Another option that many independent inventors are choosing nowadays is to license their inventions for royalties. This is a method of choice for many inventors for lots of compelling reasons. Once a product is licensed to a manufacturer, that product will automatically have a place on the planogram of the retail stores where the manufacturer places goods. The manufacturers handle all of the responsibility for producing the product, selling it to retailers, bookkeeping, etc. The licensor (the inventor) goes to his mailbox and collects his royalty checks at regular intervals, usually quarterly. The inventor’s time is entirely his own to spend creating other moneymaking new products or in whatever way he chooses.
While receiving a royalty amount of 3-5 percent of net sales on your product may seem like settling for a very small amount, consider this: the manufacturer is taking all of the financial risk in getting the product on the market. He is spending the money to make the product, warehouse it, insure it, sell it, ship it and handle the bookkeeping. His profit margin on the product may not be as great as you imagine. In addition, if you have a guaranteed annual amount of royalty (and you should!) you will receive at least that amount whether your licensee sells that much of your product or not. Lest you jump to the conclusion that 3-5 percent of the wholesale price does not amount to much, do the math. A product that retails $8-$10 million annually returns between $120,000 and $250,000 in royalty, depending on the percentage. This is money that you didn’t lift a finger to earn once it was licensed. If you are still thinking 3-5 percent is a paltry amount of royalty, consider this; if you are unable to get the product marketed on your own, 3-5 percent of something is much to be preferred over 100 percent of nothing!
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Marketed as simple and easy to own, stocks are actually the most complex and emotionally challenging of all asset classes. Powerlessness,
unmanageability, regrets, fears, social pressures, herd behavior, and complexities galore are the norm. Stock investors are primarily an optimistic group. They believe that stocks they purchase will increase in value. They all know stories of stocks that increased in value by 100 times or more. The potential rewards appear unlimited. Of course, most stock investors are aware of the risk of loss, so they diversify and employ other cautions. Still, every stock investor believes that one or more of his stocks or mutual funds will have fantastic returns.
Businesses issuing stock encourage this belief and are all too happy to accept the investor’s cash.
Investment relationships are not identical to romantic, family, and social relationships solely among people. Though people, often with conflicting interests, are involved in investment relationships, the primary relationship is between the individual and an inanimate object: money. At first, it may seem odd that a relationship between a person and an inanimate object could be dysfunctional. In fact, our society is saturated with such dysfunctional relationships.
It is estimated that 10 percent to 15 percent of the U.S. population is alcoholic; essentially more than 30 million Americans have a life threatening dysfunctional relationship to an inanimate object: alcohol. One out of every three adult Americans are obese, based on their dysfunctional relationship to food. Sixty million American families have larger credit card debt than they can afford. Their relationship to material goods is dysfunctional.
In fact, consumerism dysfunction has reached new heights. Compulsive shopping is portrayed in the media as fun, not as an illness. Yet in the booming economy with a roaring stock market of the late 1990s, the number of personal bankruptcies had never been higher: 331,000 filed for bankruptcy in 1980; 413,000 in 1985; 783,000 in 1990; 927,000 in 1995; and more than 1,300,000 filed in 2000. In recent years, Americans as a whole have spent 1 percent more than they earn.
Let’s look at another example. Sally is carrying a $10,000 balance on her credit card. Sally’s monthly minimum payment is 2% of the balance, or $200, and the interest rate on the card is 18% annually.
If Sally makes just the minimum payment each month, it will take her 57.5 years to pay off her balance! Not only that, the $10,000 she put on the credit card will have cost her $33,930 by the time she gets it paid off.
But let’s say Sally always makes her minimum payment, plus an extra $100, or $300 a month. In this case, it will take Sally just under 7 years, instead of 57.5 years, to eliminate this credit card debt. In addition, her $10,000 that she spent on the credit card will only end up costing her $16,000. That’s a savings of over $17,000, which could have been used to eliminate other debts sooner.
Keep in mind as well that this example used a credit card that is charging 18%. With credit cards that charge higher rates (30%+) and things like payday loans, you can spend the rest of your life trying to get caught up. In either case, you’ve got to take drastic action to cut your debt now.
CDOs typically experience three distinct life stages: ramp-up, reinvestment, and amortization/maturity. Ramp-up defines the time between the premarketing phase of an issue and the first cash flow distribution. For cash transactions, the ramp-up phase usually lasts one to nine months; for synthetic transactions, shorter ramp-ups are common. During the reinvestment period, the CDO manager adjusts the collateral portfolio by buying or selling securities, subject to a set of prescribed constraints. The reinvestment period can be as short as three years (for some middle-market CLOs) and as long as seven years.
Equity investors have the right to call the transaction following the noncall period subject to a 2/3 majority vote. This option is most likely exercised when funding costs have fallen and the collateral is trading at or above par. In many cases, equity investors can roll their investment into a new issue and save on underwriting fees. We have estimated this optional redemption clause was worth approximately 61 basis points over the period September 2003 through September 2006. Alternatively, if funding costs rise, this option falls out of the money and has little value.
During the final life stage, the amoritization/maturity stage, a CDO distributes the principal payments from the collateral to the notes, amortizing the latter according to a prescribed schedule. Nearly all older vintage transactions had five-year reinvestment and three-year noncall periods; recent vintage issues typically have longer noncall and reinvestment periods. The final life stage of a CDO can be shortened via a cleanup call (exercised when the collateral’s outstanding balance drops below 10% of its original par value).
An equity investment has none of the contractual certainty or specificity of a debt investment such as a bond (Appraisal Institute, 2001). Ordinary shares in companies can be purchased through a stock market or via a broker. Investors effectively own a share of the company’s assets, that is, its equity, subject to prior claims of operating expenses and debt service, and will receive a regular income or dividend (based on company profits), usually twice a year. The ‘dividend yield’ is similar to the income or running yield on a bond and is calculated by dividing the dividend per share by the market price of the share.
Unlike bonds income from equities is not known in advance as dividends are linked to profits which, in turn, are linked to company performance and economic activity. Also, there is no redemption date so shares must be sold on a secondary market to realise capital. Prices on the secondary market are determined by supply and demand and vary according to future cash-flow expectations and perception of risk (Ball et al., 1998). Equity investments can yield a high rate of return but are more volatile and risky than debt investments such as bonds. Consequently market knowledge is needed if informed decisions are to be made and this incurs fees. Nevertheless, millions of pounds are traded in debt and equity markets daily, traders are sophisticated and well informed, investments are often professionally rated for risk and transaction prices are reported daily. Changes in yields of equities respond quickly to changes in supply and demand due to the efficiency of the equities market. Consequently data from these markets provide an objective basis for property market assumptions, particularly regarding expectations of debt capital performance (Appraisal Institute, 2001).
The majority of subprime loans are refinanced (cash out), meaning that borrowers are extracting equity from their homes. The purchase cohorts differ according to loan type. Specifically, the purchase ARM repayment risk multiplier is 1.06; conversely, the fixed multiplier is 0.97. This suggests that the hybrid ARM purchase borrower demonstrates faster turnover than the cash-out borrower, whereas the fixed rate purchase borrower exhibits a slower turnover.
Rate and term (no cash out) hybrid ARM and fixed rate borrowers exhibit lower voluntary repayment multipliers of 0.89, and 0.83, respectively. This suggests that rate and term borrowers refinance based on an
expectation of living in their homes for a longer period than either refinance cash out or purchase cohort.