The Best Risk/Reward Ratio Of Any Investment Sector (Or How To Turn US$1 Into US$13)
Oct. 1, 2010, Panama City, Panama: Historically, timber has enjoyed the best risk/reward ratio of any investment sector, and it remains one of the smartest long-term investments you can make.
Dear Live and Invest Overseas Reader,
My beat is real estate, but timber qualifies in my view…assuming you’re investing in land planted with trees rather than in shares of some timber company.
Historically, timber has enjoyed the best risk/reward ratio of any investment sector. Depending on whose chart of historical returns you consult, timber as an asset category has produced an annualized ROI in the 12% to 15% range every year since they started keeping records on investment risk versus return.
A friend calls timber “a long-held secret of the world’s wealthiest people.” It’s low volatility, a hedge against inflation, and an asset class that operates independent of the stock market.
On top of this, timber is the kind of investment I like. It’s real and productive. This is more important right now than it’s ever been. If you don’t have some of your money in this kind of real, productive asset, you should.
Here’s how a direct timber investment should work…
You buy the land. A management company plants trees on it and maintains them for you. They take care of everything–from insect and weed control to thinnings–until harvest time. Come harvest time, the management company organizes the cutting and the sale of the trees. The revenue from the harvest goes to you, as the owner.
Here’s the best part: You still own the land, meaning you can replant and start the process over for another harvest.
I’m over-simplifying things, of course, but the point is that you want to be buying the land.
I’ve seen offers where you buy only the trees and the management company owns the land. Once you harvest the trees, your investment is done…closed out.
And I’ve seen many offers where you buy shares of the operating company that owns and manages the land and the timber. I find this option much less appealing, because you’re not buying a real productive asset; you’re buying a company. You have no control over the land, the timber, or how the business is operated. The only thing you control is the timing for when you sell your shares.
On the other hand, you probably don’t want to learn how to grow and manage a forest. That’s why I recommend direct ownership of the assets–land and trees–with a management company in place to take care of everything for you.
One opportunity that I’ve long recommended is teak farms in Panama. A friend, Robert Kroesen, whom I met years ago during my first few scouting trips to this country, has a reforestation company that today owns and manages more than 3,000 hectares of teak plantations (and that is aggressively working to acquire more land).
With Robert’s help over the past seven or eight years, I’ve learned a little about this business and have come to appreciate the opportunity tremendously.
Robert’s company, United Nature, was founded in 1993, meaning he is now getting into full harvest for some of his early plantations. Growth rates have been good in the region of Panama where United Nature has cultivated its plantations, and Robert is positioned now to achieve an excellent return on his initial investment.
Robert started United Nature with a single partner as a personal investment undertaking. About 10 years ago, six or seven years after he’d been planting for his own portfolio, Robert began putting together packages for other investors. This had never been his intention, but, when people saw what he was doing and that he had the infrastructure in place to manage the plantations, they came to him asking to invest.
Rather than sell those people shares in his company, as other plantation operations in Panama were doing, Robert segregated out specific parcels of land for people to own directly. He continued to manage the plantings, the maintenance, and the harvesting, but each investor was given the opportunity to own his own piece of land and the trees planted on it outright.
Each investor with United Nature decides himself when to take the final harvest (though I’d say the sensible thing would be to take Robert’s team’s advice on this). And each investor can sell his land and/or his trees whenever he wants.
There is an active and expanding market of investors looking to buy older plantations. As other investment types become increasingly volatile and uncertain, more and more investors are looking to things like timber for long-term safety. However, many don’t want to have to wait the full 17 to 25 years from initial planting to harvest. They’re willing to pay a premium to accelerate the exit and the payout.
Robert’s projected annualized ROIs are in the low teens.
This modest statement, though, doesn’t do justice to the real opportunity here. Because this is such a long-term proposition, the total return come harvest time can be extraordinary. US$1 can turn into US$13.
Yes, I’m invested with Robert.
P.S. Another benefit to an investment in Robert’s teak plantations is that it can bring you a residency visa in Panama. With an US$80,000 investment in a registered reforestation project (United Nature’s reforestation plantations qualify), you can arrange permanent residency visas for you and your dependents (that can lead to Panamanian citizenship).