About 20 years ago a small group of hog farmers in the American mid-west rocked the financial world. Tired of just farming hogs, they wanted a bigger piece of the action, so they thought to try their luck at trading hog futures on the commodity exchange. After all, who should know more about hog futures than hog farmers? So the group, numbering eight altogether, pooled their capital totalling $20,000. What happened next made them legendary.
Over the following eight years they managed to turn that $20,000 into $420,000, an astounding compound return of 46% per year. Although no one’s heard from them since they disbanded, one of the farmers was quoted in a local newspaper during their run.
He told the reporter that every Friday night the eight farmers would gather together in one of their kitchens. There, they would decide whether to buy or sell hog contracts when the market opened on Monday morning. They agreed to spend their entire capital on each trade, because this was no occasion to tread lightly.
The farmer went on to describe their method for buying and selling -- it was entirely unorthodox. The farmers had in their possession what they believed was a lucky hog’s tooth. Years before they started trading, one lucky hog escaped the pen and managed to avoid the annual slaughter. When they found that hog a week later he was already too lean, so was kept alive another year. When his time had finally come, the farmer kept his tooth for good luck.
On their Friday nights, the farmers tied a string around that lucky tooth, making a pendulum. They watched in heated anticipation as it started swinging back and forth. If the pendulum swung from north to south, it was a clear indication to buy. But if the pendulum swung from east to west it was a clear indication to sell. In their years together they never once second-guessed that gentle swing.
It’s amazing to think such amazing returns could all come from a lucky hog’s tooth, but there it was in black and white, profits upon profits. The newspapers praised the farmers, who became local celebrities known for their investing acumen. Some people are just lucky when it comes to investing, I guess?
Well, it turns out there was one more thing the farmer forgot to mention in the interview...
As long as their trade was going in the right direction, the farmers let it be. But if they started losing money, they immediately got out of the trade and kept their cash until next Friday night.
Sometimes good money management is worth more than good investment selection. Like every good hog farmer, you have to know when to stop feeding the pig.
Ben Kizemchuk is a Portfolio Manager & Investment Advisor with Altus Securities Inc. in Toronto. He offers financial planning and investment management for high net worth Canadian investors. Ben focuses on high quality investments, the Growth and Income Portfolios, low risk investing, and reducing tax.