Forum: A Technical Discussion of Layers
of the Forest
October 2003
Vic: In old growth forests, the height of trees may
be categorized this way:
OK. Is there a separation by price of the
distribution of prices at a given time? It’s a question that M.F.M. Osborne
would have asked from his vantage point as a man from Mars. I am inspired by his memory and by the visit with
my kids to the Natural History Museum in Manhattan today to study same.
From: J.T.
Date: 10/07/2003
Two things come to mind. Hurricane Isabel's eye just came through Richmond, Virginia, and
the vast majority of trees that fell were of the 100 feet-plus type. The trees
that fell were hardwoods, not coniferous.
The closer to the ground the more stable the tree during the 50-65 mph
winds for obvious reasons. The amazing thing to me was the fact that the hardwoods
fell due to the "sail-effect" of the leaves and their shallow root
system, whereas the confiirous trees with needles didn't budge and they are
stuck in the ground more like a pencil.
The trees that I thought before risked falling were the dead trees in my
side yard. They didn't budge. No sail or root system to make it a factor.
The healthiest, oldest, taller trees were the victims of
the Hurricane Mistress. The dead, weak, short and leafless trees were around after the
Hurricane left town.
Ssecond thought.
I read somewhere in a book once, slips memory, that when a stock hits 80
it’s a good sign it’s going to 100 and then chances are it splits goes back
down to 40-50 depending on split and hopefully works its way back up
again. Sounds like the life of a
hardwood tree in the cycle of life with hurricanes—or just normal time erosion
in a forest? Is the hurricane
supply/demand?
The Cone-Bearing trees vs. the Hardwoods sounds
like Growth vs. Value as well. I do
know from observation that hurricanes typically hit Virginia during the end of
summer-beginning of fall—not a good time to be looking up at hardwoods near the
house, but in the winter the
coniferous trees sap freezes up making them brittle
and easily blown or weighted down in an ice or snow storm—not a good time to be
looking up at hardwoods near the house!
I am in a recently built home; after the hurricane I looked at my
landscaping and noticed that my house was surrounded by nothing but shrubs,
dogwoods, and a redbud. Nothing like
being at the bottom of the forest floor.
I find it weird that I had no risk a la hardwoods/pine trees, but tons
of reward in the flower-bearing dogwoods/redbuds/azaleas and forsythia two
times a year: spring and fall.
From: Tom Ryan
Date: 10/07/2003
Along this line of thought I continue to believe
that days of large movement, close to close, say >1.5 or 2.0 std deviations
away from the mean of the past 6, 9, 12 months, can contain much information.
In particular, the stocks that move counter or do not participate in the move
(down on the day when market averages up big or conversely up on day when
market down big), and the prospects of that generally small list of
nonparticipants on the day in regard to their immediate future can and should
be tested for various time intervals. Is the market anticipating negative
consequences of a forest growth spurt to certain species, or conversely an
increased potential for some to flourish in the aftermath of a fire. Maybe this
is random thinking but at least it is prospective and can be tested and
falsified.
From: Charles Pennington
Date: 10/07/2003
Here's a meager start on the question that you
posed. My backtesting software makes it
difficult/tedious to test your proposition, so I just did the best I could in
limited time.
For each trading day from July 2001 through July
2003 I took the worst daily performing Dow 30 stock and tabulated its
performance for the next week. (This
doesn't guarantee that the stock had negative return that day--just the worst
return of the Dow 30.)
Then I looked at the subset of those roughly 500
names (250 trading days per year times 2 years =500) for which the S&P 500
had been UP by more than 1.5% on that same day. (Don't ask me why I used S&P instead of Dow.) There were 49 such days.
For those stocks on those days, the subsequent
5-day performance (buying on the next open) was as follows:
avg return 1.5% stdev 5.2% count: 49 std err 0.7%
That looks encouraging. However, it's interesting to also take the same set of roughly
500 names and take the subset for which the S&P 500 had been DOWN by more
than 1.5% on that same day. This is not what you asked about. There were 66
such days.
For those stocks on those days, the subsequent
5-day performance was:
avg return 1.71% stdev 9.7% std err 1.2%
SO, it was good to buy the lowest-performing Dow
stock both on big up days and big down days for the index.
For the neutral days (return between plus and minus
1.5% on the SP500), here are the numbers for the next week on the lowest-performing
Dow stock:
avg -0.22% stdev: 5.0 std err 0.3%
So it's not a compellingly good idea to buy the
lowest-performing Dow stock on a neutral day.
Of course keep in mind that this study was done from
July 01-July 03, and the SP500 was down about 20% over the span.
From: Bill Craft
Date: 10/08/2003
Unusual/infrequent Micro events like this can have
unexpected consequences.
GEOtrophs (conifers) grow away from Gravity( high
p/e) while
PHOTOtrophs(Deciduous) grow toward light(slower
more patient growth).
Both balanced by each method.
Former and latter grown in more OPEN conditions can
get heavier tops.
Similar to a pecan orchard. Heavy tops on purpose
for fruit. Real danger
from the sail effect (uprooting).
So BIG open grown Hardwoods give plenty of shade
and form but have over
developed tops and are at higher risk.
Overabundance of growth, big shade and protection,
Falls at first BIG wind.
Keep mowing the lawn or the forest will creep back
in.
Bill
From David Higgs
Re: all u lumberjacks
Take a swing at this from the perspective of the
rings of a tree. The outmost Russell 2000, the inner the S&P 500, then the
S&P 100 and finally the Dow 30—should I say core.
Now twist and turn them on a timely basis and align
them like the stars above. Seems like there should be clues upon clues to build
from?
From: Easan Katir
Date: 10/07/2003
The one-time head of real estate operations at
CALPers did an analysis on the suitability of timberland for retirement
portfolios. He told me the tree cycle is not unlike the human cycle: When young they sprout up tall and
spindly. In middle age they grow wider
around the middle.
He deduced one could get about an 8% average yield
from a mature forest, so he bought heavily for CALPers, which is now the
largest owner of timberland in the US.
Wanting to buy even more, he visited other
timberland, and reports that Indonesian lumberjacks wear masks on the back of
their heads while working. The theory
is that a tiger will not readily attack someone who is looking at them. He brought a mask back to wear around the
office.
PCL not a bad simulation of the CALPers strategy,
p'haps, for those of us not Arnold's employees.
From: Cliff Roche
Date: 10/07/2003
Jeremy Grantham has been touting timber for some
time now as well. Unfortunately, the number of funds holding trees in their
portfolios is in short supply. As I
recall even GMO acknowledged difficulties in making a direct play. If anyone
has suggestions on how to best work this market, it might be interesting. Perhaps companies that hold large reserves
are the best ticket? While considering
other fundamentals of course . . .
From: John Bailey
Personally, I'm trying to find the forest product
companies with spectacular Coke kind of returns that these conclusions
imply.
From: Mr E
Date: 10/07/2003
quietly, under the radar of the green party scum
and the job killers of the
sierra club, CHINA passed laws that permitted
TIMBER and LIMBER to be used in
home construction...
almost immediately smart timber managers took aim
at new zeeland as a great
place to grow and harvest timber...and its close to
china
in america, why grow timber at all...the liberal
scum who run the forst service
can be tested: in the years since mt helena the
small weyerhouser plot has
outgrown the liberal scum by 10 YEARS...go and see
what liberals are able to
grow...OPEN SPACE NO TREES NO COMPETENCE
From: Mr E <cybedude@mail.lawguru.com>
Subject: Re: [SPEC-LIST] Fw: [SPEC-LIST] all u
lumberjacks...........
Date: 10/07/2003 23:25:06
thamkyou...but the liberal slime on these boards
will find a CRY BABY way...like
crying to the mommys...to stop me from
writing...wait and see
From: Cliff Roche
Date: 10/08/2003
In regard to our discussion of timber, Mr E had
said:
"quietly, under the radar of the green party
scum and the job killers of the
sierra club, CHINA passed laws that permitted
TIMBER and LIMBER to be used in
home construction...
almost immediately smart timber managers took aim
at new zeeland as a great
place to grow and harvest timber...and its close to
china
in america, why grow timber at all...?" (see
original for answer)
The reference to New Zealand caught my attention,
and today I found this article:
"September 15, 2003
Campbell Group to buy New Zealand timber property
The Portland-based Campbell Group intends to buy
the entire forest estate of
Fletcher Challenge Forests of New Zealand for $604
million.
…
Founded in 1981, the Campbell Group buys and
manages timber properties for
investors. Its $1.4 billion in assets under
management makes it one of the
largest timber investment managers in the world. It
has nearly 150 employees in
nine offices."
The following information can be found on the
Campbell Group website
(unfortunately the fund seems open only to
institutional investors):
"Based on statistics compiled by The Campbell
Group, timberland returns,
represented by the NCREIF Timberland Index, have
outperformed stocks and
long-term corporate bonds over the last 14 years.
Over the last 15 years, a fundamental change has
occurred in the ownership of
a significant part of these commercial
timberlands. Institutional investors,
such as public and private pension funds, have
purchased large tracts of
timberlands from these forest products companies,
and in turn, sell logs
harvested from these lands back to the producers of
forest products. These investments
have generally been made through private equity
investments in limited
partnerships, commingled funds and insurance
company separate accounts. This
trend is expected to accelerate as more forest
products companies sell portions of
their timberland in order to focus on their core
business of forest product
development and production.
One of the most compelling reasons for including
timberland investment in a
long-term institutional portfolio is the ability to
enhance the risk/return
characteristics of the total portfolio. Timberland
has a low correlation to
other major asset classes, including stocks and
bonds, and is negatively correlated
to real estate. Besides being an excellent
portfolio diversifier and
inflation hedge, timberland makes a good investment
because its returns are
equal to or better than comparable risk/return
investments."
Within the limited time I was able to spend today
looking, it appeared that
opportunities for comparatively small individual
investors were limited to
direct purchases of timer laden property (ie: real
estate). Specialized real
estate sales companies do exist for this
purpose. I understand that you can use
funds within an IRA or Solo 401K to direct the
purchase of raw land and hold
that land within the tax deferred vehicle.
The issue in all of this of course, is WHAT DOES
THE AVERAGE SPEC KNOW ABOUT
BUYING TIMBER LADEN REAL ESTATE? ANSWER: NOTHING.
Three questions (I'm sure others can thing of
more):
Is it worth learning more about this given the potential
for returns?
How big is the liquidity issue?
What sort of business cycles is this investment
subject to, and where are we
now?
From: Bill Craft
Date: 10/08/2003
Cliff asked three questions (I'm sure others can
think of more):
Is it worth learning more about this given the
potential for returns?
How big is the liquidity issue?
What sort of business cycles is this investment
subject to, and where are we
now?
--------------------------------------------------------------------------------
Yes it is worth learning more and while this field
is specialized doesn't mean
you can't learn.
From land aquisition, timber inventory, growth
projections and harvest
optimization it is a new world for many people and
quite enjoyable.
Fortunately there are quite a few highly qualified
US firms that do this sort of
work.
I have even seen investment possibilities in New
Zealand but while that is close to the Pacific Rim, I would think it is hard to
get there on a regular basis.
Liquidity of forestland was considered more of a
problem in the past. The demand for land has increased as an alternative to
securities. Many professionals have put forest land into a retirement plan. You
don't want to buy higher than a calculated present value of the
investment. Age, growth, harvest regime and
reforestation all are used to establish a PNV
for the investment. You can buy bare land and start
from year 1 or purchase an established stand depending on your investment time
frame.
The land and timber are simultaneously conjoined
AND separate investments. First, you
must have a current and future market for wood products in the area and, since
many cash out of the land base later on, have land appreciation also.
The business cycle is subject to the local wood
using market normal fluctuations and this must be determined regionally then
locally (near the investment). Probably means a longer investment period for
individuals than institutions. It can be a capital intensive business and
depending on your objectives maybe buy and hold.
Generally, risks of ownership are low but can
include fire, insect, wind, theft, the new kid on the block, and political or
legal challenges so you have to be informed here as well.
Yes there are sharks in the business.
Another point is taxation. One of the remaining Tax
Credits is in reforestation. Up to a max $10,000 /yr expenditure, you receive a
10% tax credit and then amortize the rest over an 84-month period and of course
favorable capital gains treatment of income.
Special tax provisions apply to active and passive
investors.
There is a Tax form T for active investors.
Some links of interest are:
works with individuals
http://research.yale.edu/gisf/ppf/understanding_changes
lists timo's and reits
http://www.cintrafor.org/CONFERENCE_TAB/2001presentations/Lutz.pdf
http://www.americanforestmanagement.com/timberinvest.shtml
works with individuals
of interest: see Ag Handbook No. 718