by Tony D'Altorio and the Investment U Research Team
Every American goes through a 100-foot tree every year.
How, you ask? Just look around you… Chances are that you're sitting at a desk made of wood, littered with paper reports, inside a room with wood trim and/or a house that was framed in wood.
The commodity makes for big business. So if you've never considered investing in timber as an investment strategy, perhaps you should.
Over the past two decades, some of the world's most prominent investors and institutions – pension funds, endowments and insurance companies – have plowed $40 billion into this asset class… up from just $1 billion in 1989.
Timber has been one of the consistent favorite investments of legendary investor Jeremy Grantham. He points to how it's risen 3% more than inflation for more than 90 years. During the next several years, he expects timber to have an inflation-adjusted return of 6%.
The fact is that timberland has actually beaten the stock market over the long run and with less risk. It has outperformed the S&P 500 over the last 100 years since 1910. And since 1987, the NCREIF Timberland Index climbed by an average of 15% per year, compared to about 11% for the S&P 500.
The returns on timber are especially good in bear markets…
During the Great Depression, for example, timber gained 233% while the price of stocks fell more than 70%. In fact, during the three worst market downturns of the 20th century (1911-20, 1929-41 and 1966-81), timber outperformed the S&P 500 by a wide margin.
More recently, when the S&P tanked by 38% in 2008, timberland rose by 9.5% based on the NCREIF Timberland Index.
You see, trees grow come rain or shine/ And so does their value… by an average of 2% – 8% per year. It might not be a glamorous business, but it definitely is a profitable one… in more ways than one.
Timber is also a natural inflation hedge. Real prices for timberland have risen steadily for over 100 years. And during the last bout of high inflation in the U.S. (1973-1981), it was a fabulous hedge, increasing by an average of 22% per year.
Timber is also a fabulous portfolio diversification tool. It sports a very low correlation with most asset classes of less than 0.1. So adding it to your portfolio enhances the potential for return while reducing your risk at the same time.
The Future for Timber
Let's take a look at the demand for timber. The United Nations forecasts that world demand for wood will nearly double by the middle of the century.
Not surprisingly, that's in large part to China, which ranks second only to the U.S. in wood consumption. It's also the #1 importer of timber products in the world. In fact, more than half of the timber shipped anywhere in the world is destined for China, which happens to be about 50% of the country's supplies.
China used to import large amounts from Russia, but it now derives the majority of its supplies from New Zealand and western areas of North America. To show just how important the latter area has become to China, look at shipments from just the Canadian province of British Columbia, which increased 4-fold year-on-year from January 2009 to January 2010. And annual shipments from British Columbia have tripled since 2007 to $365 million.
For Canada as a whole, wood exports to China and the rest of Asia accounted for 23% of all exports in last year's fourth quarter versus only 13% in 2008, and 7% five years ago.
The Chinese government wants to be self-sufficient in timber by…
To continue reading this Investment U Research Report,
|
Related Investment U Articles:
- Canada’s Timber Industry Cuts Out the U.S. In Favor of China
- Timber Investing: An Inflation Play a Cut Above Gold…
- Timberland Stocks: Why It’s Time to Knock on Wood for Profits… Literally
- Hug a Tree… Bag Some Profits
- The Real Estate Market Isn’t Dead
Check out our selection of daily Investment Research:
 |
 |
