Timberland Investments: Free Lunch? No. Attractive? Yes.

17 05 2010

The New Yorker magazine published a cartoon in its May 17, 2010 issue of two trees talking in the woods.  One says to the other, “Can you believe that people inhale the gases we expel – sick, right?”  The cartoon was timely for me because it echoed a conversation I had last week with an investment banker who dismissed common arguments associated with investing in timberlands.  He said, “Timberland investment managers are selling a free lunch.  ‘Don’t like today’s timber prices?  Then don’t harvest.  And while you wait your investment grows as trees grow in size in value!  Don’t like inflation?  Timberlands will protect you; they hedge inflation!’  It’s as if timber investments are sitting around, waiting to do us a favor.  C’mon, that’s sick.”

Are timberlands perfect investments?  No.  (A perfect investment would generate triple-digit returns, eliminate your tax bill and come with annual 50-yard line seats to the Super Bowl where you’d enjoy a bottomless goblet of Glenmorangie.)  Are timberlands an attractive addition to a diversified investment portfolio?  Yes. The Canadian Investment Review features an article summarizing a presentation by Tim Cayen, director of business development at timberland investment manager (TIMO) Hancock Timber Resource Group (“Institutions turning to timberlands,” May 10, 2010).  Cayen’s presentation provides an updated flavor on the benefits of timberland investments:  they provide attractive long-term returns; they appear to hedge against unexpected inflation.

I often hear a key sentiment shared by the banker.  “Well, if everyone waits to harvest, won’t we have too much forest supply in the future, thereby suppressing stumpage prices and decreasing returns?”   In reality, anything resembling a herd mentality creates potential investment strategies and opportunities.  For example, our forest economist, Tim Sydor, applied game theory to part of his dissertation research on the economics of forest investments.  His results indicate that benefits can accrue to investors who integrate their understanding of changing expectations and behaviors in timber markets into their decision-making.  In sum, timberland investors can learn and make more efficient investment decisions.

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