I recently came across a report, written almost a year ago, by a group of Goldman Sachs analysts.  Part of a series on “Profiles in Innovation,” it is titled “Precision Farming: Cheating Malthus with Digital Architecture.”Doc Drop | At the time of this writing, the report is available online via this site.  (If that doesn’t sound interesting to you, be patient.  The point I will try to make is a broader one about the investment world.)

The cover of the report explains that its authors “explore how agriculture offers fertile ground for a confluence of technology trends, from sensors and the Internet of Things to drones, big data and autonomous driving,” asserting that precision farming can lift crop yields 70% by 2050 (and that a number of companies stand to thrive as a result).  That would extend the rise in food production which started in the 1800s with a sustained increase in acres planted, continued with mechanization in the following century, and accelerated in the last fifty years with advances in seed development.

I have farmers on both sides of my family and the changes have been obvious even to this relatively ignorant observer.  The scale of the operations has increased dramatically; many of the farms that used to dot the countryside where I grew up are gone.  The houses were demolished, the groves cut down, and the creeks and sloughs tiled out, so that every acre possible can be planted.  Where there are buildings, they are big, storing massive (and expensive) machinery.  And, increasingly, technology runs the show.

When I got the Goldman report, I sent it off to a relative that provides consulting services to farmers.  In his response, he said, “While there are ways for better technology to improve farming, and thus provide solid investment opportunities for folks inside/outside of agriculture, my strong opinion is that these claims are usually wildly overstated, over-simplified and neglect to account for the biggest variable of all, mother nature.”

He went on to talk about some of the other realities that are likely to put a dent in the most optimistic forecasts for precision farming, but I kept thinking about the weather.  Days before, I had driven through southwest Minnesota in an unrelenting rain.  An odd spring had delayed some of the planting and now there was standing water everywhere.  Which of those fields had been planted?  Which were waiting to be?  What will happen?  Precision mattered little amidst the deluge.

Farming can be filled with heartache.  The rain sometimes doesn’t come and at other times doesn’t stop.  As my relative wrote, “So much is out of our control.  Perhaps that is why the promise of digital ag is so enticing.  It gives us the illusion that we have more control than we actually do.”

It seems like that’s where we are in the investment world too.

Since the financial crisis, investors and investment firms have become obsessed with “risk.”  Mostly it centers around a limited notion in which risk is defined as the standard deviation of returns.  Sure, lots of other statistics adorn the superficially encyclopedic reports that decision makers use, but at the core of the exercise is a belief that the volatility of a pool of investments can be effectively judged and controlled.

To that simple end, much has changed in the years since the crisis.  New systems have been devised, new teams of quantitative analysts assembled, and new products and strategies created.  Those developments are based upon the belief that we can engage in a precision farming of sorts.  Ironically, in the wake of a failure of risk management and the modeling of market behavior, we have a renewed faith in risk management and the modeling of market behavior.

Apart from a few minor squalls, that faith hasn’t really been tested yet.  What if the rain comes (and comes)?  We have modeled an unrealistic world that “gives us the illusion that we have more control than we actually do.”  When the weather changes, our belief in precision will look a bit silly.