Forestry professionals continually grapple with the most effective and “context appropriate” ways to report timberland investment performance and forest sustainability. How do we compare results in forestry for questions ranging from cash flows to wood flows? Once you get through the brambles and brook the fjords, pick the chiggers, and sidestep the snakes, forest investments and the search for sustainability come down to math.
Research on the most effective ways to teach children financial literacy reinforces this idea (“The Smart Way to Teach Children About Money”, The Wall Street Journal, 2/2/15). The findings indicate that classroom education on finance yields little with respect to improved financial behavior in the future. However, researchers found that “regular math” helped children to manage money effectively. States that assigned more math courses produced students with more lifetime investment income, more home equity and fewer debt management issues. Harvard Finance Professor Shawn Cole said, “A lot of decisions in finance are just easier if you’re more comfortable with numbers and making numeric comparisons.”
So let’s consider measures of forest sustainability versus investment performance. Investment reporting often focuses on returns in percentage terms, which simplifies comparisons across investments. However, percentages communicate “differently” than dollar amounts. For example, saying “you earned 5% last year” differs than saying “you earned $5,000 on your $100,000 investment last year.” They mean the same thing, but hearing dollar amounts clarifies the implications of how much wealth you gained.
The math of investments can, when reported in percentages, camouflage the dollar impact of fees, as well. Consider these two descriptions:
- “You will pay a 1% annual fee on this $1 million investment.”
- “You will pay a $10,000 annual fee on this $1 million investment.”
These phrases describe identical fee structures in different terms. Do they sound or feel identical? The Securities and Exchange Commission (SEC) has, since 2004, accounted for this issue explicitly in shareholder reports and quarterly portfolio disclosures. How? The SEC requires reporting of fees in both percentage terms and in dollars per $1,000 invested.
The math of relative (percentage) measures versus absolute numbers applies to the health of trees and sustainability of forests. Saying that a local timber market “has a growth-to-drain ratio of 1.1”, which means growth exceeded removals by 10%, differs from saying “this market grows 1 million more tons than are harvested each year.” A percentage, while informative, provides incomplete and insufficient information. While we can always estimate performance in percentage terms, it takes absolute values, whether in dollars or tons or board feet, to communicate the available cash or wood.