The Unforced Error
Buying at Peak Price
Worth It: Timber
Not Worth It: Gold
Gold has been the trade of the (young) century until recently. Back when tech stocks were hot and George W. Bush was headed to the White House, an ounce of gold went for about $280. It passed $1,900 in 2011, then fell below $1,400. Doomsayers predict that, as central banks around the world keep printing money, gold will be the only thing that holds value. And maybe they’re right—it’s tempting to want to buy the dip. But Warren Buffett didn’t become the world’s second-richest man by investing in assets after they’d run up sixfold, and you probably won’t, either.
Instead of following the herd, consider an investment that some say is better protection against inflation, and hasn’t had such a run-up: timber. The smart money—pensions, college endowments—have been buying forestland for years. You may not be sitting on enough cash to buy yourself a forest, but you can buy shares of Plum Creek Timber (PLC). It pays a 3.3% yield, which compares nicely with gold’s 0% payout. Plum Creek has had a good run lately, but has only doubled since Y2K.
Gold is a fear trade. Timber is a growth trade. Construction dried up in the wake of the housing bubble, but home builders are finally swinging hammers again, and that’s already boosting the need for wood. Demand from Asia is also strong. Sure, there could be another downturn, and, like any investment, shares of Plum Creek could drop. But unlike gold, trees keep growing, so the intrinsic value of your investment increases till it’s time to harvest. And in the meantime, you collect 3.3% a year, compounding.
In some ways, timber is the perfect investment. There are no huge deposits of trees that might be discovered, lowering the price of existing trees. In fact, warming temperatures are allowing the forest-destroying pine beetle to decimate woodlands in British Columbia, crimping supply and putting upward pressure on prices. And, unlike a hot energy play, a timber investment won't have you worrying about the tree well drying up.
Bonus: Plum Creek is a real estate investment trust, or REIT; but unlike most REITs, its payout is treated as a capital gain rather than ordinary income, so the taxes are lower if you're in the 25% tax bracket (income exceeding $36,000) or above.