“The future is not something to be predicted, but to be made.” – Professor Nick Montfort in The Future (The MIT Press, 2017)
Discussions of inverted yield curves and equity dividend yields purport to clarify the tea leaves of investor intents and worries. A form of interpretive dance, these yields also communicate something about the opportunities available to executives, who could take dollars distributed to shareholders and redirect them to value-creating projects. If they have them.
While shareholders may like dividends and yields, they represent an opportunity cost relative to alternate uses for that capital. This distinguishes Warren Buffett and Berkshire Hathaway. The company pays no dividends (dividend yield = 0.00%). Rather shareholders buy in and gladly leave generated cash in the hands of Warren, Uncle Charlie and his fellow investor-executives for deployment. In the ten years following the 2007 recession, shareholders earned a 10% annual compounded rate of return (CAGR) in exchange for this confidence.
Given the current investment environment, I worry about how investors price risk into certain assets and certain markets. This temptation to embrace urgency manifests itself in valuations. For example, if you have an urgent need to park capital, you can “buy your way” into an asset or market through lowering return expectations via lower discount rates, which raises valuations and offered prices.
What is the math? If an investment pays $1 per year and I expect a 10% rate of return, I would willingly pay $10 [$1/.1 = $10]. If I settle for a 5% rate of return, I would pay $20 [$1/.05 = $20]. We see this in bond yields as investors move capital around the globe. Higher valuations reflect in part a greater “urgency” for getting capital placed and parked in sleep-enhancing places.
We observe this in the timberland investing sector and forest products markets, and this accounting for risk is undergoing a deep rethink to better account for carbon markets and climate change and changing weather, fire, immigration and demographic patterns. In the forest industry, Forisk research affirms how timberland investors and wood-products manufacturers prioritize place over time in getting capital deployed to the “best” timber markets and wood baskets.
Analysis and ranking of 37 timber markets and wood baskets in the South and Pacific Northwest build on physical facts and market structures tied to forest supplies, wood flows, manufacturing capacity and infrastructure. Regardless housing markets and economic growth, some markets will generate more cash and with less risk than others. And capturing this value relies more on the skill and performance of our forest, mill and procurement managers than on the budgets and forecasts of our economists. We either know how things work on the ground or we don’t. And when we do know, we are better positioned to make things happen.
For those interested in a day dedicated to sharing and discussing research and insights related to forest industry operations and investments, register for Wood Flows & Cash Flows, Forisk’s annual conference on December 5thin Atlanta. Executive Panelists will address threats and risks to the forest industry.