Posted on 12/20/2016 on forisk.com
During a recent “Investing in Timberland and Timber REITs” workshop, a student asked about the “problem” of liquidity for timberland investors. We have posted on this theme before, and the issue clearly differs for those buying shares in publicly traded timberland-owning firms versus buying timberland acres in southern Mississippi, just as buying shares of Ford Motor Company differs from buying a Ford auto dealership. Still, the topic of liquidity – the ability to convert assets into cash – may generate more heat than substance.
What worries investors? One way to think about liquidity is to consider the situations where, as an investor, it might matter. If you have an asset that you want to sell, how long would it take and would you net a satisfactory price (or return)? These two questions get to the heart of the matter: speed and price. The inability to move an asset quickly may “cost” you something, and the need to accept a “below market” price because you are in a hurry also “costs” you something. In an emergency, a lack of liquidity affects your ability to extract value, and in the case of a market squeeze or crash, where sufficient buyers and sellers do not exist, you may not be able to move your asset at all.