WHAT'S THE PROPER RETURN (IRR) ON INVESTMENTS IN TIMBER, IN TIMBERLAND?
From the outset, we at JMV&CO have emphasized that timber and timberland are economic assets and should produce suitable economic returns for their owners. After listening to and watching investors for 46 years, we have learned that answers to the above questions are the same as they are in stocks, bonds, city real estate, gold, etc. They depend on the individual investor.
Key factors in his decision are his current needs and his hopes and fears about the future. Today, when IRR on 30-year U.S. Treasury bonds is about 6.6%, the proper IRR for timber and timberland should probably be higher, but only investors smoking the wrong stuff expect 15%. The answers will sooner or later be important to all investors, so we'd like to know how you would answer the questions.
First, however, we must point out that, as investments, timber and timberland have very different characteristics. PPICs clearly show this. In a start-from-scratch plantation, here are the contrasting features of the PPIC Investor in timber and the Landowner in timberland:
| PPIC Investor - Timber | Landowner - Timberland |
| Receives a small cash flow in 12 years and a big one in 22 years | Receives annual cash flows |
| Bears all risks of loss from casualties or price declines | Bears no risks of loss |
| Cannot cancel contract | Can cancel contract by buy-back |
| Is protected against inflation if timber prices rise that much or if landowner buys back | Buy-back required to protect against inflation |
| Merchantable volume of asset increases with growth each year | Merchantable volume of asset never changes |
| Volume depends on cultural practices | Innate productivity does not change |
| Amount of investment determined by actual costs (regeneration, annual landowner payments, etc.) | Amount of investment determined by estimate of market value of bare land (nothing but dirt and minerals) |
| Incomes not taxed until received | Incomes probably taxed each year as received |
| Pays taxes on timber | Pays taxes on land |
| Has little liquidity | Has little liquidity |
| Cost of management paid by PPMC | Cost of management paid by PPMC |
| Proper IRR% __?__ | Proper IRR% __?__ |
After you think about the features of each investment, we hope that you will fill in the blanks on the enclosed reply card and send it to us. We'll keep score and report results in a future newsletter.
We also hope that you will tell the reasons for your answers under "Comments." Reply by mail or e-mail if you need more space. We are sure to receive replies from very experienced investors, opinions that will interest, and should be passed along to, all our readers. If you comment, please tell us whether we can quote you in a future newsletter and on our Internet site. We look forward to hearing from you.
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