Forestry Investment Update
The Newsletter of Greenwood Management  - for Sustainable Investments       August 2009

We are pleased to send you our recent newsletter to keep you up-to-date with developments in investment markets with a particular emphasis on forestry news.

Here at Greenwood Management, it has been a year of unprecedented interest in our projects. The market turmoil has clearly driven many investors toward safe havens in their investment strategy. We will continue to search for suitable plantation sites to further develop our forestry projects. In these turbulent times, timber investment is generating an increasing momentum, and we are uniquely positioned to take full advantage for our clients.
History repeating itself?
With the stock market rally from the lows of spring well under way, it is perhaps a fitting time to ask if this movement bears the hallmarks of a classic bear market rally, to work out what might happen next.
A bear market rally will typically last up to three months. The price gains then break down again. That is because those who bought into the rally gradually realise that underlying economic conditions don't warrant such optimism.
Sharp rallies in the middle of bear markets are standard procedure. Bear markets always see shares get oversold, becoming ripe for a rebound. The 1930s bear market is a perfect example. The charts for that period for the Dow Jones Index, from October 1929 to the bottom of the bear market in 1932, show six strong rallies. The largest of these, a gain of almost 50%, came in the immediate aftermath of the 1929 crash and it lasted until the spring of 1930. It's a sobering thought that while the Dow recovered close to the 300 mark (at which it had been trading for much of 1929), it subsequently dropped to around 50 points two years later. Only then did it begin its long recovery. After the sixth and final rally of 20% the market dropped a further 54%. Anyone buying into the first or final rally would be likely to have seen their investment capital virtually wiped out.
Similarly, after the crash in the NASDAQ in 2000, there was a 35% recovery in prices. The recovery was short-lived and prices subsequently more than halved from the peak of that upswing.
A particular characteristic of bear markets is that they end in extreme undervaluation, just as bull markets are characterised by the opposite. But the latest market rally began from a point at which, by common agreement, most of the normal indicators of long term market valuation suggested that it was only fairly valued. The question investors ought to ask is whether or not the markets began the rally from a point at which it was fundamentally undervalued in terms of earnings. Additionally, the question is whether or not the economic and business conditions underlying the markets are turning positive. Bear market rallies that lack these conditions are not usually sustained, and are often accompanied by over optimistic suggestions that there is 'weight of money' sitting on the sidelines waiting to return to equities
So what could create a further downward shift in today's markets?  Well, there is certainly no shortage of potential geopolitical risks. A pandemic swine flu breakout has been cited by Ernst and Young as a possible threat to global economic stability, with mass absenteeism in the workplace. The situations in Iran and North Korea continue to be a threat, with potentially disastrous global economic repercussions. These are amongst the many causes of market nervousness. That's leaving aside any further possible financial sector chaos. Investors may be keen to re-enter the equity markets but remain extremely nervous about further market fluctuations.
So, looked at objectively, there really isn't much reason for market optimism right now. According to the IMF's April World Economic Outlook, the global economy is projected to shrink by 1.3 percent in 2009, having been in the most severe recession since World War II. The IMF's projections are based on an assessment that financial market stabilisation will take longer than previously envisaged. Matthew Merritt, head of strategy for Insight Investment, which oversees the management of the Halifax Growth Fund, also says there are powerful negative factors to consider. He warns, "The healing process will be measured in years. The current market rally has come a long way, so it's vulnerable to sharp pull-backs and could well have further to drop before we see the levels of undervaluation typical of the terminal stages of past bear markets."
The start of a new bull market is very likely to be accompanied by improving corporate profits. However, what we are witnessing at present across most sectors is the exact reverse. During a downturn, any signs of recovery can trigger a big rally, most are false dawns and end up fizzling out. The facts get in the way of the story.

The good news is that in each of the three past bear markets, the price of timber actually rose. In forestry management, the option of "storing at the stump" or "withholding the forest" simply means the trees will continue to grow and add value. This option to pick and choose the right time to offload to the end user is almost uniquely advantageous, helping to make timber the only reliable negatively correlated asset class.
Forestry Matters
There are about 2,050 million hectares of tropical and subtropical forests. They represent an enormously valuable resource in terms of the diverse economic products and environmental services they provide. Since 1990, over 12 million hectares of natural subtropical and tropical forests have been changed to other land uses. From 1990 to 2005 an area roughly equivalent to France, Spain, Norway and Sweden was deforested.
Deforestation is simply the conversion of forest to another land use. Commercial farmers, loggers, cattle ranchers, slash and burn farmers are largely blamed as the main agents for the deforestation. Exploitative logging, with selective removal of tree species results in overall forest degradation. Unsuitable government policy, global market forces and the undervaluation of forests are also indirect causes of deforestation. Forests that are seen to have low value are cleared and replaced by more profitable land uses such as cattle ranching. For the last 30 years there has been intensive clearing of the moist tropical forests of South America. The environmental and economic consequences of deforestation are profound, making it one of the most crucial issues we face. The deterioration of natural resources erodes the foundation upon which long term prosperity is dependent. Increasing soil erosion results in a permanent loss in agricultural productivity.
Brazil is the country with the largest area of tropical forests and suffers from the greatest deforestation. Until the late 1970's deforestation was considered a minor problem but the following 20 years changed all this. Fifty million hectares of forest were cleared, almost 15 percent of the Brazilian Amazon.
On a positive note, the economic potential of the forests' carbon storage capacity could be huge under the joint implementation agreements that are coming out of the climate change conventions. Silvicultural practices like clear cutting, if followed by reforestation, are not deforestation. Tree plantations do not cause deforestation because there has been no permanent change in land use. Plantations form a part of a country's forest estate. They are different from natural forests in the benefits they bring. They differ in their composition and complexity but they are still forests and can be seen as a first step in a long term strategy to restore degraded land. Although stopping deforestation in the near future will be impossible, there are many opportunities to mitigate its negative impact and bring it under control.
For forests to continue to perform their vital functions and to realise their enormous potential, they must be managed. There are many practices that can be used which improve forestry management and reduce the degradation of forests. Plantations for fast growing trees can satisfy much of the demand for forestry products, reducing the need to exploit the natural forest. The successes of countries like Brazil show how plantations can be managed in an environmentally sustainable manner and profitably grow raw materials. If they are established on degraded land, plantations can significantly improve land use productivity.
Greenwood Management is part of a sustainable development programme involving the protection and management of forestry.
Five common errors in investing
We all have our own ideas about how to invest. Some people like high risk, high reward. Some look to growth opportunities. Some prefer charting theory or fundamental analysis in stock picking. Others use a mix of investment styles to create a portfolio. What is much less common is discussion on how not to invest!
1. Failing to set investment objectives. 
Every investor ought to know the precise reason why they are investing. Are they looking to build wealth over time? Are they investing to produce income over future years or just simply build capital? Understanding the criteria for investment allows investors to make clear choices for their portfolio.
2. Investing without proper understanding. 
It is essential for investors to understand completely what they are investing in and how it may react in changing economic conditions. How does each investment fit into their overall portfolio? How do the risks and returns of each investment compare with each other? Understanding these factors will help an investor to achieve a balanced portfolio.
3. Portfolio diversification. 
Clearly investors need to diversify portfolios, avoiding disproportionate risk in any one sector, asset class or company. However portfolios shouldn't be diversified to a level that each position has no affect on the portfolio as a whole.
4. Taking a profit too soon or running a loss too late. 
One of the hardest decisions for any investor to get right is when to sell. Investing can often be a long term process and many of the most successful investors will run their winners for longer, but it can be even harder to sell something that is showing a loss. This loss shows the investor has made a mistake and taking the loss crystallises the thought, which is often difficult to accept.
5. Time is money. 
Investors can easily forget the impact of compounding over time. The actual income from an investment can earn further income if those proceeds are reinvested. The compounding effect becomes greater the longer that the investment income is allowed to build.
Forestry project updates
Our income/capital growth project in Acacia Mangium went live on July 19, 2009. Interest in the Acacia launch has certainly exceeded all our expectations, so much so that we are currently backlogged with enquiries but expect to get up to speed by the end of August. Complementary to many of our clients' existing forestry portfolios, this income/capital growth project shows revenue streams coming in at years 3, 5 and 8, with the final harvest taking place in year 10.

Thank you for your interest in forestry, for further news updates please go to
Joe Randall
Greenwood Management

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