Royalty Investing: This is the Age of Absolutism

Dec 28, 2014

In the markets just as in life, to everything, there is a season.

Stocks rallied for years in the 1990s, only to fall by nearly half for three years straight in 2000, 2001 and 2002. The market climbed during the 2000s only to drop 38% in 2008.

Gold soared in the 1970s, but declined 32% in 1981. Last year, it lost a quarter of its value.

Thus is the quandary with most investments: paper gains one year become paper losses the next. With stocks, bonds or even “hedges” like gold, you don’t just have to estimate the potential gain, but the potential loss as well.

But broadly speaking, we're not stock investors or bond investors or commodity investors. Whether we admit it or not, each of us is an absolute-return investor with one goal: making money over time.

Typical relative return investments against benchmark:
relative return

A relative return on investment tends to move in the same direction as its benchmark. The are "correlated."

Typical absolute return investment against benchmark:

absolute return

An absolute return investment seeks consistent positive returns. It is "uncorrelated" to traditional benchmarks.

Absolute return refers to an investment philosophy that employs different strategies in order to produce a consistent, positive return independent of fluctuations in the capital markets.

And as we age, the importance of an absolute return gets even more pointed because our risk tolerance shrinks.

The potential for steady income that is uncorrelated with market fluctuations is one of the primary value propositions of royalty investments in general and of music royalties in particular. While revenue will vary based on usage, the regular income from music royalties can never be below zero. This is textbook absolute return. With music royalties, you’ll never have a losing year.

And while there are myriad of risks, including the possibility a music royalty’s revenue fails to beat other income-oriented investments, leading to an opportunity cost of capital, they are, by definition, streams of cash flow tied to intellectual property. That property can go out of favor, but it can never go out of business.

Companies do go out of business, however, including many once-well known and widely owned blue chips like Chrysler, Polaroid, WorldCom, Lehman, and Enron, making their stocks worthless in the process.

It’s in those eerily regular moments, when once-dominant companies evaporate, and their bonds go belly-up that the attraction of regular income is most clear.

So just as growth stock investing dominated the 1990s and commodities and emerging markets ruled the 2000s, strategies with consistent, absolute returns will capture investor attention today.

It’s the age of absolutism, indeed.

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