The #1 Investment of the Iron Chancellor
by Tom Dyson
July 18, 2006
Otto von Bismarck was one of the most prominent statesmen of the 1800s. Before Bismarck, Germany was a collection of independent kingdoms. When he died, it was a unified empire and the most powerful nation in Europe.
They called him the “Iron Chancellor.”
We’re interested in Bismarck for another reason: He was an outstanding investor. According to a story by Barton Biggs in his book Hedgehogging, Bismarck’s investments delivered about 10% a year for 25 years, in a time of zero inflation. It was enough to make him a very rich man by the time he died in 1898.
When you’re the most powerful man in Europe – in the 19th century - it’s not hard to make money in the stock market. You control the military and the politicians and there are no laws against insider trading. That’s how Bismarck made his money. Insider trading. No skill required there.
The hard part was holding onto your fortune through all the political and economic turmoil. This is where Bismarck excelled and the reason we mention him today.
Bismarck always plowed his profits into timberland.
“Bismarck’s appetite for timberland was insatiable,” writes Biggs.
“His theory was that the price of land would gradually appreciate in line with population growth, or about two percentage points annually. His studies had convinced him that… his real return from timberland would be around 4.75% per annum, because inflation at the time was virtually zero… He thought that with very little risk, this was a spectacular compounding of wealth.”
Bismarck’s insight was spot-on. The 50 years in Germany following his death featured hyperinflation, depression, war and defeat. Timberland held its value better than any other investment.
We believe the investment proposition of timber today is just as powerful as it was in Bismarck’s day.
Here’s why:
1) Excellent returns
We calculate that, between 1972-2006, an investor in timber saw average annual returns of over 14.5%. In other words, if you had invested $10,000 in timber in 1972, you'd be sitting on close to a million dollars today.
Here’s a rough breakdown of timberland’s average annual return over the last century:
1% Land values increase
6% Biologic growth of the trees
3% Increase in market price of lumber
3% Rise in inflation
2) Beats every other asset
Most people don't know that timber beat all major asset classes over the last 30 years.
Consider the chart below from the Campbell Group... it shows a comparison of the annualized returns for timber versus several other investments. As you can see, timber has performed better than stocks, bonds and commodities. The total compounded gain for timber during the period 1987-2002 was about 15%.
3) Less volatility than stocks
Not only does timber beat other assets, it does it with lower volatility. We find timber has had three down years in the last 45 years. That makes it much less risky than stocks, which have had 12 down years over the same period.
4) Timber goes up when stocks go down
Timber does best when stocks do badly, so it’s a great asset to own when stocks are in a secular bear market, like today:
The last great bear market in stocks began in the late 1960s and lasted until about 1980. An investor in stocks during that time literally lost money due to inflation.
However, an investor in timber never had a losing year. And more often than not, the returns were in the double-digits… with a 55% return in 1973 and a 47% return in 1977.
In layman's terms, the trees don't care about the War on Terror, or the Nasdaq Bubble. They just mind their own business, growing exponentially in value every year!
After a ton of research, my co-editor Steve Sjuggerud, has discovered the cheapest and easiest way to buy timberland assets at a huge discounts is to buy stock in paper businesses that happen to own millions of acres of valuable timberland.
On such investment - timber REIT Rayonier – brought True Wealth readers a safe, 60% gain in just over two years.
Bismarck would be proud.
Good investing,
Tom
Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.
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