We don’t succeed in business or investing by falling in love with our own ideas. We profit through continuously and doggedly comparing our prior decisions to actual results in order to calibrate our “model” of how the world works and improve future decisions. This model includes frameworks to organize data and structure our thinking.
In forest finance, we apply specific tools to make the “best” investment decisions possible. Investing, whether in trees or Turkish bonds, requires a “probabilistic” mindset that acknowledges uncertainties. And, over time, this type of systematic decision-making beats gut feelings or investment tips from Cousin Eddie.
Forest Finance Framework
The application of finance in forestry addresses three sets of investment questions related to how we deploy and allocate capital:
- First, how do we identify, screen and value timberland acquisitions or forest management decisions? This set of questions deals with the “investment decision” and includes proper valuation (appraisals) and the ranking of different forest management plans, such as comparisons of seedling types, thinning strategies and fertilizer applications.
- Second, how do we pay for this investment? This deals with the “financing decision” and addresses the relative advantages and disadvantages of applying debt, paying with cash, or issuing equity. This often includes conversations with our accountant or banker.
- Third, how and when is the appropriate time to divest – sell – the property, or to harvest timber to maximize profits? We refer to this set of questions as the “exit decision”, which includes how to evaluate “woods run” or “special” prices in a given local market.
The price of an asset can vary from its fundamental value over time because of uncertainty associated with future cash flows or from different investment theses and priorities. In forestry, financial analysis supports our efforts to estimate this value while making decisions related to the optimal (economic) rotation, when to harvest, how to manage (silvicultural), and the buying and selling of timberlands.
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An investor looking at timberland should employ a local consulting forester to evaluate not only the timber as it currently is and it’s potential long timber growth as well as the local timber market which can fluctuate with the economy drastically as well as somewhat seasonally due to weather.