Avoiding the “Dumb” Choice when Investing in Timberlands

When it comes to making choices and decisions, I think we overvalue “best,” we underappreciate “good” and “effective,” and we fail to purge “dumb.” This idea rooted in my brain years ago after reading a financial report that quoted the late investor Charlie Munger:

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

In writings and interviews, Munger (rhymes with “hunger”) emphasized the power and advantage associated with avoiding ignorant decisions and thinking systematically. While compound interest and forests and experience grow over time in beneficial ways, dumb choices and their consequences accumulate and destroy value. There are a lot of ways to do things, and Munger preached the importance of avoiding the dumb one.

Don’t do the Dumb Thing

When puzzling through a situation or plan, I often try to clarify the key choices, and then gain ground by simply crossing off the “worst” path given the objectives. The dumb choice – the one that fails to account for the facts on the ground or how things actually work – can put lives, projects, progress, and organizations at risk. Choosing a better path means learning from mistakes, adjusting as conditions change, and developing a view on what might work given the constraints.

Timberland investors need access to diverse sets of well-capitalized wood-using mills. Forest products manufacturers require sustainable, accessible, and economically viable flows of wood raw materials. Understanding reality and relative risk are more important than perfection. Good plans and well-implemented ideas make money. Projects unmoored from the fundamentals lose money.

Backtest to Learn from History

Our team at Forisk studies how investment ideas, forest industry assets, and timber markets perform today and historically. We backtest models to assess previous forecasts and apply scenarios to test assumptions and sensitivities for clients. When demand for lumber goes up, what happens to the price of timber? What does this imply for timberland investors and forest products firms across geographies?

Each edition of the Forisk Research Quarterly (FRQ) includes an appendix with rolling Forisk forecasts by year versus actual results for housing, lumber, and regional timber and log prices. This ongoing, transparent scorecard reinforces the importance of logic and continuous improvement of our applied research so that clients have viable projections to support their investment decisions.

For example, in Q1 2021, the FRQ forecast for South-wide pine sawtimber prices was $26.55 per ton for 2025. The actual South-wide price in 2025 was $25.47, or 4% lower. For Douglas-fir domestic #2 domestic sawlogs in Coastal Washington, the forecasted price in Q1 2021 for 2025 was $755.68 per MBF, while the actual price for last year was $740.47, or 2% lower. Scanned over time and compared to changes in the economy or locally through custom market forecasts, we can better identify and set aside the worst (“dumb”) options for given investments and prioritize the best opportunities.

Forecasting and timber market assessments require arbitrary choices. As such, we can leverage the available information through testing and tracking prior performance to learn and improve. The systematic testing of priors and models helps us avoid irrational ideas and decisions when investing in timberlands.

There are a lot of ways to do things. To paraphrase Charlie, don’t do them the dumb way.