Build solid profits from timber

With lumber prices having risen steadily for 200 years, and an average yearly return of 6.5% over the last century, investing in timber is a 'no brainer' says James McKeigue. Here, he looks at one of the most promising stocks in the sector.

Is timber a good investment? Actually, it's a no-brainer says GMO's Jeremy Grantham. "In the sunshine, it grows. If you get stuck with it, it has a negative inventory cost. The rats may come and eat your corn, but trees continue to grow. Five years later, when the economy continues to grow, you've got a bigger tree."

Pine trees are a great illustration of why Grantham loves wood. For the first 15 years of their lives they are good for cheap pulp. But after 20 to 27 years they can be used for telephone poles or plywood and fetch a much higher price. That means that once a tree is planted it grows in value with very little extra work. If the lumber price is low, growers can leave the tree in the ground until the market picks up. And with less and less forest around, prices always recover. Lumber has risen steadily for 200 years, returning an average of 6.5% a year over the last century.

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James McKeigue

James graduated from Keele University with a BA (Hons) in English literature and history, and has a certificate in journalism from the NCTJ. James has worked as a freelance journalist in various Latin American countries.He also had a spell at ITV, as welll as wring for Television Business International and covering the European equity markets for the Forbes.com London bureau. James has travelled extensively in emerging markets, reporting for international energy magazines such as Oil and Gas Investor, and institutional publications such as the Commonwealth Business Environment Report. He is currently the managing editor of LatAm INVESTOR, the UK's only Latin American finance magazine.