximity what his income will be for the next twelve months.

His strategy doesn’t rely on constantly buying and selling cows. It relies on good, consistent milk flow.

Ironically, as the production capacity of his cows increases (milk flow), so does the value of his herd. He wins both ways. Happy days!

And that’s why I like dairy cows. Always have. Always will.

Have a great weekend!

Adam