| The Primary Source of Business Capital | | | | startup company in one hundred will succeed. The |
| | | | odds are strongly against their making a consistent |
| July 2004 | | | | profit. So assuming a fivefold return on their two |
| [ | | | | winners, their Risk/Reward ratio is 99% loss over |
| [ | | | | time against a 1.43 potential reward. The Risk |
| It's OPM. Banks don't have any money. They lend | | | | Reward ration is 99/1.43. My proof of this is that any |
| OPM. Brokerage Firms rarely risk their money; they | | | | comparative review of American Venture Capital |
| rely on OPM to trade the Market. Venture Capitalists, | | | | Directories shows that there is a steady attrition of |
| Hedge Fund Managers, Pension Funds and Insurance | | | | these firms over time. Venture Capitalists regularly |
| Companies are constantly searching for more OPM. | | | | lose money because the Risk/Reward ratio is |
| Governments rely upon OPM to run the country. So | | | | strongly against them. They are failing to do the |
| what's OPM? It's Other People's Money. | | | | simplest arithmetic which should be the cornerstone |
| Understanding OPM is the Key to Raising Risk Capital | | | | of their investing philosophy. I can assure you that it |
| The suppliers of OPM expect to be rewarded for | | | | is the cornerstone of Beowulf Investments. |
| their money. That reward is a combination of | | | | Hedge Funds use OPM to speculate in derivatives, |
| acceptable risk and profit. Often these investors | | | | which are high-risk financial instruments. The recent |
| don't fully understand the Risk/Reward Ratio of their | | | | failure of a growing number of Hedge Funds |
| investment. To have any chance of succeeding over | | | | underscores the high-risk nature of their speculations. |
| time, they should reduce investment proposals to a | | | | Insurance companies use actuaries to ensure a |
| simple Risk/Reward ratio to determine their | | | | mathematical bias in the favor of the company. |
| willingness to risk their money. | | | | Pension funds often take too many risks or are badly |
| American Banks borrow money from their depositors | | | | structured. The U.S. Social Security Program is a |
| and leverage it with tax dollars. The Depositors | | | | textbook example of a mathematically impossible |
| believe there is very little risk in loaning money to an | | | | retirement plan. |
| American Bank and since 1934, no American bank | | | | Beowulf Investments Approach to OPM |
| depositor has lost their money in a bank failure, | | | | Our working rule that is the company(s) in which we |
| thanks to the American taxpayer. | | | | invest must be publicly traded in the United States. |
| Losing At the Bank | | | | The reason is that this gives Beowulf Investments |
| However, what bank depositors fail to realize is their | | | | access to OPM. We can sell our shares to the public. |
| 3% interest rate reward is inadequate to allow them | | | | We are significantly different than other private |
| to breakeven over time. They are taxed on their | | | | placement merchant banks. We will only sell sufficient |
| interest income at about 40%, thus their after tax | | | | shares to recover our risk capital. We are willing to |
| income is about 1.8%. The current inflation rate is | | | | defer profits for years, since we can't lose our |
| about 6%. Bank savings depositors are steadily losing | | | | money and see the sale of the public company in a |
| money every year. To break even against inflation | | | | M&A as the best way to maximize our profits. Our |
| on a taxable investment requires a 10% interest rate. | | | | risk is zero. Our reward is about sixty-fold our initial |
| Thus, their Risk/Reward ratio is certain loss over time | | | | investment. It's a winning bet. The Risk Reward Ratio |
| against a 0.03 annual reward. That's a Risk/Reward | | | | is 0/66. |
| ratio of 100/0.03 over time. You would probably do | | | | The VCP Program goes further. It advises the |
| far better in Las Vegas or Atlantic City! | | | | investors supplying the OPM to follow our example. |
| Losing in the Stock Markets | | | | Sell some of their shares to recover their risk capital |
| Brokerage Firm clients supply the money (OPM) to | | | | and keep the balance until the public company is sold, |
| play the Stock Market. The public company failure | | | | which will maximize their profit. The GVIC (Global |
| rate on the volatile end (Over-the-Counter and | | | | Village Investment Club) & ISI (International Stock |
| Over-the-Counter Bulletin Board) of the U.S. Public | | | | Investors Newsletter) investment risk is zero after |
| Market is over 98%. To breakeven, the client needs | | | | sixty days. Their potential profit at the time of the |
| to sell their stock at a share price 98 times their | | | | M&A acquisition is about twenty-two fold. The Risk |
| investment. And that figure doesn't factor in taxes | | | | Reward Ratio is 0/22. As for the last buyers of a |
| and inflation. It's rare that shareholders sell when the | | | | VCP stock, our discount benefits program should |
| share price doubles. Thus, their Risk/Reward ratio is | | | | save them the cost of their 100-share investment |
| 98% odds of loss over time against a twofold | | | | every year. After the first year, their Risk Reward |
| potential reward. The Risk/Reward ration is about 98 | | | | Ratio should be 0/2. |
| 2. | | | | To my way of thinking, the ONLY wise gamble is a |
| At the conservative end of the U.S. stock market | | | | Risk/Reward ratio where the reward is greater than |
| (the New York Stock Exchange), most share prices | | | | the risk, the greater the better. Too many |
| have traded within a narrow range of about 20%, | | | | entrepreneurs and business owners think that the |
| for the past couple of years. Thus, the OPM | | | | folks with OPM should accept a negative Risk |
| investor's Risk/Reward ratio is even over the past | | | | Reward ratio. In fact, too many people with money |
| few years against a 0.02 reward. The shareholders | | | | failed to take statistics and probability courses in |
| reward isn't justified by the fact that the inflation | | | | college. |
| rate is 6% and capital gains taxes of 23%. The Risk | | | | Consistent Winners |
| Reward ratio is about 1/0.005 | | | | The OPM winners are the people who always want |
| Why Most Venture Capitalists Fail | | | | the number on the right of the Risk/Reward ratio to |
| Venture Capitalists speculate with OPM. They | | | | be far larger than the number on the left of the Risk |
| wrongly believe that out of seven very high-risk | | | | Reward ratio. If you are going to design an |
| investments, they will make money if two | | | | investment to attract OPM, you should ensure that |
| speculations are profitable, three financings | | | | the Reward is a multiple of the risk. There's still no |
| breakeven and three speculations are losers. They fail | | | | guarantee that the folks with OPM will win. However, |
| to understand the odds against them, when only one | | | | the odds will be greatly in their favor. |