We don’t succeed in business or investing by falling in love with our own ideas. We profit through continuously and doggedly comparing our prior decisions to actual results in order to calibrate our “model” of how the world works and improve future decisions. This model includes frameworks to organize data and structure our thinking.
In forest finance, we apply specific tools to make the “best” investment decisions possible. Investing, whether in trees or Turkish bonds, requires a “probabilistic” mindset that acknowledges uncertainties. And, over time, this type of systematic decision-making process powerslams inferior guessing, gut feelings or investment tips from Cousin Eddie. In short, the tools we use help value and rank potential forestry investments and determine whether or not they satisfy our investment objectives.
The application of finance in forestry addresses three sets of questions:
- First, how do we identify, screen and value timberland acquisitions or forest management decisions? This set of questions deals with the “investment decision”and includes proper valuation (appraisals) and the ranking of different forest management plans.
- Second, how do we pay for this investment? This deals with the “financing decision”and addresses the relative advantages and disadvantages of applying debt, paying with cash, or issuing equity.
- Third, how and when is the appropriate time to divest – sell – the property, or to harvest timber to maximize profits? We refer to this set of questions as the “exit decision”, which includes how to evaluate “woods run” or “special” prices in a given local market.
The price of an asset can vary from its fundamental value over time because of uncertainty associated with future cash flows or from different investment theses and priorities. In forestry, financial analysis supports our efforts to estimate this value while making decisions related to the optimal (economic) rotation, when to harvest, how to manage (silvicultural), and the buying and selling of timberlands.
Click here to learn about and register for “Applied Forest Finance” on February 19thin Atlanta, Georgia. The course details necessary skills and common errors associated with the financial analysis of timberland and other forestry-related investments.