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Contemplating Cash Flows and Forest Investments

This post is the fourth in a series related to the Q1 2021 Forisk Research Quarterly (FRQ). It includes topics that will also be addressed in the (virtual) Applied Forest Finance course on March 4th, 2021.

When we feel uncertain about a situation – that things are oscillating and bouncing and hard to control – we may look for and identify patterns in random data that do not actually exist. We may also overestimate the importance, relevance and power of negative information. Both this tendency to seek and call out nonexistent patterns and this tendency to overweight bad (or recent) news can lead to poor decisions in our personal and business lives.

What can we do to prepare ourselves for these psychic battles with ourselves? It helps to remain humble and to use practiced approaches in our work. [I also recommend grabbing a beer and catching a ballgame with friends once in a while.] To the extent possible, we want to set aside the “tyranny of the urgent” and apply proven frameworks with a clear mind.

As forestry professionals, it also helps to remember what (timberland) investors care about: Returns. Yields. Risk. Values.

While markets are somewhat efficient…sort of efficient…temperamentally efficient, it can be hard at times to tag near-term valuation changes to our understanding of the fundamentals. We do our work with the understanding that the acquisition, ownership and management of timberlands is competitive, both within the sector and with other asset classes. Sometimes the reason the price changes is unrelated to localized fundamentals. There’s a lot going on.

In forestry, cash flows are periodic and diversified. And the biggest cash flow occurs way out in the future when we harvest trees planted today. It’s the reason our sector values biometricians and active, knowledgeable forest management. The forest is out there growing, with nobody around, so it needs attention and oversight, especially during opportunistic markets, turbulent weather or uninvited fires.

Sometimes I hear asset managers or investors talk about cash flows as unpredictable. “We have a great strategy and business model, but our cash is all over the place.” To me, this misreads the situation. In most businesses, cash flows from core operations are understandable and manageable. In forestry, most of our cash flows depend on the productivity and quality of our assets, our cost structure, our location relative to key markets and professional, effective management.

When husbanding cash, we do so with an understanding of potential leakages. For example, growth can drain cash. While exciting, it takes cash to keep up with the Jones’. So have a clear understanding of what growth buys you.

In 1963, physicist Richard Feynman said, “If you know that you are not sure, you have a chance to improve the situation… Doubt is not a fearful thing, but a thing of very great value.” Indeed.

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