What does a box of lemons have to do with investing for beginners?
Sit tight, my soon-to-be investor friend. You’re about to find out.
You’re in your early 20s and your grandpa has just passed on. Please accept our sincerest condolences.
You’ve been notified that he’s stated in his will that you are to inherit his tiny house on 100 acres of bare land that he purchased for his retirement. Your family’s attorney mentions that he’s left you a very important box.
You arrive to your new property and eagerly open the box, beside yourself with curiosity. Your grandfather was a very calculated man; the contents of the box must be valuable!
It takes a moment to sink in upon analysis of said box that your grandfather has left you a box of lemons. The estate executor repeats that your grandfather stressed the lemons’ importance, but her face betrays that she’s just as puzzled as you are.
Your grandpa…he’s weird.
Grandpa didn’t leave you any instructions, just a bunch of land and this box of perishable food that can’t even really be consumed by most people without something to accompany it. You can’t just eat a box of lemons.
Obviously, you also can’t throw the lemons away either, as they’re your inheritance and must be significant in some strange way. Grandpa was eccentric, but highly intelligent. He was always sitting in his armchair, reading the finance section of the newspaper, eating his lemons and harping about things like ROI and preservation of capital.
Then, you have an epiphany.
When you were little, Grandpa always took you to the open market to get fresh fruit. “The government wants to off us all with processed food,” he’d rave. “If it isn’t alive shortly before it’s on your plate, don’t eat it.” He must have wanted you to plant some fruit trees.
Ultimately, you decide to make and freeze a lifetime’s worth of lemon pepper chicken, then plant the seeds from the lemons on your new land in honor of Grandpa. You pat yourself on the back for cracking the code, and carry on.
Over the next year your lemon seedlings begin to look more like actual trees.
Every time you look at them, you miss your grandpa and the way he’d drink too much brandy on Thanksgiving and shout things like “You imbeciles never learn. NEVER TOUCH THE PRINCIPAL!” and “Who brought the canned cranberries? THIS FAMILY EATS CANNED FRUIT OVER MY COLD, DEAD BODY.”
Lightning strikes again.
You have a startling realization: this must be what Grandpa wanted for this land! A fruit orchard. Grandpa heaves a sigh of relief from beyond the grave that you aren’t as dense as he was worried you might be 20 years ago, when you ate a cat turd from the litter box.
Just like that, you’re an orchard farmer.
Now what? The land is paid for, but you’re going to have to plant your orchard bit by bit, as seed prices can vary widely and can be tough to obtain at a fair price.
You want to get seeds that are going to give you strong, high quality trees that you can gather fruit from with your children one day.
You spend your time researching the best types of trees, the most stable, the ones that grow well from cost-effective seeds rather than more expensive saplings, the ones that give the best yield of quality fruit, the ones that withstand a variety of weather changes.
You realize during your extensive research that Grandpa’s choice in fruit to leave wasn’t just because it was his favorite, but an intentional nudge: lemon trees are rather well known to grow easily from seeds.
You build upon Grandpa’s wishes, and get to work on planting more lemon trees. You’ve done plenty of due diligence, and have a plan to eventually look into peaches, nectarines, and apricots, which can be a bit trickier to get just right, but will also give you a steady, long-term stream of fruit.
These trees will take several years to mature, but you know once they do, they’ll be giving back for a lifetime. Heck, with this much land, you could even build a profitable business! (Grandpa breathes an additional sigh of relief.)
Other fruit farmers in your area are buying the same types of seeds for their orchards, so seed prices stay on the high side. You are patient.
You keep an eye out for the best prices, save up your seed fund and slowly buy your seeds and plant your trees when prices are reasonable. (Your inherited, along with the land and the lemons, your frugality from your grandfather. “How ‘bout I just leave you this kid?” you recall him replying to the clerk at the market upon hearing his total, pointing to you. “My firstborn’s firstborn. That’s nearing what you’re asking, with these prices.”)
A few years down the road, word on the street is that people don’t like lemons anymore. It’s front page news. Rumor is, people are demanding pineapples.
Other fruit farmers are clearing all existing trees off their land and dumping the fruit and seeds they’ve got on hand so they can buy and plant pineapple seeds. They’re selling their lemons and seeds at a steep discount.
You’re skeptical. You’ve done plenty of research; people have always wanted fresh lemons. What changed? You do a bit more digging into the history of the lemon industry and confirm what you already suspected: lemon sales are still strong, people will probably still buy them as they always have, and the seeds people are selling you at low prices are still going to produce the same quality trees that you’ve been successfully planting for the past couple years.
You happily buy the discarded lemons. Where you could only buy enough seeds for 20 trees at a time on your budget before, now you’re buying 25.
By now, the first seeds that you planted, Grandpa’s seeds, are now full blown trees, and producing beautiful lemons.
You’re tempted to sell your lemons and use the money for new clothes and dinners out (one can only eat so much lemon pepper chicken), but you know if you keep the seeds and plant them, you’ll get your 100 acres filled with fruit producing trees much more quickly and keep Grandpa from side-eyeing you from beyond. You just keep planting away diligently, working towards your grandfather’s dream of you drowning in healthy snacks on the land he left you.
Your orchard is coming along nicely. You didn’t realize how many lemons a single tree would produce. Your mature trees are now yielding enough lemons to fill your whole orchard with trees within a couple years.
You hire some help to keep up with your rigorous planting schedule and decide that while lemons have been extremely good to you, you’d like to add some variety to your orchard.
You know that nectarines, peaches and apricots are also strong, stable and profitable trees. Now that you’ve got some fruit-farming experience under your belt, you decide to dedicate portions of your land to planting these other trees once seed prices come down (once it was discovered that pineapple plants bear fruit once then die, disappointed farmers flocked back to the stable lemons, nectarines, apricots and peaches, driving up seed prices. An expensive lesson for those farmers: thoroughly research before planting.)
Later that year, you pick up the newspaper and the headline glares, “MAN NEARLY CHOKES TO DEATH ON NECTARINE PIT! NECTARINE SALES PLUMMET!” Your phone rings all day. Other fruit farmers have deemed nectarines and other pitted fruits too risky and are unloading their fruit, and recommend you do the same.
“Get into strawberries,” they tell you. “Strawberries don’t take years before you can eat them. I’m clearing my land for them as we speak. Strawberries are fast money. And no one has ever choked on a strawberry seed.”
How silly, you think. All of humanity isn’t going to quit eating nectarines because one guy forgot to chew. You have nothing against strawberries, but you learned enough during your fruit orchard-ing research to know that they, like pineapples, usually must be replanted yearly. You also follow fruit prices enough to know that strawberry market is currently in a bubble.
A memory of Grandpa’s voice echoes in your head. “What? Do I want to leave the waitress a tip? Yeah, here’s a tip: be fearful when others are greedy. Be greedy when others are fearful. Right now I feel fearful.” (No offense, but your grandpa was kind of a jerk.)
You decide to stick with your strategy of planting strong trees that will produce year after year. You offer to take your colleagues’ perfectly good, out of favor fruits and seeds at 20% less than you’d have paid the day before, and continue to plug away. Plant, harvest, repeat. You’ve stopped buying seeds. Your fruits from the trees you planted years ago are quickly populating your land with more baby trees, and with no additional investment from your pocket.
Not long after, you head out to plant and realize you’re at the edge of Grandpa’s land.
Your orchard is complete.
You started with just a few lemons and planted the seeds, investing in more seeds when you could. Now you’ve got all these trees, and soon thousands of delicious fruits will be falling off every single one, every season.
The fruit from your trees will provide you a steady stream of income for you, for your children, and possibly even their children.
Grandpa beams proudly from above, and vows to stop telling everyone in the Great Beyond about the cat turd incident.*
And those pineapple and strawberry farmers who got distracted by the media and unloaded their trees with every bit of bad news? Not only are people not as enthused with these fad fruits as originally anticipated, but in their chase after the next big thing, they had already cleared their land and paid steep prices for their seeds before they realized that tomatoes, watermelons and huckleberries are also short lived plants.
These plants are fine to grow in a section of your land, but betting the farm on them is a good way to end up with nothing. Some of them sold their short-lived plants and quickly filled their fields with something else for the next season, but many of them held on to the dead plants for another year before they realized they weren’t ever going to give them fruit again.
The stock market is irrational and can be volatile, but for long-term investors, that can be a great thing. While many folks are out there looking to get in on the next pineapple from the ground up, smart investors are waiting for someone to slip and fall on a big pile of lemons so others clear their inventory on temporary news and they can stock up on the quality plants that keep on giving.
*This reference is unfortunately based on actual events.