The Contrarian Case for Music Royalties

Feb 06, 2016
Jonathan Hoenig, Capitalistpig Hedge Fund

"There is still a small minority of people out there that believes the world is coming to an end and that gold is the only place to be," a financial adviser sarcastically joked to the Associated Press in November 2000.

Gold prices went on to rise 522% over the following ten years.

Being a contrarian is lonely. You're ignored or immediately dismissed. People don't think you're cool, they think you're crazy.

Perhaps that fear could explain why music royalties, and intellectual property in general, have not yet become a staple for investors.  Today, allocating even a portion of a portfolio into music royalties seems ludicrous, just as buying gold did back in 2000. In the subsequent decade, gold went from being contrarian to mainstream.

Given their attractive returns, why wouldn't music royalty investing boom as well?

One of the main deterrents to royalty investing has been SEC regulation that limits music royalties only to so-called accredited investors, fueling the perception that music and other IP investing is inherently risky. Interestingly, regulators expressed similar attitudes towards Apple Computer when it went public in 1980; the state of Massachusetts actually banned shares as being too risky for residents to buy. We know how that turned out.

The point is, that consensus views, conventional wisdom and so-called safe bets are often wrong: think Microsoft in 2000 or real estate in 2007. Real Estate Investment Trusts (REITS) were rather esoteric when they first rose to popularity in the 1990s.  So too is intellectual property such as music royalties, which are just now starting to rouse investor interest as a high-income-alternative diversification.

Word is getting around, and private equity firms, like Round Hill Music, are dedicated to investments in revenue-generating music. Additionally other organizations like Royalty Exchange sell individual music (and other types of) royalties to investors at auction.

Being a contrarian is hard. It's uncomfortable to invest in something none of your friends have ever heard of.  It's unnerving to take a risk on an unproven bet. However, the contrarian takes risk prudently.

Over time, as an investment confirms your outlook, positions like music royalties once considered "reckless," are ultimately thought of as quite rational and sane. By then, the contrarian has already moved on to the next trade.

Disclosure: Jonathan Hoenig is the author of Royalty Review. The opinions expressed here belong to Jonathan Hoenig. Mr. Hoenig runs the Capitalistpig Hedge fund, is a regular contributor to Fox News, and is a private music royalty investor. He is also an investor in and paid advisor of Royalty Exchange, Inc., the parent company of Royalty Insider. The Royalty Review column is presented for information purposes only and should not be construed as a recommendation, solicitation or advice. Follow @TheRoyaltyMkt to receive on-going music royalty news and analysis written by Jonathan Hoenig.
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