A new way of investing: Fund manager or shepherd?

www.ssrivas.com
Investment Consultant Services 
Sultanpur Uttar Pradesh(228145)
Sanjay Srivastava

 This is worth considering, but why does it feel so wrong?

This morning I was very excited after watching a video on X that claimed sheep farming was better than mutual funds. Then I thought, why not take it a step further and find some savvy sheep farmers or even buy a sheep farm myself (obviously, a small, more affordable one, right?). After all, if startups can become unicorns, why not start with a few sheep? A video posted on X (shared below) features a man explaining how he earned better returns from sheep farming than from mutual funds.

https://twitter.com/i/status/1986387935412035945

On paper, the sheep story sounded perfect:

Low initial capital: Immediately productive, self-sustaining, and wonderfully VC-free. The magic of compounding: Every sheep reproduces. Finally, an investment that grows and feeds itself while you sleep. Low reinvestment needs: Just some feed, land you already own, and a prayer. Guaranteed demand: Meat, milk, wool. Call it the holy trinity of inflation-beating returns. It sounded like a living, breathing version of a high-IRR asset—self-replicating, cash-generating, and growing not linearly, but organically. Then reality hit. It turned out the only thing growing faster than the sheep were my assumptions.

A former colleague recently described me perfectly: "You're easily swayed by ideas, unless they're presented at a press conference." Ouch, but true. This time, recency bias worked in my favor, and I paused before buying the flock. That's when the shiny story started to unravel. The ovarian lottery: What if the first two sheep produce two males? Game over. Start all over again. This can happen every time—with a 50% chance of pain.

Hidden costs: wages for herd care and maintenance (the wife and kids can only help so much), land rent, fluctuating feed costs, vaccinations—all easily overlooked in viral videos. As the herd grows, costs increase rather than decrease. The economics fall apart before you can even say "baa." In other words, as a business scales, its character and profit profile completely change.

That's when I remembered Michael Mauboussin's "Measuring the Moat," which I read years ago. I don't recall every line, but I remember some of the arguments: a clever street vendor can make sky-high profits, but can never scale—they'll never build a moat or reach a critical mass. Street vendors (and yes, sheep farmers) are stuck in perfectly competitive markets. Anyone can start selling the same product with minimal capital. Your favorite pani puri vendor or street chaiwala might be the best, but if they raise the price by 2 rupees, you'll gravitate towards their competitor. Raise it by 5 rupees, and they'll be history.

Even if someone invents something new—a better cart, tastier tea—others immediately copy it. No barriers to entry, no pricing power, no moat. As Mauboussin says, some businesses never reach the point where growth translates into profits and keeps competitors at bay. So yes—a street vendor can't achieve economic leverage with a good product, and a sheep farmer can't scale to a large-scale business with a good operation. Both are stuck in markets where hard work and skill don't translate into sustainable profits of the same magnitude—not even close. Australia and New Zealand have many industrial-scale sheep farms, but even they don't yield exceptional profits. The closest Indian equivalent might be Venky's (India), which is involved in poultry and chicken meat processing. Over the past 10 years, it has delivered an average equity return of 13%, with a -2% return in the COVID year and a 36% return in its best year (2018). Mutual funds promise better returns, as Venky's is currently trading at 1.3 times its book value. Therefore, for a sheep farmer or a street vendor, their micro-business might be better than a small SIP (Systematic Investment Plan)—but only up to a point. Sheep farming is good for the farmer, but not as an alternative to an SIP. Because that small SIP helps them diversify, reduce risk, and quietly participate in hundreds of opportunities they could never access on their own. Mutual funds are the way to go. They don't need vaccinations, fodder, or, for that matter, gender balance. And speaking of sheep, the stock market has its own flock. They come in during bull runs, full of optimism... only to be shorn. Or worse, slaughtered. So, there's a reason it's called a bull market—the sheep rarely survive.