Teak Wood Investing: The Benefits

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Day trading encompasses trading short time horizons in liquid asset classes. But it’s also important to have flexibility. There is a time for day trading, swing trading, position trading (i.e., buy and hold), and also investments into less liquid asset classes, like real estate, venture capital, private equity, and even timber and teak wood investing (the subject of this article).

In markets, there is a “liquidity premium”. The ability to get in and out of a position is a convenience such that liquid and illiquid assets tend to have different premiums – i.e., differentials in their expected forward returns – associated with them to compensate for this risk.

In liquid investments, you can get in and out at the price you’d like and you are also not limited to holding for longer periods. Illiquid investments are inherently difficult to sell. This can also be patents and other intellectual property that has typically has no readily available buyers.

Private equity and venture capital funds often have 10-year lockup periods. Once you commit capital to them, you will need to wait for an extended period to access your capital. That’s the natural time horizon of the transaction. “Quick flips” are not easy to do when investing in private equity, real estate, or real assets. It takes time to create value in these investments. Value creation in private equity typically doesn’t simply come from the leverage involved, but from the operational improvements made to the business to make it more efficient.

In the case of teak wood investing, this is the typical process.

1. Invest in a country where they grow teak wood.

(Different types of vegetation thrive in different environments. For US-based investors, in particular, teak wood is generally sought after in Panama and Nicaragua due to the combination of the offshore investment opportunities, low taxes, and the potential to obtain citizenship down the line. Teak is native to south and southeast Asian countries. Myanmar accounts for about half of the world’s naturally occurring teak.)

2. Buy a plot of land dedicated to growing teak.

3. Plant trees on the property and/or buy plantations with existing teak forest cover.

4. As they grow, harvest out the wood, sell it to buyers to meet demand, and collect payment for the sale.

For any type of investors with an “ESG” mandate (which takes into account environmental, social, and governance factors into the viability, sustainability, and overall ethics of an investment), teak is likely to become an increasingly popular option. Teak is indigenous to rainforests and deforestation of these tropical forests has been a longstanding environmental issue. Teak harvesting on dedicated areas is a more responsible and sustainable way of meeting global market demand while preserving natural habitat.

Geography of teak wood

Because Myanmar produces roughly half of the world’s teak wood and the country banned teak logging and exports of the hardwood (to protect natural habitat and rein in deforestation), more of its production has shifted to other parts of the world.

Now, Panama and Nicaragua, and to a lesser extent Paraguay, have picked up a material part of the void. The climate of Central America is similar to that of south and southeast Asia, making the land hospitable to teak forestation.

Demand for teak wood was formerly mostly limited to the developed western world. But as China opens its economy and India grows in population and increases its living standards, and general tastes become more globalized, there is more demand from these two markets as well. China and India account for close to 40 percent of the world’s population.

The value in teak wood investing

Teak is a particular type of hardwood that has numerous applications due to its strength, durability, and aesthetic honey gold appearance. It is frequently used in making furniture, stairways, ship decks, and flooring.

Foreign investors often come to Panama and Nicaragua as a source of international investment or “real estate tourism”. Because teak demand is steadily growing and supply is relatively limited, this attracts investors. With the forward returns of equities and fixed income looking very low going forward, teak is a type of alternative investment that can provide a new source of cash flow.

To incentivize investment, Panama and Nicaragua also offer the opportunity to obtain secondary citizenship provided certain conditions are met (i.e., spend one day in the country every two years). Other countries like Cyprus have programs where they offer citizenship for developing their real estate infrastructure.

Panama’s Friendly Nations Visa program is one of the easiest methods of obtaining permanent residency in a foreign country. This allows those who obtain one to apply for a work visa, which provides a path to citizenship.

For older residents – men 65+ and women 55+ – there are select discounts on lodging accommodations, entertainment, travel, among other purchases.

For those in less stable countries, where there is social, economic, and/or political turbulence or the threat thereof, having a secondary citizenship could also be of use as a backup option. It can also provide a separate residence base should any type of disaster occur in your home country that is beyond your control.

1. Returns

Teak is a commodity and returns are obviously dictated by the supply and demand for it. Some dismiss commodities are “zero sum” or even possibly negative-returning as new innovations make it easier to grow commodity supply over time.

But in this case, teak wood investing is actually closer to owning a piece of real estate. You own the land, grow teak on the plantation, and sell it.

Teak is being consumed or destroyed at approximately 10x the rate of replantation at the same time teak demand is increasing.

The demand for timber roughly matches the growth in the world’s population in conjunction with the improvement in their living standards. As we move into the new decade (2020s), the global population stands at 7.7 billion.

By 2050, this is estimated to be around 9.7 billion (0.77 percent annualized growth from today), and 11.2 billion by 2100 (0.47 percent annualized growth from today) based on UN projections.

In the 40-year period ending in 2005, teak yielded a money-on-money return of 26x, or close to 9 percent annualized.

More investors from various investment vehicles – hedge funds, family offices, pension funds, alternative managers – are likely to get into teak wood investing as part of their timber portfolios.

2. Volatility

Timber tends to be less volatile than equities. One benefit is that you are not marked to market. In liquid investments – public equities, credit and fixed income, spot FX, liquid commodities – you can continually mark your performance to two decimal points.

In private investments, you don’t have this type of constant reporting. Many things need to be sold before their actual worth can actually be determined. Periodic performance can be tracked based on comparable sales of the asset in question. For example, if you invest in Manhattan real estate and want to get a feel for how your investment is doing, you might look at recent transactions of comparable properties to the ones you own.

In the past 45 years, teak wood has been down in only three years. Equities, on the other hand, lose money in about one-quarter of those years.

However, being the returns of financial assets will be lower going forward, we can expect more down years in stocks relative to what’s been typical historically. If the expected forward annualized returns of US equities is about 5.5 percent going forward and their volatility is 15.4 percent, then we should expect about 36 percent of the years to be below zero percent returns going forward.

Timber, as an asset class, tends to be relatively stable, making it an increasingly popular investment for various types of asset managers. It is also a means by which families can create an intergenerational store-hold of wealth that can be passed on.

3. ESG and sustainability considerations

Teak wood investing is not simply a matter of making money. You’re fundamentally contributing in a way that places less burden on natural habitat and harvests teak in a way that is sustainable (i.e., not through deforestation). Teak wood investing is about reforestation and doing some small part to offset the loss of the planet’s natural forest cover.

4. Diversification

Putting all or most of your portfolio in stocks, as most individual investors and pension funds do, can be dangerous. All assets have a particular type of environment in which they do well. Stocks do best in a growth environment that is either stable or surprising to the upside (relative to expectations) with a supportive interest rate backdrop.

When the economic environment is not as supportive, and because stocks have inherent leverage embedded in them (companies have debt), equities can see large corrections in their price.

This is true of all asset classes. But what we do know is that different asset classes will act differently. Namely, they will have a particular environment in which they do best. Risky corporate credit will tend to do best in a similar environment as stocks. Sovereign debt of reserve currency countries will tend to best in deflationary recessions. Commodities normally do well in periods of rising inflation. Gold has its own element of diversification.

Many investors understand the importance of diversification as a way to keep their upside while avoiding any unacceptable downside. Because of “risk on” and “risk off” behavior, stocks and safe bonds often have an inverse correlation (though, over a long enough period of time, the correlation should be roughly zero). Gold also tends to behave differently from stocks and bonds and acts as a type of cash alternative.

Commodities can also be thought of in different ways – as alternative currencies, a growth-sensitive asset class, store-holds of wealth, and assets subject to their own supply and demand characteristics.

Because of their volatility and low overall long-run returns, when thinking about balance, commodities (excluding precious metals) are typically positioned as a relatively small part of the portfolio (e.g., around 5 percent of assets). Because commodities as a whole do well in a particular type of backdrop, they have some level of value in a portfolio.

Timber, minerals, or farmland investments have some element of falling into the commodity bucket, but are also fundamentally real estate investments. The natural resources involved are effectively a dividend or the source of the stream of cash flows that give the assets value.

Teak is also not an exhaustible resource like various forms of mining or upstream processes involving extraction of a finite level of reserves or material; of course, this is true so long as the supply is continually replenished.

Final Thoughts

Teak wood investing is not a pure commodity investment, but rather an investment into land and real estate and something ecologically friendly.

When you invest in precious metals, for example, you have a source of diversification, but they are simply alternative cash forms. They don’t provide much as an investment accordingly. Teak wood investing would be analogically comparable to owning a gold or silver mine. You do not just hold the commodity (or trade the commodity, whatever the approach), you physically own the land that produces or extracts it.

No investment is without risk, which is why diversifying well is the best thing that you need to do in order to invest well.

Everybody’s favorite asset class is probably going to dip 50 percent or more during their lifetimes, whether that’s equities, bonds, gold, oil, whatever it might be. But we do know that different asset classes will perform differently. Stocks will act differently from bonds, and bonds will act differently from various forms of commodities and currencies.

It is very difficult to predict what the best trades and the best investments are going to be. All that is unknown, and broadly can’t be known, is going to be greater than that which is known relative to what’s already baked into an asset’s price.

But you also don’t need to time markets or pick assets well in order to have success in the markets. Diversifying will improve your expected return relative to your risk by more than anything else you can do.

Like in sports betting, making money is not easy because the line (odds) already reflect what the market thinks. Making money involves betting against the consensus, which is reflected in the price, and being right. Converting unique insights into profitable outcomes is difficult to do consistently because the payoffs already reflect what is known. You are dealing with probabilities, expected value, and a lot of unknowns.

Similarly, when trading stocks, betting on the best companies is not necessarily any more likely to pay off than betting on the worst companies because what is known about their quality is already reflected in their prices.

From this perspective, almost everything is about an equally good or bad bet. Different assets compete with each other. And while different asset classes return more relative to another (which is why most investors prefer stocks relative to fixed income and cash), these are also similarly arbitraged by investors through the use of leverage to give them similar return and risk characteristics. Stocks are already inherently leveraged instruments as companies have debt.

Moreover, a lot of smart and capable people are out there trying to pick what the best investments are going to be, which changes their prices to reflect these expectations.

The overall message is that new investment or trading opportunities that are likely to provide a future stream of cash flows (and are fundamentally different from other assets) is something worth checking out.

This is where timber and teak wood investing come into the range of possibilities for those intent on pursuing alternative opportunities. Teak wood investing, in particular, can bring you not only financial benefit, but also foreign residency in a different country and potential eventual citizenship.