My parents gave me a sport coat earlier this year. The sleeves were too long, so I looked for an experienced tailor near my home. Multiple calls later, I found a helping hand at the local Men’s Wearhouse, where the staff didn’t require me to have bought the coat in their store. I immediately drove over, where they took measurements and pinned the sleeves. A week later, I picked up my coat, tailored to fit at a reasonable cost and with professional service. I was a happy customer.
It feels as if we only, truly appreciate the plumber, tailor, electrician, teacher, nurse, or mechanic when we really, really need the plumber, tailor, electrician, teacher, nurse or mechanic. The news is full of stories on AI and cryptocurrency and the barbarians at the gate, and yet our daily lives depend on practical skills and human relationships with those in our own towns.
My wife and I know and work with Michael Faust, an experienced handyman (if that’s the right word for someone who knows how to do just about everything). Michael runs a successful contracting business with his wife. Among other projects, they helped renovate our new office at Forisk in late 2023, and, like he told me, “I try to stay on schedule.” We work with Michael because he’s responsive, talented, and delivers quality work on time. He listens and takes ownership for the performance of his team. He is highly skilled. He’s a professional and he’s a friend.
I get tired of people saying one thing and doing another, even if it’s accidental or unintentional. The road to hell is paved with good intentions. I don’t get as frustrated as I used to, but I do move on and then do my best to work with and take care of those who do what they say they are going to do when they say they are going to do it.
My Dad is one of the most honorable people I know. He’s the kind of guy you may sit next to on an airplane and talk about a book and he’ll say, “hey, I’ll mail you a copy.” Then, if you give him your business card, he will.
I am highly appreciative of the people in my life who can “do things,” whether growing food, mending fences, raising goats, speaking Spanish, or hanging drywall. I admire the person with the experience and intuition to look at a situation and figure out a workable approach, regardless the field. And I am thankful for the people in my life who consistently keep their word and live by example.
In college, my friend and mentor Mark Lundstrom taught me that “earning good grades gives you more freedom.” I had struggled as a freshman, and Mark, an actual rocket scientist, talked to me about how getting straight on study habits and academic performance translates into more options later, enhancing sovereignty over your own life. It’s that simple, and that hard. Put the processes in place to get better results, and those results will deliver more opportunities and independence. In my case, following and implementing better study habits led to better grades, postgraduate scholarships, and my first job in forestry.
Years later, after working in forest operations in Aberdeen, Washington and as a procurement forester at a sawmill in Barnesville, Georgia, I sold my Jeep Wrangler for $4,500 and bought a laptop computer for graduate school and a month of Spanish classes in Alajuela, Costa Rica. In Costa Rica, I lived with a family who had never hosted a “Spanish student” before. The family of five spoke no English, while I spoke minimal Spanish. However, the mother of the house had firm routines for her family and for me, which I quickly learned and followed. The family had daily routines for eating breakfast and dinner, for washing hands before meals, and for ironing clothes each morning before leaving the house for school and work.
During that that first week, while language remained a barrier, we spoke little at the table during meals. However, the clear routines provided structure and comfort as we learned to communicate with body language and the new words I was learning each day. By the second week, the father and younger son had me out on their farm and the mother accepted my help washing dishes. By the third week, the kids were trying to teach me the Spanish phrases I’d never learn in a classroom.
The French novelist Gustave Flaubert said, “Be regular and orderly in your life, so that you may be violent and original in your work.” His call to process and routine speaks to the power of structure as an enabler of getting things done. Without processes and routines, we expose ourselves to nettlesome and distracting worries. We are human. The mind wanders. Our attention gets lassoed.
A commitment to process is a commitment to controlling what you can. Routines help us control our attention and how we invest our time. This takes effort. It requires caring less about results and what other people think, and more about the planning of our days. Nobody, except perhaps for our parents, will care as much about our own lives and goals as we do. That’s because everyone else is too occupied and ensnared with their own lives and worries.
Marcus Aurelius wrote, “If the cucumber is bitter, throw it out. If there are brambles in the path, go around.” Care less about the inconveniences, the fear of missing out, the opinions of others. Process and routine help us deal with things as they are, and powerfully support any effort towards being productive, proactive, and goal achieving.
Liquidity – the ability to convert assets into cash – generally worries investors.[1] In talking with clients and in my forestry investment research, I find that the issue of liquidity varies significantly by investor and over time, and that we are quick to generalize about the advantages and disadvantages of liquidity. How can we frame liquidity in a way that provides context for planning and decision-making?
Issues Related to Liquidity
In finance, liquidity is a construct that affects certain folks in certain situations; it does not affect everyone always. Liquidity, a problem when you need it and don’t have it, covers issues that may relate or overlap. For example, consider the use of debt (leverage) and the valuation of assets.
Debt differentiates during market crashes. While leverage has its role in finance, investors without debt will be less compelled to liquidate during tough markets. For highly leveraged organizations, debt compresses time and reduces options.
If we view liquidity as a balance of buyers and sellers at any time, then in the absence of buyers or sellers, how do we value an asset? When traders scramble to pay debts and meet margin calls, they don’t sell what they should, they sell what they can. Investors in comparable situations act surprised when markets tank and buyers are nowhere to be found.
Plan Ahead to Manage Liquidity
At times, investors need cash. In forestry, for example, due to irregular harvest revenues on smaller timberland ownerships, an investor may need supplementary funds through a partial sale, an advance, or a loan. While situations require balancing time with flexibility, it helps to plan how one might unload a timberland tract in a crisis. Investors get part-way there by breaking down the forest into its salable components, including timber, hunting rights, and choice parcels.
At the Federal Reserve Bank’s 2005 Jackson Hole Economic Policy Symposium in Wyoming, economist Raghuram G. Rajan, then working with the IMF, noted how actual and perceived time pressure from excessive debt, unusual financial structures, or other obligations can essentially manifest losses through illiquidity. He observed[2]:
Liquidity allows holders of financial claims to be patient… and allows the value of the net financial claim to more fully reflect fundamental real value. Not only does illiquidity perpetuate the overhang of financial claims as well as uncertainty about their final resolution, a perception of too little aggregate liquidity in the system can trigger off additional demands for liquidity.
Raghuram G. Rajan
Putting Liquidity in Context
Liquidity is largely a function of time horizon. Timber is a long-term play for long-term buyers and liquidity matters more for short-term sellers or investors reliant on significant leverage.
In addition, investors may hold positions that are ‘effectively’ illiquid if they are too large or too small or too marginal in quality or location. When prices crash, it’s easy to blame an absence of buyers on liquidity. From this view, liquidity is a problem for poor planners.
Conclusion
The relevance of liquidity to risk, returns, or cash flow varies across investors and over time. Liquidity thrives during periods of stability and of growth. Crashes, panics, recessions, and blackouts dry up liquidity. Sizable investment assets, whether timberland or car dealerships, often comprise a diversified portfolio of smaller assets, inventories, and cash flows. The issue of liquidity is rarely all or nothing.
[1]This post includes content from the Q2 2024 Forisk Research Quarterly (FRQ) feature article, “Topics on Forest Finance: Investment Criteria and Timberland Liquidity” and from the forthcoming 7th edition of Forest Finance Simplified.
[2] “Has Financial Development Made the World Riskier?” 2005 NBER Working Paper available at: https://www.nber.org/system/files/working_papers/w11728/w11728.pdf
The growth of ESG investing – which screens investments and firms based on environmental, social, and governance criteria – and markets for forest carbon and other environmental “services” highlight the importance of clear communication skills and the value of those who possess them.
Consider the situation for professionals in the timberland investment sector, a part of our research portfolio at Forisk. Timberland professionals grapple with the most effective and “context appropriate” ways to report investment performance and forest sustainability. How do we answer questions ranging from cash flows to wood flows to rates of return? Finance, investing, and forestry, come down to math.
Example: The Math of Finance and Forestry
Consider measures of forest sustainability versus investment performance. Investment returns often focus on percentages, which simplify comparisons across investments. However, percentages communicate differently than dollar amounts. Saying “you earned 5% last year” differs than saying “you earned $5,000 on your $100,000 investment.” They mean the same thing, but hearing dollar amounts clarifies the implications of how much wealth you gained.
The math of investments can, when reported as percentages, camouflage the dollar impact of fees, as well. Consider two descriptions of investment management fees:
“You will pay a 1% annual fee on this $1 million investment.”
“You will pay a $10,000 annual fee on this $1 million.”
The phrases describe identical fee structures differently. Do they sound or feel identical? The Securities and Exchange Commission (SEC) has, since 2004, accounted for this issue in shareholder reports and quarterly portfolio disclosures by requiring the reporting of fees in both percentage terms and in dollars per $1,000 invested.
The math of relative (percentage) measures versus absolute numbers applies to tree health and forest sustainability, which affects the reporting and communication of forest carbon investments and wood bioenergy projects. Saying that a timber market “has a growth-to-drain ratio of 1.1”, meaning growth exceeded removals by 10%, differs from saying “this market grows 1 million more tons than are harvested each year.”
Conclusion
A percentage, while informative, provides incomplete information. We can always estimate performance in percentage terms, while absolute values, whether in dollars or tons or board feet, communicate the cash, wood, or forests available today.
Classic lessons and finance fundamentals inform my approach to investing. Start saving and investing early to crank the flywheel of compounding interest. Minimize costs to keep more of what you earn. Diversify to mitigate risk. Commit to regular and systematic investing, instead of trying to time the market. My Dad introduced this last one to me, years ago, through dollar-cost averaging,
Words inform, and the name of this strategy previews its priorities. “Dollar” means money, as opposed to volume (e.g. numbers of shares). “Cost” is about what we spend (now) as opposed to what we might get later. “Averaging” speaks to doing this over time. In short, dollar-cost averaging is a process that focuses on what we can control.
With dollar-cost averaging, we regularly and systematically invest a fixed dollar amount, regardless the share or fund price or situation in the overall market. When prices are up, we will buy fewer shares, and when the market is down, our allocation pays for more shares. This strategy tends to result in a lower average cost per share over time when compared to lump-sum purchases.
If you participate in a workplace retirement plan with monthly contributions, such as a 401(k), you effectively employ dollar-cost averaging. In addition, users of 401(k) accounts and the like typically trade less frequently in those accounts, further reducing costs and preserving capital. The framework reduces emotion and anxiety while supporting a proactive approach to building wealth.
Dollar-Cost Averaging in Action
In the timber industry, my research focus at Forisk, the easiest vehicles for applying a dollar-cost averaging strategy are the publicly traded timberland-owning REITs (PotlatchDeltic (PCH); Rayonier (RYN); and Weyerhaeuser (WY)). The Forisk Timber REIT (FTR) Index, commonly called the “footer index,” is a market capitalization weighted index of the public timber REITs.[1] The figure below summarizes a dollar-cost averaging approach to investing in the timber REIT sector based on buying $10,000 worth of FTR Index shares at the end of each year for ten years from 2014 through 2023.
With this strategy, the weighted average cost per “share” is $277.44, while the straight average of the ten year-end prices was $285.21. With dollar-cost averaging, your portfolio has more of the lower-priced shares and fewer of the most expensive shares, which brings down the weighted average. The strategy is not always advantageous. If you had simply purchased $100,000 worth of shares at $270.52 in 2014, you would have been better off. For that reason, it helps to think of dollar-cost averaging as a robust and systematic approach to cost-effectively stay invested over time.
Discussion and Considerations
With the regular, systematic investing of dollar-cost averaging, you acquire more shares when the market is lower, thereby reducing the average per-share price in your portfolio. When the market rises, you acquire fewer share, but you still gain from rising prices because your portfolio already contains shares bought previously at lower prices. In this way, periodically buying fixed dollar amounts outperforms the regular buying of fixed numbers of shares.
Fundamentally, dollar-cost averaging is a risk-averse, conservative approach. While it helps manage risk, it also reduces the likelihood of outsized returns. Dollar-cost averaging functions best in a world where the market always mean reverts. However, the stock market rises, tends to rise, has risen over time, even as it does so on a random path. If the market or asset of choice were guaranteed to increase and appreciate, we’d be better off investing all money now, regardless the prices. But that’s not how life or access to capital work. Most of us save and invest over time as we earn income and generate cash, and dollar-cost averaging serves as an investment hack, a short-cut for the person who wants a reasonable, low cost, relatively effective way to invest systematically without the stress of timing the market.
As a strategy, dollar-cost averaging is also agnostic and indifferent. It will acquire more shares of underperforming firms or funds as easily as attractive and performing investments, so there are still decisions to make. This is one reason why dollar-cost averaging fits well for investing in diversified index funds that tend to follow the overall market.
Conclusion
With dollar-cost averaging, you buy shares of a stock or fund regularly over time at the prevailing prices. With this approach, your average cost is neither the highest nor lowest market price. It is a weighted average that systematically acquires more shares when they are cheaper and fewer when they are dear. This strategy keeps you invested in the market without any need to deliberate over “timing” the market.
[1] Initiated in 2008, the FTR Index provides a benchmark for comparing timber REITs to other timberland investment vehicles and the overall market. To subscribe to the free weekly FTR Index Summary and to obtain historical FTR Index data in an Excel format, please contact Pamela Smith, psmith@forisk.com.
