The Daily Crux: You’ve done a tremendous amount of research on timberland investing over the years… and you’ve been a big proponent of this idea. What is so special about timberland?

Steve Sjuggerud: Yes… I’ve literally been all over the world researching timberland investing. I’ve spent hundreds of hours on it. I’ve recommended many timber stocks to my readers over the years. And I’ve personally invested in timberland.

There’s a long list of reasons why investing in timberland is a great idea… and consistently produces big returns.

First of all, trees grow year in and year out. Trees in good growing regions in the U.S. grow at 6%-8% per year. They grow through recessions. They grow through wars. They grow through stock and real estate crashes. They grow through everything. They give you built-in investment growth that isn’t guaranteed with a stock.

[ad#Google Adsense 336×280-IA]Along with the tree growth, the price of wood has grown at a consistent rate throughout the years. It’s extremely difficult for a company to increase the prices of its goods by 6% every year. But the price of wood, according to legendary money manager Jeremy Grantham, has increased by that amount for the last 100 years. Specifically, he says “stumpage” prices – the value of all the wood on the stump – have beaten inflation by 3% a year over the last century.

Another nice thing is timberland is a resource investment, but it’s not a constantly depleting one like a gold mine or an oil well. Trees will grow back. It’s a sustainable resource investment.

And not to ramble on, but you should know, timber is uncorrelated to the stock market. It makes sense… the trees have never heard of the Nasdaq bubble… and they don’t know what a “War on Terror” is. This makes timber a great place to park money in big portfolios… where you need diversification.

Crux: But what happens to your timberland investment in a down year, when lumber prices crash?

Sjuggerud: That’s a great question. What happens when the market is slumping? When you can’t get the price you need to make the business profitable? Did you just waste eight… 15… 25 years on an investment with nothing to show for it? The answer can be summed up in five words: “Bank it on the stump.”

In the industry, it’s a phrase that means if conditions aren’t right for harvesting your crop, you just keep letting it grow. You keep the profits on the stump and wait for a more profitable time to sell your timber – most likely, when timber prices are in your favor.

One of the great benefits of owning timberland is you don’t have to harvest it every year. It’s not like fruit, where it’s ripe just once and then you have to pick it. Instead, it grows exponentially on the stump for years.

This is not to imply that timber is an absolutely risk-free investment… But with the ability to bank it on the stump, investing in timber does come with an extra safety net. “If the rain rains, the sun shines, the suckers grow,” Jeremy Grantham once said. “If you don’t want to sell, they get bigger and more expensive.”

Crux: Those are tremendous attributes. How has timberland performed over the years?

Sjuggerud: Take a look at this chart of the period from 1971 to 2010… which was filled with all sorts of bull and bear markets for stocks…

From 1971 to 2010, an investor in timber saw average annual returns of over 14% – turning $10,000 into over $1.5 million. That’s better than stocks and bonds over the same period.

Here are the rough numbers on where timberland returns come from:

* 1% Land value increase

* 6% Biologic growth of the trees

* 3% “Stumpage” price increase (the price of the actual tree)

Crux: So timberland can serve as a good alternative investment when stocks are in a bear market?

Sjuggerud: Absolutely. One of the worst-ever bear markets in stocks began in the late 1960s and lasted until about 1980. An investor in stocks during that time lost money, due to inflation.

However, as the table shows, an investor in timber never had a losing year during that period. More often than not, the returns were in the double-digits… with a 59% return in 1973 and a 49% return in 1977.

To sum up, timberland offers high returns… It is a sustainable asset that can provide returns for centuries… It has no correlation to the stock market… It’s less volatile… And it constantly grows in value.

Crux: So, how do you go about buying timberland? What’s the easiest way to own it?

Sjuggerud: It’s important to point out that rather than just going out and buying a forest, you want to make sure to invest in managed timberland.

The reason it’s important to make the distinction is simple: Managed timberlands, according to a study conducted by the University of Georgia and published in the Journal of Forestry, generate returns almost four times higher than non-managed lands.

With managed timberlands, you get just what it says. You get professional managers who cultivate the trees, look after them, and harvest the trees and their products at the right time.

They look to earn extra cash by selling hunting rights to the land. They harvest and sell the straw and seeds that fall from the trees. Good managers even look to sell chunks of your timberland if a real estate developer comes along and offers a sky-high premium for your land.

My point is, everything on the “tree farm” – even the tree farm itself – is for sale. You can make these types of managed timberland investments privately, or there are usually a handful of publicly traded timberland companies on the exchange at any given time.

The big names in the U.S. are Weyerhaeuser (WY), Rayonier (RYN), and Plum Creek (PCL). To spread your risk, you can buy the big U.S. names through an exchange traded fund (or ETF) with the symbol WOOD. You can get much broader international exposure through the Guggenheim timber ETF (symbol: CUT).

Crux: There are many good points to timberland investing. Any negative ones?

Sjuggerud: When you compare the built-in yield of timberland to any other asset class out there, timberland wins hands-down.

The only problem is timeframe – you can sell a stock or bond immediately, but you can’t get rid of acres of timber like that. It’s illiquid. You’ve got to hold it for some time to maximize its value – the ideal timeframe is infinity. It’s definitely not for traders… it’s for long-term thinking investors.

And keep in mind… like all investments, you have to make sure you buy timberland at a reasonable price.

Crux: Thanks Steve.

Sjuggerud: You’re welcome.                              Source:  Daily Wealth

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