Hedging personal expenses

It can be a pain in the ass to be a farmer. I know this because I’ve read Grapes of Wrath and seen lots of movies. The bank is always trying to take your land. You need tons of stuff to run your farm–fertilizer, seed, equipment, feed, labor–but you can’t pay for it until you can earn some money from the harvest. Even worse, prices of the commodities you produce may be in the toilet when it comes time for you to sell at the market and you may not earn back enough to pay your expenses. What’s a poor farmer to do? Hedge. He arranges contracts with buyers to sell at specific prices. He buys options for the feed he needs at known prices.

Why don’t most people approach their personal finances like a business? For the farmer, locking in reasonable prices for his goods keeps his farm afloat. For the average individual, there are times when it may be prudent to consider an investment as a hedge against rising prices on a commodity you must buy. I think particularly of gas prices. (Note: I don’t mean you should consider options or futures trading.)

The past few years have been crazy for gas prices and I’ve heard many people complaining about the increased chunk price hikes have taken out of their wallet. At the same time, they complain that the oil companies have been posting huge profits. What these people fail to realize is that they can be recovering much of that cost in the form of dividend and capital gains for holding stock in those same oil companies.

For instance, since the start of 2006 shares of Exxon/Mobil have appreciated 32% (not counting dividends). If price increases required you to drop on average an additional $20 a month on gas (for a total of $240 for the year) you could have recovered that expense by only owning about 12 shares of Exxon for the year.