Stephen Covey, the famous motivational author, and speaker created the term – ‘The Law of the Farm’. What is the law of the farm and how is such a term connected to personal finance?
Law of the 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 do many tasks at the right time in the right order if he wants to get a bumper crop. The farmer has to prepare the field, plant the seeds, nourish the soil and seeds, water the plants, provide protection to the plants from insects, diseases, and stray animals and birds, take care of weeds and 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 crops on their own, he is mistaken. He is going against the ‘Law of the Farm’ and cannot expect to reap good results.
This law applies to many aspects of our life. For example, you can do well in your studies if you are disciplined and work hard and smart consistently. A tennis player has to spend hours training and practicing. She has to work on her fitness, game strategy, and mental strength continuously to compete at the highest levels.
Similarly, we have to plan our finances, take different steps at different times and monitor and review our progress to achieve financial freedom. Winning a lottery or selling out your business or company will get you a lot of money but if you don’t take care of it and plan well, you might squander it all. 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 the various ways farming and investing are similar –
Prepare your financial Plan
Just like a farmer readies 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.
Execute your plan
Once the land is ready, the farmer sows the seeds. He should plant generously. He should constantly cultivate and fertilize the field. He should water the crops regularly. The farmer bears the risk in terms of weather conditions etc. which he cannot predict. But he studies a threat from insects and birds etc. and finds the right time to plant seeds and takes precautionary measures. Similarly, as an investor, you need to take calculated risks to get optimum returns. You need to research before you invest.
Protect your finances
For a farmer, it is important to protect the crops. He has to work at the weeding. He has to build fences around the field to protect from stray animals. He has to plant in such a way and such time that crops are protected from unfavourable weather conditions.
Even small Farmer tries to saw two crops – to avoid losses due to the price fall of one item due to the cyclical nature of food prices. Similarly, you cannot invest all your money in one basket – diversify. You have to take steps to mitigate losses and protect investments from the downside. You have to be careful of where you invest and review on regular intervals.
Just like you cannot reap the harvest fast, you cannot become rich overnight. It takes time for investments to give good returns. It is not smart to sell some stocks just because they have reached near their highs. They might have more potential. Similarly, Stocks and Mutual Funds units will not rapidly increase in value. You have to be patient to reap the rewards of a good investment plan.
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.
It is not easy to follow the Law of the Farm as we want shortcuts for everything including financial success. We want to put minimum effort and get maximum returns. In farming, you cannot ready the soil, plant the seeds and put the required water and fertilisers in a few days and expect to get a good harvest. Similarly, you cannot cram all your investment strategies in a small time frame and expect them to be a success. You 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 reap a good harvest. 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 don’t follow. Tell me a good reason why most of the investors join the party at the peak of an asset bubble.