Saturday, October 1, 2011

Timber and Forestry Investing - Money Really Can Grow on Trees

Forestry and timber investing - the very concept seems either dull or extremely alien to most people. After all, its' much more satisfying to follow the rest of the herd and chase the latest hot social networking stock. However any investors - especially those looking for true diversification and stable returns - are making a real oversight by ignoring the value timber investments could bring to their overall portfolio. Noted stock market skeptic Jeremy Grantham of GMO Asset Management has long been a fan of timber investments (whilst being quite pessimistic about the long-term returns on offer from global equities at their current valuations), and when Mr. Grantham has an investing opinion it is well worth listening to.

There are a number of factors that make timber and forestry investments attractive:

1) First, as a "hard asset," timber investments are an excellent hedge against inflation.

2) The returns on timber investing have been quite impressive. According to the National Council of Real Estate Fiduciaries in the United States (NCREIF), timber returns since 1987 through 2010 have averaged 155 a year, whilst the main US stock index the S&P 500 has gone up only 9.1% annually. Furthermore, on average the price of harvested timber itself has gone up 5% per year over the last 100 years.

3) Timber investments also perform extremely well when stocks are in a Bear Market. For example, in 2008 when stock indexes lost as much as 40 - 50%, the NCREIF's main timber index actually went up 9.5%. As another example, during the Great Depression when stocks fell anywhere from 70 - 90%, the main US timber index went up 233%.

For those that may be interested in timber investing, there are really two main options. The first is to access the asset class by investing in timber or timber related stocks. For example, the US company Weyerhaeuser (NYSE: WY) is a #13 billion company that sells a range of paper products to customers globally. Another alternative is to invest in a basket of stocks through an Exchange Traded Fund such as Claymore Beacon Global Timber Index Fund (NYSE: CUT).

Whilst options like Weyerhaeuser and CUT are involved in the timber and forestry business, at the end of the day, they are still stock exchange investments and as such will fluctuate broadly and leave the investor exposed to the overall performance of global stock markets.

One option most individual investors tend to overlook is direct investment in timber in which one actually owns a plot of forestry directly. In many ways, a direct forestry investment is more secure, stable and tangible then putting money into stocks. Direct timber investments still benefit from the overall advantages of timber investing discussed above, but provide much greater stability then timber and forestry stocks which can fluctuate wildly.

Whilst the price of timber and forestry products can vary, the most important variable in a forestry investment is the growth of the trees themselves. Trees and forests do not particularly care what the latest numbers are for the Footsie or the Dow Jones stock indexes, and if the price of timber is not high enough forestry investors can simply permit their trees to continue growing until the price reaches a satisfactory level. This can assure individual investors a certain peace of mind that stocks cannot provide.

There are two basic types of direct timber investments available. The first - and more traditional option is to invest in pine forests, which has historically been done in the US. However, pine is a softwood, and better investment returns can be made by investing in hardwood trees.

As with farmland investing, there are an increasing number of forestry and timber investments that are easily accessible by individual investors. We have seen a number of hardwood timber projects in tropical countries such as Costa Rica and Sri Lanka that are available to individuals. If one does not want to take on the political risk that come with owning assets in developing countries, there is also a rather unique hardwood timber investment available in Germany as well.

Of course, no investment is full-proof and forestry should simply be a small part of a broad portfolio, but if you are looking for stability, diversification and returns that are not correlated with stocks, timber investments are well worth a look.

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