So where should we put our money? Stocks, as a class, seem no bargain; long-term bonds seem to carry far more risk than reward; real estate is due for a correction (or at least not likely to zoom in the next few years as it’s been zooming in the last few); money markets yield under 1% before tax.
Not, ‘tim . . . . BER!’ as the loggers warn at the top of their lungs as a crash is about to occur. I do not expect a crash. But, rather, ‘timber’ in vaguely the same way Dustin Hoffman encountered ‘plastics’ in that famous scene in The Graduate. (And, while we’re at it, it’s always a good idea to raise a glass to Mrs. Robinson.)
I claim no expertise in timber, yet feel comfortable suggesting that you consider putting 5% of your investible funds in it. Maybe 10%. Not more. [As always: free advice is worth what you pay for it! Just because I’m doing it doesn’t mean you should. If I had a nickel for every dumb thing I’ve done with my money over the years, I’d be a rich man today!]
I arrive at this conclusion because people who actually do know something about timber, and who, if they had a nickel for every smart thing they’d done with money over the years would be (and are) rich men and women today, think this makes some sense.
Timber, for starters, grows. Gold doesn’t. Copper doesn’t. Pork bellies and sorghum do, but you have to feed the pork and fertilize the sorghum. (I think. I’m actually not sure what sorghum is.) Trees are fed by God.
And as they grow, they not only become bigger (that much you knew) . . . they become more valuable. Skinny trees may be suitable for conversion to paper or woodchips or something. But as they grow wider around the shoulders, they gradually become more highly prized for their usefulness in making things.
So, the first thing is that where most inventory actually shrinks – either because it spoils or because some of it walks out the door with the occasional disgruntled employee – timber just sits there and grows more valuable. Don’t ask me how fast, but you might imagine 5% a year, between actual growth and the growth in value as it becomes suitable for board-room table tops.
Nor do they need to be warehoused, like most inventory.
Then you have what I’ve been told is perhaps a 2% annual ‘unpopularity’ bonus. That is to say, the market allows you a higher return on your money than it should, because people are quite skittish about investing in trees. Leave aside the sheer boredom of it; I’m talking here of the obvious negatives: Fire! Dutch elm disease! The increasing irrelevance of paper in a world of pixels!
It turns out, according to experts like Jeremy Grantham, whose Boston-based firm, Grantham, Mayo & Van Otterloo, manages $38 billion or so – a bit of it in timber partnerships – these fears are overdone. The wise forest manager diversifies geographically and by species, so that the risks from fire and disease are less than they might seem. And while wood is undoubtedly the most substituted-for material on earth – we are constantly finding other materials to replace it – it seems to grow ever more valuable. With ups and downs, to be sure, but on a general 2% annual long-term trend line.
That long trend could always end or go into reverse. But it might not. Think, for example, of a billion Chinese and nearly as many Indians who don’t now have decent houses but might someday be ready to build. That’s a lotta wood.
So you get the growth of the inventory and its gradual ‘seasoning’ to more valuable uses. You get what may be a slow but very long-term increase in the value of wood products, generally. And you get the same sort of unpopularity premium you might have gotten investing in Philip Morris all these years – without having to feel in any way responsible for helping to addict young children to the world’s leading cause of preventable death. There is a large anti-tobacco contingent. Few people are anti-tree.
Yes, if interest rates go up and the U.S. housing market collapses, timber prices could fall sharply. But, smiles Jeremy, you don’t have to sell until you want to. It just keeps growing. (Contrast that with an airline seat or hotel room that, if unsold tomorrow, is gone forever.)
And there’s more!
For one thing, timber should be a good inflation hedge, over the long run.
For another, properly managed, income from timber should be lightly taxed. If you cut and sell some trees, Uncle Sam generally views the revenue not as a taxable dividend, but as a ‘return of capital’ . . . or at least he does until you’ve sold off most of the trees you started with (even though new growth has occurred in the meantime). At that point, you can sell your forest for a lightly-taxed capital gain.
I have probably lost most readers by now, because another aspect of the unpopularity of this investment may be its seeming impracticability. How, exactly, are you, who not that many years ago paid off the last of your education loans, going to buy a diversified portfolio of forests?
One way, if you have a great deal of money, is to lock up a small fortune in one of Grantham’s timber partnerships.
But an equally good way, accessible to more or less anyone, may be to buy shares in plum Creek Lumber (PCL), as I have done over the years, most recently at around $26.50 a share. These days, it yields about 5%. That ain’t hay (and hay, I think, unlike timber, rots when it gets wet) – at least not these days. Over the decades, the yield might rise with, or even outpace, inflation.
You’re 24 and have $3,800 to invest? Forget PCL – you’ll die of boredom. But if you’re 50 and have accumulated $700,000 to help hold you from age 70 on thru 95 . . . well, putting 5% of it in PCL might not be the worst thing to do in this environment.
Quote of the Day
Years ago, in the Carter term, a stockbroker tried to explain what Schlumberger did. 'It goes to 100,' the broker said, exaggerating only a little bit. 'Then it splits three-for-two and goes back to 100 again.'~GRANT'S Interest Rate Observer
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