Why Timber Outperforms Stocks, Bonds and Even Commodities

The investment prospects of timber today are just as powerful as they were in the 1940's.

Catalysts that make Timber a buy:

1) Excellent returns

Between 1972-2006, an investor in timber saw average annual returns of over 14.5%. In other words, if you had invested $10,000 in timber in 1972, you'd be sitting on close to a million dollars today.

Here’s a rough breakdown of timberland’s average annual return over the last century:

1% Land values increase
6% Biologic growth of the trees
3% Increase in market price of lumber
3% Rise in inflation

2) Beats every other asset

Most people don't know that timber beat all major asset classes over the last 30 years.
Timber has performed better than stocks, bonds and commodities. The total compounded gain for timber during the period 1987-2002 was about 15%.

3) Less volatility than stocks

Not only does timber beat other assets, it does it with lower volatility. Timber has had three down years in the last 45 years. That makes it much less risky than stocks, which have had 12 down years over the same period.

4) Timber goes up when stocks go down

Timber does best when stocks do badly, so it’s a great asset to own when stocks are in a secular bear market, like today:

The last great bear market in stocks began in the late 1960s and lasted until about 1980. An investor in stocks during that time literally lost money due to inflation.

However, an investor in timber never had a losing year. And more often than not, the returns were in the double-digits with a 55% return in 1973 and a 47% return in 1977

In layman's terms, the trees don't care about the War on Terror, or the Nasdaq Bubble. They just mind their own business, growing exponentially in value every year!

Steve Sjuggerud (of Investment U & Daily Wealth), has discovered the cheapest and easiest way to buy timberland assets at a huge discount is to buy stock in paper businesses that happen to own millions of acres of valuable timberland. The timber REIT Rayonier (RYN) is a perfect example.

It seems money does grow on trees.

For a related article, see Ashish Kelkar's Timber Stocks Should Outperform in an Inflationary Market.

Sources for this piece: F & T Association, DW and RYN.

Comments

[VennData]

This article explains THAT timber outperforms, not why.

What reason is there to expect outperformance of this asset class to continue?

While it's amusing the the sum total of all US equity capital markets is beat by commerical foresty, there's no reason that proves this outperformance will continue.

[Yaser Anwar]

John,

One of the reasons timber outperforms the rest is 'cause of its wide uses by construction companies not only for residential reits but also commercial. Secondly, the world consumes an enormous amount of paper & raw materials, again, timber comes into handy.

3rd point, it is uncorrelated to stocks & bonds, and has low volatility, hence it outperforms.

Your point about whether it will continue to beat or not, is valid, past performance is not indicitive of future performance but i believe its low volatility & broad range of uses will continue to outperform the rest of asset classes.

Hope this answers your question.

[DividendGrowthInvestor]

My take on timber is that the outperformace over the past 3 decades might lead to underperformance for the next 1-2 decades. I would be interested in seeing total return performance of timber for at least the past 100 years. 30 years is just an average tree's lifespand ( isn't it)?

Besides, looking at this chart of lumber prices since 1974, it seems that the price is pretty volatile. And the move from 150 in 1973 to 250 in 2007 is equal to 1.5% increase annually.
www.mrci.com/pdf/lb.pd...

It does seem to me that you are placing the increase in market price and the increase in inflation together. How exactly does inflation add to your returns?