In Economically Stressed Times —
How much volatility is enough?
Sophisticated investors may prefer to invest a segment of their investment portfolios in high- yielding revenue royalties, rather than subject themselves to the stock market’s volatility and the challenges of stock picking.
The professional measurement of profit depends on both the amount of time required for a disposition of the acquired asset and the risk of loss accepted by the investor.
The investor’s conundrum is choosing the known risks and benefits of securities speculation, compared to the higher yield and more predictable outcome of revenue growth investing.
For there to be a profitable equity investment, two things must happen. The company’s stock must have shown an increase in per-share earnings, making the company theoretically more valuable, and the market valuation must have remained at least positive compared to its valuation the time of acquisition. It can be frustrating for investors if their publicly traded companies do well, and yet market measures are down.
However, for investors to profit from the buying of a revenue royalty, which is driven by a percentage of a company’s revenues, the investment proposition is much more simple: sustainable increases in revenues need to be generated. It is also necessary for there to be an effective means in place for collecting the agreed royalty and assuring that the royalty issuing company honors its contractual obligations. The mechanism for the royalties we recommend addresses the issues of collecting and paying the agreed amounts covered by the agreement.
In other words, revenues must continue for a necessary period, and cumulative revenues should reach a desired minimum level. However, neither the company’s profitability nor its market valuation is of direct concern to the royalty investor, because it is company sustainability which is necessary for the investor to benefit.
Most investors will more easily reach a decision as to company revenue growth than reported profitability. Revenue growth depends on the relative value of the company’s products or service offerings to their customers, not the company’s ability to maintain profit margins. Investors will also need to hold a positive view of the economic outlook for the company’s customers when they develop a forecast for the likely growth of the privately-owned company’s revenues.
We can help.