Many years ago I heard a story that illustrates the principle of investing in a memorable way. I can’t remember where I heard it, or who I heard it from, but I have never forgotten it.
The story is about a young boy named Tommy growing up in a much simpler time than today. Tommy’s favorite treat was not a candy bar, but a ripe tomato picked fresh from the vine. I have never been a huge fan of tomatoes myself but a perfect tomato picked from the vine was also one of my father’s favorite treats.
One day Tommy earned a nickel. Instead of heading to the store for a treat Tommy walked over to the neighborhood farmer’s house. He asked if he could buy a tomato and when the farmer agreed Tommy began searching for the perfect one.
Tommy’s standards were high but after searching for several minutes he found the tomato of his dreams. However, his joy turned to disappointed when the farmer informed him that the tomato he had selected would cost a dime, not a nickel.
Disappointed, but not beaten, the search resumed. Eventually Tommy found another tomato, slightly smaller than the first and not fully ripe. Tommy pointed at it and the farmer agreed to sell it to him for a nickel.
Tommy reached in his pocket, fished out the nickel, handed it to the farmer, and then shook his hand to seal the deal. With the deal finalized Tommy turned to leave, when the farmer said, “Hey, don’t forget your tomato.” Tommy turned back and replied, “I won’t. I‘ll be back to check on it in a couple of days.”
We laugh – or at least smile – when we hear that story. The idea of the young boy outsmarting the farmer and making such a shrewd deal brings us joy. Young Tommy appears to be headed for great things.
What is Investing
The classic definition of investing is “The deferral of present consumption for future consumption.” I might add that we hope our deferral will lead to increased value in the future. The goal is for our investments to grow in real – after inflation – value over time. In investing we are not merely deferring current consumption to prove our discipline. We are hoping to improve our financial situation.
Tommy’s bargain fits this definition nicely. He deferred current “consumption” of the tomato for a couple of days hoping that the tomato would increase in value during that time, and he could get the ten-cent tomato he desired for only a nickel.
Investment and Risk
Most of us, including the farmer, believe Tommy made a wise deal but Tommy’s plan is not without risk. Before Tommy picks and eats the tomato many things could happen to spoil his plan. A worm could eat the tomato, a hail storm could damage it, or an early frost could freeze it. If things work out in a couple of days he will have a perfect tomato to enjoy, but he could also end up with a damaged tomato worth less than what he paid for it.
Likewise, you cannot be a successful investor without taking risk. Too much risk is bad but not enough risk might even be worse. The key is determining an appropriate amount of risk given your situation and then finding investments that match your risk.
Invest You Must
Tommy probably didn’t know the definition of investing. He did, however, understand the principle and how to use it to improve his life.
So it is with us. It is not important that we remember the definition but it is absolutely vital that we understand the principle and put it into action.
Sounding like the Jedi Master, Yoda, from the Star Wars movies, John C. Bogle, founder of Vanguard Mutual Funds and an investing Jedi Master, instructs us, “Invest you must, for not investing is an iron-clad formula for failure.”
If you are not currently investing, commit to start now. It doesn’t have to be difficult. My next several posts will teach you everything you need to know to get started. With a little practice you will be making investment decisions that would make Tommy proud.