Investing Legend Jeremy Grantham: Money that Grows on Trees

By Dr. Steve Sjuggerud,President, Investment U
Monday, March 1, 2004: Issue #316

Lumber prices are up roughly 20% in 2004 and they’re up nearly 100% in the last year and a half. It’s been just crazy.

Who are the biggest beneficiaries of this? Those who own the trees…

According to Investing Legend Jeremy Grantham, Timber Beats Stocks

Historically, timber has performed incredibly well. According to legendary investor Jeremy Grantham, timber prices have beaten inflation by 3.3% a year over the last century.

Add in 6% a year in income (from cutting trees), and 2.5% a year in inflation, and you’ve got returns of nearly 12% a year in timber that beats the return on stocks! Even better, the returns on timber have been less volatile than the stock market.

Right now, it seems, just about every asset is overpriced. Stocks at a P/E of 30 are way too expensive to buy. Bonds that pay 4% interest aren’t exciting, and neither is 1% on cash in the bank. The price of gold and many other commodities has risen by 50% and more in recent years.

Timber is the odd man out. Timberland values actually fell in 2000, 2001, and 2002. As timber has been a good asset to own over the long run, the last few years have been the worst few years anyone can remember.

“Perfect!” I say you see, the trees have kept growing and gaining value all this time. Today we’re coming off the worst stretch of timber returns in many years.

Pessimism in the industry is high. But in the midst of pessimism, lumber prices have been in a strong uptrend. It’s my recipe for success a cheap asset, with great skepticism surrounding it in a powerful uptrend. Time to buy!

Even Better News: Timber Performs Well When Stocks Perform Poorly

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, as the table below shows, an investor in timber never had a losing year More often than not, the returns were in the double digits with a 55% return in 1973 and a 47% return in 1977.

RETURNS PER YEAR:
Year                Stocks          Timber
1966                  10%              13%
1967                  24%              11%
1968                  11%              18%
1969                   -8%              22%
1970                    4%                1%
1971                  14%                4%
1972                  19%               11%
1973                 -15%               55%
1974                 -26%               21%
1975                  37%                 1%
1976                  24%               16%
1977                  -7%                47%
1978                   7%                29%
1979                 19%                31%

The 1970s weren’t a “timber fluke.” Even in recent decades, timber has been one of the best assets to own. The annual compound gain over the last few decades in timber has been about 16%.

Clearly, timber is an opportunity now. So how do we play it?

Two Direct Ways to Play Timber Investments

There are two direct ways the first is to own timber directly, whether it’s buying the timberland yourself or investing in a big timber partnership, like one run by Jeremy Grantham (www.gmo.com) or John Hancock Timber Resources (www.htrg.com). You need big dollars for those, however.

The other way is to buy shares on the stock market in businesses with a ton of timber. The most direct timber play in the stock market is Plum Creek Timber (NYSE: PCL).

In the last issue of my newsletter, True Wealth, I recommended the publicly traded company that I feel is the very best way to play timber. It’s only a little less direct of a play than Plum Creek. And it still owns over 2 million acres of timberland, which at $1,000 an acre would be valued at over $2 billion dollars.

Just imagine if you owned that and you just saw lumber prices double. Your trees are just sitting there and your cost of production doesn’t really change. So your potential investment earnings have gone through the roof.

In this world of overvalued assets, still-reasonable timber deserves a place in your portfolio.

Good investing,

Steve

• What If Jeremy Grantham is Right?
• The Ultimate Inflation Hedge: Stocks?
• When Losing 11% is Winning

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