Market Curiosity: Exploring Markets And Systems

December 5, 2010

Timber: An Excellent Retirement Vehicle (update 3, Oct 23)

Filed under: Editorials, Favorite Posts, Short Puts — Tags: , , — Jeff Fitzmyers @ 12:26 am

Assuming markets exist and patience, the apogee retirement vehicle is:

The #1 Investment of the Iron Chancellor The 50 years in Germany following [Bismarck’s] death featured hyperinflation, depression, war and defeat. Timberland held its value better than any other investment… Most people don’t know that timber beat all major asset classes over the last 30 years.

You Need to Consider This Crisis-Proof Investment Timberland is a crisis-proof investment because the growth of the trees does not move in step with economic cycles. You don’t have to harvest when demand is soft. Let them grow, bigger trees equal more dollars.
+ Growing scarcity of quality of timberlands.
+ Global demand should increase.
+ Growing institutional interest in timberland.

The Ideal Investment to Own, Based on History Timber, for example, has a history of high, stock-like returns with low, bond-like volatility. Using the same time period in the table, timber had a compound annual return of 11.8%, with risk (annual volatility) of only 7.9% – for a Sharpe Ratio of 0.96. That is hard to beat…

People keep wondering where to put value if there is a big appreciation in silver and gold prices: timber (PCH, PCL, maybe WY, maybe RYN).

What does the “helpful” MSM thinks of timber as of August 2009? Timber prices could be vulnerable to a decline of as much as 50% in coming years… “The reality is the underlying cash flow is highly dependent on cyclical industries like housing, paper and newspapers…” What happened in the 2 years since publishing? The break even point could have declined to $19/share. In 3 more years the beak even point could decline to $13/share — SmartMoney’s 50%. So even if PCH did drop 50% in 5 years, the overall value was flat, and it’s still chugging out dividends and income from selling options. So far the risk was very little and the reward might have been 40%.

A very safe and profitable way to buy timber shares: Sell puts on down drafts to enter and sell calls on spikes higher. Number from early 2010.

PCH ($30/share) $2/share dividends = 6% gain / year.

Add selling options conservatively 5 times per year for about $40 contract = another 5% per year.

Starting with 100 shares and reinvesting dividends and option sales at 11% per year:
5 years on : possibly 150 shares worth maybe $4,500 generating $500 in dividends and option sales per year.
10 years on: possibly 250 shares worth maybe $7,600 generating $840 per year.
20 years on: possibly 720 shares worth maybe $21,000 generating $2,300 per year.

Say you add $3,000 per year:
5 years: possibly 620 shares worth maybe $18,000 generating $2,000 per year.
10 years: possibly 1,670 shares worth maybe $50,000 generating $5,500 per year.
20 years: possibly 6,400 shares worth maybe $190,000 generating $21,000 per year.

Starting out with $100,000:
5 years: possibly 5,000 shares worth maybe $150,000 generating $12,000 per year.
10 years: possibly 8,500 shares worth maybe $150,000 generating $28,000 per year.
20 years: possibly 24,200 shares worth maybe $725,000 generating $79,000 per year.

Update June 2012: The Most Accurate Investment Forecast Ever “Grantham … predicts that managed timber will be the best-performing asset class, followed by emerging-market stocks.”

Update 3, October 2012:
+ A Safe Land Investment That Can Protect You from the Dollar Crisis

Update 4, January 2015
One of the Best ‘Hard Assets’ to Own in 2015

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