Worth the Trouble

the hurdle rate in investing and gardening

Takeaways:

• The concept of a hurdle rate guides us to identify a minimum return to justify the risk and cost of investing or planting a garden.

• Enjoyment, learning, and hedging against uncertainties (e.g., inflation or supply chain issues) may justify efforts that don't meet strict financial criteria.

Yesterday, I was listening to an investor that I admire, John Huber at Base Hit Investing, speak about how he determines the values of company shares. We hold similar values in terms of stock selection (buy good companies at reasonable prices), but his approach is different than mine in terms of calculations.

One of the things similar to our approach is a “hurdle rate.”

At first, I thought that there’s no way that gardening offers a hurdle rate metaphor. But then I realized I was wrong, there is one, which I’ll explain in a moment.

A hurdle rate in finance and stock selection in particular involves setting a rate of investment growth that you’ll need to overcome (hurdle over). This rate of return needs to be more than what you’d get if you simply put your money in a government guaranteed or backed account, like an FDIC-insured savings account or Treasury bond. Generally, it also ought to be more than what you’d gain from putting your money in an index fund like a whole-market fund or an S&P fund.

No projection or calculation about the value of a stock can be perfect, as there are many unknowns about the future, but you’d still want to consider hurdle rate in your calculations. More specifically, if you can earn 4% in savings account or 7% in an index fund, then you’d want to earn more than 4% and/or 7% annually on your investments.

(Note that savings account rates are falling now and the 7% rate is not guaranteed. But the idea holds, you’d want individual stock selections to beat these returns.}

How might the idea of a hurdle rate compare to gardening?

I’ll suggest that you’d want the cost of your gardening to be less than the amount you’d spent on fruits, vegetables, or eggs at the grocery store or farmer’s market.

That is if you spend $100 on seeds and supplies for your vegetable garden, you’d want your garden to yield over $100 in fresh produce. You may even want the garden to give you much more than that amount, if you count your labor.

The hurdle rate, then, establishes a standard for a return on effort and investment.

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Let me be honest: the money I’ve spent in gardening has not yielded a positive return. I am not a great or diligent gardener, though I’m working toward that goal.

There are valid reasons to adjust my hurdle expectations. In my case, I enjoy learning about gardening and gardening itself. I also believe that the freshness from the garden holds higher value than the obvious outlay of dollars and cents, which can be complex to calculate — such as its benefits to my health.

Plus, if I can master gardening and feed myself from my backyard, I’ve hedged against inflation and supply chain shortages. Further, the work I’ve done has attracted birds and bees, so I have contributed to the health of my yard’s ecosystem.

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Have you ever considered the hurdle rate when making decisions?