Tuesday, October 27, 2009

Compare stock market to direct tropical tree investments

I suspect many of you didn't know that you can invest in tropical trees on the stock market. The issue for me, however, is whether that is the best approach for smaller investors or for people who are not watching the market diligently on a daily basis. If you have purchased tropical trees through a broker please don't take this article the wrong way, as I applaud you for making a green decision. However, I want my comments to provide people with some food for thought, especially given the 2 spectacular stock market meltdowns we have witnessed in the past decade alone. I suspect many of us make investment assumptions that are not really based in fact or reality, so maybe these 3 comparisons will be of assistance. Whichever way you choose to go, you should have the opportunity to compare your options before making an investment decision. A good article on the subject can be found here.

Practical Considerations

If you are going to invest in the stock market you need a brokerage account. This automatically puts a middle  man between you and the companies in which you may wish to invest. That middle man or broker is going to take a commission for every transaction he or she handles. In addition, many brokerages don't even want to talk to you or open an account if you have less than $50,000 to $100,000 to invest. If you look for cheap solutions like on-line brokerages, then you lose the service factor. A frequent issue is conflicted advice. Many brokers will recommend stocks that are questionable simply because the brokerage has a special deal with the company in question. In those cases the brokerage hopes to move the stock price in the short term by piling people into that stock without any consideration for the long term capacity of that company to produce results. None of these considerations affect people who invest directly and privately in tropical trees with a plantation or forestry company.

Due Diligence

Other people assume that because the SEC or securities commission has licensed a business for public trading due diligence is no longer a factor. They are dead wrong. First off, it is not the SEC's responsibility to evaluate the business model a company has, nor can they mind read to ascertain whether someone is lying or not. The result in the past decade has been less than comforting. Recently we had the fund fiasco with Bernie Madoff, the spectacular frauds of Enron, Worldcom, Bre-X and barrels of others, and the incompetence of banks (Lehman Brothers et al.) and insurance companies (AIG et al.) around the world investing in assets that were value-less and unsupportable. Regulation is not a guarantee of anything, and government has shown itself to be an extremely poor arbiter of market place malfunctions, though government seems to have no problem using taxpayers money after the fact to try and bail out CEO's who deserve no leniency. In contrast, a direct investment in tropical trees with a plantation or forestry company makes for easy due diligence. You can ask and answer these questions yourself: Do they own or control the land on which my trees will be planted? Are they actively planting tropical trees at present? Can I visit and see where the trees I want to purchase are being planted or have been planted? Answers to these questions are usually right there on their web site or just a phone call or visit away.

What Am I Buying?
Dagan Dombro in a newly planted Eucalyptus pellita plantation
If you invest in the stock market you are buying shares in the company that is promoting the green  investment. That can be a problem if they are not actually the plantation that is growing the trees. Shares can be problematic when companies keep on selling shares to raise money, which means that the stock you hold is being continuously diluted, with your percentage of ownership declining as time passes. Despite these problems publicly traded timber stocks have managed to average a growth of about 13% non-compounded a year for investors, which is pretty good. However, consider that if you invest directly with a plantation by owning some tropical trees, you are secured against the primary asset of the business. You are not sharing in any dilutions of the stock, or other risks. If you buy 100 tropical trees on day one, you own 100 mature tropical trees on the maturity date in 10 years time. It becomes a matter of low risk but high return. For example, Amazonia Reforestation investors earn a return of between 30% to 40% per year non-compounded over the 10 year growth cycle of their tropical trees, depending on the amount they invest. $4,000 invested becomes $17,000 in just 10 years time, way better than anything the stock market can offer, and in my opinion with a lot less risk.