Why does everyone say timberland is boring and then also say it beat the S&P on volatility

The catch is you can't get out. A tenant leaves, I re-lease in six weeks. A timber tract goes to market and you might sit two quarters waiting for the one buyer who wants that size in that basin, and if you're forced you take the haircut. Index returns are computed on appraised values, not on what a hurried seller actually gets.

Appraisal smoothing is the whole thing. If the index marks are appraisal-based, the measured volatility is lower than the true volatility of what you'd realize. Doesn't mean the asset is bad, just that a 6.9 against 16 comparison isn't quite apples to apples.

Also the index period includes some extraordinary years in the nineties when institutions were buying tracts off the integrated forest products companies at prices that don't exist now. Read the fund materials on any closed-end timber vehicle and you'll find the expected return language has come way down, mid to high single digits is what's being quoted, and some of them are struggling to raise at all.

The part that put me off was the cash flow. You don't get a check every month. You get a check when you harvest, and harvest might be every 12 or 15 years on a tract, or you thin in between for a smaller amount. I wanted income without a second job and this is the version where the income arrives in one lump a decade from now.

@marlow that's the direct ownership version. Plenty of tracts carry hunting leases that pay per acre per year, and those are actual annual dollars, small but real, and they cover a good chunk of property taxes in a lot of counties. Recreational demand has been holding land values up in places where the timber math alone wouldn't.

The harvest deferral option is the piece I keep chewing on. If prices are bad you just don't cut and the trees keep growing, so your inventory literally increases while you wait. There isn't an equivalent in a building. But that only works if you don't have debt service forcing your hand, and I suspect a lot of the return stability in the index comes from owners who never had to sell.

@anchor yes, and that's the real answer to wren's question. The strategy works for capital that can genuinely wait 15 years. Most money can't, so it isn't priced away. Minimum bites on institutional funds also sit well above what an individual brings.

Fifteen years is the entry price. People hear low volatility and think safe, and it's more that nothing happens for a very long time and then a mill closes in your basin and your stumpage drops 20 percent for reasons you had no part in.