If anything has become clear, it is that the 2020s is a decade for antifragile investing. Antifragility, as coined by Nassim Taleb in his book “Antifragile: Things That Gain from Disorder,” refers to the tendency for a system or object to get stronger or gain from stressors. It must not only be able to withstand the stress, but actually gain from it like a hydra that grows an extra head when one is cut off. In many ways, a natural forest ecosystem represents antifragility perfectly: Stressors like fire and insect outbreaks help to thin out weak and unhealthy trees and leave room for stronger individuals to grow. The net result is a stronger forest. The antifragility of forests, however, extends to the investment world too. Owning a woodlot or larger parcel of timberland is the ultimate antifragile investment and protection against systemic chaos. Here is why.
The Robustness of Timberland in a Growing Economy
When economies are stable or growing and times are good, the benefits of owning forest land come from the sheer diversity of products they offer and the optionality it presents the owner. Healthy markets all around support decent returns as products such as lumber, pulp, and firewood fetch nice prices at the mill and allow the landowner to sell as many parts of the tree as possible. Moreover, growing real estate markets can boost the value of the bare land the trees grow on, adding an equity appreciation component on top of timber growth. In such times, forestry is a great way to diversify your portfolio and provide you all the other perks of owning timberland. That said, money is easy to make when economies are growing. What makes timberland perfect for antifragile investing comes from times of chaos.
Antifragile in the Face of Inflation
Investing during periods of high inflation can be tricky. Consumer sentiment can drag on sales, and profit margins can be squeezed as businesses face increased costs from every direction. But the prices of commodities and products soar! The key to hedging against inflation lies in having control of both production and the cost of that production. Timberland gives you just that sort of control.
The wide diversity of products exposes you to the optionality of producing and selling exactly what the market demands at that moment. Take, for example, the surge of lumber prices in the spring of 2021. A major shortage of lumber nationwide caused the price of dimensional lumber to soar to record highs by massive margins!
Woodlot owners who owned portable sawmills took shrewd advantage of the situation and made massive returns. Others sold the stumpage rights to their softwood at highly elevated prices. But here’s the key: Their costs stayed low. A forest grows wood for free every year. Inflation to the timberland investor is only a boon. True, harvesting and trucking costs may go up if applicable, but unlike a grain field requiring expensive and possibly scarce herbicide, a forest requires absolutely nothing to keep putting on growth year after year. It is the ultimate cost control.
Antifragile in the Face of Deflation
It should be expected that a commodity producing asset does fairly well in an inflationary environment. That much is true. The uniqueness of forests for antifragile investing, however, comes from what happens in severe economic contractions–something on the scale of the Great Depression. Prices are falling. Real estate is falling. The world is crashing down. What is a timberland investor to do? Nothing. That’s right: Absolutely nothing. By NOT harvesting trees when there is no advantage in doing so, the trees grow bigger and taller. More wood is produced. When you harvest later when conditions are better, there will be more wood, and because trees will be bigger, it will be cheaper to harvest.
There is no other asset class that allows you so much optionality and continues to produce for you even when completely neglected. Oil pumps rust and degrade, creating environmental liability. Crops rot, and fields become overgrown. Timber? It will be there waiting for you, bigger and stronger than ever.
Preparation for a Real Black Swan
What if there was an event no one could foresee? A massive disrupter comes along and brings society to its knees, crippling supply chains globally. In this scenario, your personal woodlot also functions as a massive emergency energy reserve. Paired with a backup woodstove in your home, every stick of timber on your property can be used as firewood to heat your home and keep you and your family safe and cozy. Perhaps this is when your timber is truly priceless.
The Ultimate Solution for Antifragile Investing
To any investor seeking antifragility in their investing portfolio and lifestyle, there is simply no other solution quite like owning forest land. The next decade is likely to be rough and unpredictable, as I am sure you have already surmised. Protect yourself.