Dear Reader and Fellow Investors,
Is their an investment that can protect clients against inflation and deflation?
We think we may have found one.
The answer is: trees.
Wood, as a real, finite, asset used for a number of vital functions around the world possesses the properties that can allow its real value to be maintained even though the currency it is being priced with may weaken during an inflationary environment.
However, during a deflation period, so long as the tree is growing more than the deflation rate, should the price of wood fall, you will have more tree, due to its natural tendency to GROW if watered and the weather is suitable. Hence, under such conditions, your tree would still be worth more than it was last year in real terms.
Hence a tree combines properties that can allow an investor to potentially preserve their wealth in a deflationary or inflationary environment.
Our best method of investing in such a strategy is to purchase companies that own forests: NOT companies that have forest concessions.
There are few countries that allow private companies to own forest land. Indeed, we count no more than three or four where we find the countries law offers suitable protection for foreign equity investors.
Over the last few days we have added aggressively to such positions as pricing has become more attractive due to the markets perception of these companies being in the real estate bucket. Though their revenue is strongly affected by the health of the real estate market, the value of their forest is only temporarily impaired in value according to your authors view. Many companies hold these assets on their balance sheet at cost price. Many such transactions have occurred over 50, 60 or even 100 years ago, and hence the balance sheet is extremely under valued. A price to book ratio of 2, for example, would therefore be doing no justice to the real assets the companies possess.
The investment strategy is therefore very much an asset backed one, where we feel we are buying a unit area of forest land at very attractive prices and with the potential of having a quasi hedge against an inflation or deflationary environment.
Yours sincerely,
Alessandro Sajwani
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Due to the fact of my bad english, I will writte in spanish.Muy interesante análisis, y aunque nunca me había planteado este caso de los árboles quizás por desconocimiento del sector,he decir que, efectivamente, "suena" bien y puede ser cierto que la inversión en árboles cubra, a largo plazo, contra la inflación y la deflación
ReplyDeleteDear Mr. Pilar,
ReplyDeleteMany thanks for your comment.
Timber investment studies have also incorporated the methods of modern portfolio theory (MPT) and the capital asset pricing model (CAPM) into the evaluation of timber assets. Though we do not use this model in our work, it was interesting to see serious studies by Redmond and Cubbage, 1988; Thomson, 1987; Washburn and Binkley, 1990, who computed timber betas tend to be small or zero. As a result they found timber investments to be desirable components of an investment portfolio.
Indeed, many respectable investment houses have also shown the risk - return of timber is most interesting, including GMO, an independent investment house whose approach to research and portfolio construction applies a method that can be categorised as "value" and who we greatly admire.
In short, we feel this asset offers a unique blend of properties that provide an interesting risk - return profile considering the current prices one can purchase this asset in the current macro environment we find ourselves in.
Regards,
Alex