VARDAMAN VIRTUAL FORESTRY COMPANY

The Most Direct Link to Knowledge Workers in the Southeast Forest Economy

Warren Buffett is surely the most successful investor of modern times, maybe of all times. He started from scratch and became the world's richest man solely by investing. Everything he says or writes on this subject is worth serious, thoughtful study. This is especially true for forestry investors, even though Mr. Buffett seems never to have owned a tract of timberland in his life.

Most uncommon among his concepts, and most appropriate for forestry investors, is that of "intrinsic value." In discussing intrinsic value in Berkshire Hathaway's 1996 Owner's Manual, he wrote that intrinsic value is "an all-important concept that offers the only logical approach to evaluating the relative attractiveness of investments and businesses. Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. The calculation of intrinsic value, though, is not so simple. As our definition suggests, intrinsic value is an estimate rather than a precise figure, and it is additionally an estimate that must be changed if interest rates move or forecasts of future cash flows are revised."

This is a superb way to think about timberlands in the South because most have been or will be converted to plantations that require 20-25 years to produce a single big harvest. PPICs are good examples; they don't produce annual incomes and contain little merchantable timber at age 10 and not much at age 15. Their main source of value is the final harvest.

Mr. Buffett is right on about changes in future cash flows and interest rates. Timber prices change constantly (see our monthly reports on <www.vardaman.com>) and so do interest rates, and both have a big effect on values of a long-term investment like forests. Certainty is impossible; your only investment guide is a continual estimate of where you stand (the intrinsic value of your investment).

Another of his valuable concepts is the huge advantage, for tax-paying investors, of internal compounding, which is at the heart of PPICs. In his 1993 Letter to Shareholders, Mr. Buffett wrote, "Tax-paying investors will realize a far, far greater sum from a single investment that compounds internally at a given rate than from a succession of investments compounding at the same rate."

You can prove this with arithmetic. If you invested $100 in a 22-year PPIC that paid a 10% dividend each year taxable at 35% and you re-invested all dividends, you would have a net amount of $399.66 at the end. If you invested $100 and left it to compound internally in a 22-year PPIC that paid only one dividend taxable at 35% at that time, you would have a net amount of $564.12. As you can see, long-term investors wind up with 41% more money over the life of the PPIC.

The priceless gems in Mr. Buffett's essays have been consolidated into an excellent paperback book. Its title is "The Essays of Warren Buffett; Lessons for Corporate America" selected, arranged, and introduced by Lawrence A. Cunningham. The price is $14.95 plus $2.50 (shipping). Get in touch with Prof. Cunningham at Cardozo Law School, 55 Fifth Ave., New York, NY 10003. His fax number is 212+790-0205.