traditional risk-reward spectrum.
Producers pay high interest for these
government-backed loans, not because
they’re risky, but because there’s a high
opportunity cost – the show must go
on. As a bonus, private-movie debt is
isolated from exogenous events.
Whether the economy is rising or
falling, movies are always produced.
Money is always in demand.
Further, federal, state, and sometimes
city governments give a tax credit or
cash rebate as a percentage of the
money spent in that jurisdiction. In
Canada, we often get 25% to 30% cash
rebates upon project completion. The
movie producer obtains insurance that
guarantees project completion. Most
risk is removed. Your clients’ returns
don’t depend on the film’s success, as
they end up with a two-year government receivable from an insured,
investment grade issuer. Money managers have few places to get such safety
with great yields.
That’s an Oscar-winning investment,
but it gets even better.
Mad Hatter vs. Capt. Jack Sparrow
Private-movie debt is a non-correlated
asset with nearly every other asset class.
It’s the key to proper diversification.
However, I’m usually met with resistance
when talking about diversification.
Money managers often believe by
diversifying they’ll average a winner for
every loser, and end up with no returns.
I hear them call it di-worse-ification.
Big mistake.
One golden risk management rule is to
avoid extreme outcomes. Don’t put
your clients in an investment that can
double their money – at the risk of
losing it all. That’s Mad Hatter investing.
Instead, work toward a middle ground
by giving up some rewards in exchange
for reducing losses. Diversification
moves you to middle ground. Sound
like a pirate’s tale? Let’s see.
Captain Jack Sparrow has $100,000
worth of gold overseas, and must bring
it back by ship. Unfortunately, there’s a
50% chance any ship will get plundered,
and he’ll lose it all. As a risk-savvy
pirate, his goal is to avoid these
extreme outcomes. In financial lingo, his
loot is valued at $50,000 since there’s a
50% chance he can collect it. His goal is
to increase his chances to receive
$50,000 – and reduce the chances for
total loss.
By using one ship, however, he has no
chance of collecting $50,000! It’s either
$100,000 or nothing – extreme
outcomes, for sure. Can diversification
help?
If he splits the loot between two ships,
he has a 50% chance of collecting
$50,000. More importantly, the risk of
total loss falls from 50% to 25%. There’s
a missed opportunity cost, however, as
he also reduces his chance for collect-
ing $100,000 from 50% to 25%. But
remember to keep your eyes on the
prize – increase the probability for
collecting $50,000 and reduce the risk
of total loss. Move to middle ground.
If he launches eight ships, he has a
64% chance to collect at least $50,000,
and the risk of total failure falls to less
than one percent. Cannons and
swords wouldn’t work as well as
diversification:
The key to diversification is to use
non-correlated assets. If you build a
portfolio of highly-correlated assets,
you may be putting eggs in different
treasure chests – but you’re loading
them onto the same ship. As a money
manager, your clients are walking the
plank. Diversification is the key to
reaching their goals safely, and there’s
no better way than through private-movie debt. If you know where your
clients want to go, Productivity Media
can navigate the pirate waters to get
you there – safely.
If you don’t know, your decision
doesn’t matter anyway.
William Santor
CEO, Productivity Media Inc.
william.santor@productivitymedia.com
Diversification moves you to middle ground. Sound like a pirate’s tale? Let’s see. Captain Jack Sparrow has $100,000 worth of
gold overseas, and must bring it back by ship. Unfortunately, there’s a 50% chance any ship will get plundered, and he’ll lose it all. As
a risk-savvy pirate, his goal is to avoid these extreme outcomes. In financial lingo, his loot is valued at $50,000 since there’s a 50%
chance he can collect it. His goal is to increase his chances to receive $50,000 – and reduce the chances for total loss. By using one
ship, however, he has no chance of collecting $50,000! It’s either $100,000 or nothing – extreme outcomes, for sure.
60%
50%
40%
30%
20%
10%
0%
$100K$0
ONE SHIP
60%
50%
40%
30%
20%
10%
0%
$100K $50K $0
TWO SHIPS
60%
50%
40%
30%
20%
10%
0%
$100K $50K $0 $25K $75K
EIGHT SHIPS