Are the Flames Random or Predictable

Investors are almost always prepared to pay a premium, which results in a reduced return, in order to benefit from superior predictability. The premium is in accepting a lesser return for the more predictable investment result. Government obligations typically sell at lesser yield levels than corporate obligations, due to the assumed for lower risk of the government defaulting.

If the assumed odds believed by the investor for incurring any capital loss is 1 in 10 or 10%, the fee charged by the investor for the exposure of capital to risk will be higher than if the assumed risk was 1 in 100 or 1% risk of capital loss.

Therefore, it is logical to expect that an established company generating revenues is more likely to continue having revenues than the same company being or remaining profitable.

Buying stock in a company effectively results in a sharing of profits and losses and share prices are influenced by the view of other investors as to a likely continuation or change, for better or worse.

Buying a percentage of revenues for an agreed period and on agreed terms requires less investor guesswork as revenues are only dependent on the company’s ability to create and deliver a product which customers will find an attractive value. Other than impacting sustainability, the profitability of the company and the potential future market value of the company are not considerations for royalty investors.

In the case of non-dividend paying stock the only potential profit comes from a sale of the stock at a price greater than cost, at some point in the future. The investor’s return will be based on the company’s then reported profitability, the period’s level of investor enthusiasm and how long it takes for the possibility of selling the stock.

Royalties are very different as the royalty investor receives the agreed royalty payment every 90 days irrespective of the company’s profitability or market valuation. Each royalty payment reduces the investor’s possibility of capital loss. The royalties we recommend are structured to provide investors with a minimum of a 15% Internal Rate of Return (IRR) over the course of the royalty payment period.

Also, it is highly possible the royalty issuing company will redeem royalties prior to their maturity on previously agreed terms providing investors with a very satisfactory IRR.

Therefore, the reason why royalties are the better way of investing in well selected, privately owned companies is that an excellent return can be reasonably anticipated, with reducing to eliminating capital risk and the possibility of highly investor profitable early royalty redemption.


For more information contact:

Arthur Lipper, Chairman
British Far East Holdings Ltd.
858 793 7199  (Pacific time)