Why the #1 Investment of the Last 45 Years is Still a Buy

It’s the stuff of legends...

With a straight face, legendary investor Jeremy Grantham told a room full of investment conference attendees that stocks will lose money for the next 10 years.

Now, for a guy who manages $90 billion dollars today (with $79 billion of it in stocks), it doesn’t seem like a smart move to tell your investors they’ll likely lose money for a decade. They might take their money away from him.

After all, who wants to invest with a guy who says you’ll lose money in stocks at an annualized rate of 2% a year? Smart people, that’s who...

Grantham’s timing was perfect... He said this to an audience in Atlanta in April 2000, just after the peak of the stock market bubble. At the time, the S&P 500 stock index was near its high of above 1,500. Today, five-and-a-half years later, the S&P 500 is below 1,300. His forecast was fantastic.

On March 1, 2000, Grantham published his 10-year predictions for all asset classes. He predicted U.S. stocks would do the worst and real estate would do the best over the coming ten years. Real estate is “really, seriously, absolute cheap” he told the crowd. “Real estate is a good solid asset with a good solid return. Yet REITs trade at a 25% discount.”

Grantham forecasted a total return of an astounding 10.5% a year for the next ten years in real estate stocks, his most optimistic forecast of any asset class. He was dead on. The returns in real estate stocks have been outstanding since 2000. Just like his pessimistic stock forecast at the time, his optimistic real estate forecast was fantastic.

Grantham avoided stocks, invested heavily in real estate, and made his investors a fortune.

Today, Jeremy Grantham likes timber. And so do I.

Real estate stocks, now up 100% since 2000, are no longer attractive... they're too expensive. Stocks aren't exciting to Grantham either (they’re not cheap enough yet). And Grantham doesn't even like bonds. He predicts annualized returns over the next seven years to be between -2% and +2% for these three assets.

Timber, by far, is his top pick.

Don’t think you can’t make big money in timberland. The two biggest timberland plays in America — Rayonier (RYN) and Plum Creek (PCL) — are up 212% and 82% respectively in the past five years. The S&P 500 has lost money over the same period.

How can you make money in timber? In some ways it seems easier to make solid profits in timber than in buying a big stock...

While it’s extremely difficult for a large company to grow its earnings by 6%-8% a year, trees grow 6%-8% a year without even thinking about it.

And while it’s extremely difficult for a company to increase the prices of its goods by 6% every year, the price of wood, according to Grantham, has increased by that amount for the last hundred years (specifically he says “stumpage” prices — the value of all the wood on the stump — have beaten inflation by 3% a year over the last century).

So... the trees grow 6% a year, the price of the wood goes up 6% a year... and we haven’t even talked about the underlying appreciation of the real estate... or the benefits of professional timberland management, where the benefits of genetic engineering are really starting to show now.

When you really understand this, you can understand how timberland has actually beaten the stock market since 1960 (as far back as data goes). Stocks did extremely well in that time... up nearly 12% a year. But the total return on timberland was even better, at nearly 14% (according to James W. Sewall Company).

Another nice thing is timber is completely uncorrelated to the stock market. It makes sense... the trees have never heard of the Nasdaq bubble... and they don’t know what a War on Terror is.

While timber has performed fantastically in the last century, the last five years for timberland in general haven't been fantastic. Timberland has delivered a total return of 4.5% a year over the last five years, according to the National Council of Real Estate Investment Fiduciaries (NCREIF.com).

Although most people have never considered investing in timberland for the long-term, you should really consider it. It’s simple to understand... it’s a great way to diversify your money... and a large timber REIT like Plum Creek Timber (PCL) is an outstanding way to do it right now.

Jeremy Grantham hit it out of the park in 2000, saying sell stocks and buy real estate. Now, in late 2005, he's saying timber will be the best performing asset for the next seven years.

You should listen.

Good investing,

Steve