September, 1998

Fruits of Thought

Buy Low, Sell High

As the stock market fluctuates, my phone rings with produce people more interested in trading equities than on the state of food safety legislation. It’s not surprising. One of the glories of the United States is the broad diffusion of interest in investments. Such interest is empowering, as it makes the typical Joe or Josephine an active participant in his or her own financial well-being as opposed to some medieval serf dependent on the whims of a feudal baron.

In the latter half of the 20th century, one of the most important reforms has been the development of the IRA, 401K and other such plans that encourage individuals to be active participants in the markets. These accounts are the entering wedge of a political battle to overturn the passivity of the Social Security system in which one’s intelligence and voluntary contribution plays no role.

Of course, widespread equity ownership is a bit scary as well. Bernard Baruch, famed investor and adviser to presidents, explained that he liquidated his holdings prior to the stock market crash in 1929 because his shoeshine boy was giving him stock market tips. Baruch took the involvement of shoeshine boys with Wall Street as a certain sign of over-heated markets.

He was right for his time, not so much today. The boom in retirement accounts and the development of the mutual fund industry has caused many a modern-day equivalent of Baruch’s shoeshine boy to keep a keen eye open for the latest market news.

Produce traders seem to particularly enjoy working the stock market. It makes sense. Buying and selling fruits and vegetables gets one used to fluctuating markets. Cool as a cucumber describes what is probably the characteristic most important to investing success – a non-emotional, analytic approach. The various biographies of Warren Buffet, Berkshire Hathaway’s chief executive who is widely regarded as the greatest investor of the modern age, tell stories of a perfectly nice man whose focus on investing is so intense that he can disregard this own child writhing in pain on the stairs as he walks by!

This type of emotional distance comes from long experience with a phrase statisticians call “regression to the mean.” Roughly speaking, it means that exceptional profits or losses are just that – exceptional – and future performance will tend to bring total performance levels back to the mean.

Produce traders also acquire experience in cutting their losses, which is crucial to good stock market performance. There are few assets that depreciate quicker than aging produce, so traders learn to sell quickly, take the loss and move on. In addition, the very nature of produce pricing mimics the actions of the stock exchanges. Minute-by-minute fluctuations occur as both markets incorporate all available information in the pricing levels.

There are problems when those accustomed to trading produce switch to trading stocks. For one, information is much more accurate, reliable and accessible in produce. Centuries of legislation designed to protect farmers from being swindled by city slickers have given us volume estimates and inspection services that make trading reliable. If the quality is not what is claimed, a buyer can get an inspection and reject the load. If a company’s books are not as stated, one winds up with a claim in the lawsuit.

Perhaps the biggest problem is a sense of over-confidence by produce traders when they hit the stock market. Produce is so dangerous because of its perishability that playing the stock market can look easy. If you make a mistake and overpay for cantaloupes, you better sell fast and get what you can. If one overpays for the stock of a fundamentally sound company, one can hold on and the company’s growth in time can turn a loser into a winner.

That assumes one is around to fight another day. Warren Buffet’s favorite holding period for a stock is “forever,” but produce trading is so fast that many produce traders aren’t used to thinking in terms of long-term investment. This short-term focus can lead to heavy use of options and to highly margined positions.

In the short term, these leveraging techniques can increase investment performance, as one’s return on equity is sky high. The problem is that it turns a stock market position into a load of wasting produce. The position only can be maintained if there is not a substantial market decline. In effect, the leveraged investor loses the opportunity to have time as an ally in his or her investment strategy.

Fluctuations in the stock market are unlikely to affect either price or demand for produce. Export markets will be affected, but less by the stock market than by the fundamentals of overseas economies. Within the United States, the impact is minimal. If people feel wealthy because of high market valuations, they may go out to eat more; if they feel poorer, they may cut down on the restaurants and entertain more at home. Food is just too small a portion of the family budget and too much of a necessity to see more than slight shifts from one item to another.

Credit is always tricky in the produce industry because plenty of people with weak financial statements have a million dollars in a safe deposit box and are unlikely to let their businesses fail. These types of judgments become trickier when one doesn’t know the status of people’s private investments.

But by and large, the produce industry is a great place to be in times of market flux. The flux creates opportunities for shrewd traders. In a worst-case scenario, one can always think of things as my mother’s family did when they learned she would be marrying into a produce industry family: “Well, at least she’ll never starve.”  pb