This post includes themes addressed in our Applied Forest Finance course.

Behavioral finance teaches us that we are prone to both emotional error and brilliant insight, and sometimes we confuse the two. For this reason, when evaluating investments, we value clear benchmarks (objectives) and strong decision-making processes. By accepting and acknowledging our limitations as emotive, thinking machines, we can then focus our energies on learning, practicing and applying helpful tools and frameworks.

When it comes to timberland investing, this can start with clarifying what we want and confirming that the expectation is operable and reasonable. In his 1909 book on forest finance, based on lectures he delivered at the Biltmore Forest School, Carl Schenck wrote:

“With the private owner of forests, the financial outcome of his investments is the first and last consideration. The private owner cannot be expected to supply this country with forest products unless forestry is as remunerative an investment as agriculture…”

Dr. Schenck reminds us that forest ownership, like any capital investment, is not a charitable enterprise. Even in the context of a modern-day ESG advocate, and with the promise of emerging forest carbon cash flows, the asset must pay its way, especially when compared to alternatives of comparable risk, return and liquidity. And this requires an understanding of how forest investments perform as they cycle and mature.

When is a forest mature? For investors, a forest reaches financial maturity when its annual growth rate in value equals the target rate of return. While small trees have little value to mills, they grow and add size rapidly, increasing in value. Then, eventually at some point, forest growth slows down, as does the annual increase in forest value. At some point, we have a mature, valuable forest full of logs that’s increasing in value at a slower rate. Investors focus on these numbers, relative to market prices for timber, to harvest, replant, and grow a new forest with higher returns.