How Michael Jackson Schooled an Ex-Beatle on Income Investing

In the early 1980s, a friendship blossomed between pop legends Paul McCartney and Michael Jackson. The friendship led to the duo collaborating on a number of music projects, most notably the 1983 song “Say, Say, Say.”how-to-invest-1-million-dollars
During that time, McCartney began acquiring music publishing rights. McCartney explained to Jackson the value of buying assets – such as publishing rights – that generate an income stream. McCartney’s most important publishing purchase to that date was a catalog of Buddy Holly songs.
The publishing rights McCartney coveted most, though, were those of his own handiwork. He and John Lennon had sold the publishing right to their Beatles songs in 1969. (Lennon and McCartney still earn royalties as writers. If, for example, “Get Back” earns $100,000 a year in royalties from sales, airplay, and live performances, the Lennon estate and McCartney – as co-writers – divide 50% of that income. The publisher collects the other 50%.)

Basics of Income Investing

In explaining the value of income investing – royalty income, in this instance –  to Jackson, McCartney was really explaining Finance 101: Investments are valued by the present value of a future income stream. As the income stream rises, so rises investment value.
Jackson paid attention, and perhaps too much attention for McCartney’s own good. Jackson was now interested in acquiring the publishing rights to the Lennon-McCartney songs McCartney so coveted.
In 1984, Jackson received a tip that ATV Music – publisher of the Beatles’ Lennon-McCartney songs, among others – was available. Jackson jumped to it. He outbid McCartney and other interested parties to purchase ATV for $47.5 million in 1985. The McCartney/Jackson friendship, needless to say, was kaput.

A Cool $2 Billion

So, how has Jackson’s $47.5 million investment fared?
Not bad. The ATV song catalog is valued at roughly $2 billion today – 42 times Jackson’s 1985 purchase price.
You might think that Jackson’s coup was extraordinary, and you also might think what does this have to do with me? After all, you’re not a celebrity billionaire, and neither am I. To own the publishing rights to an extensive catalog of popular songs is beyond our means.
Actually, Jackson’s investment coup is less extraordinary than it initially appears. The compound average annual increase of the ATV song catalog has been roughly 13% since 1985.
Over the same 31 years, a share of Exxon Mobil (NYSE: XOM) stock has increased at a 9% compound annual rate; a share of Coca-Cola (NYSE: KO) stock has increased at an 11% compound annual rate. McDonald’s (NYSE: MCD) and VF Corp. (NYSE: VFC) shares have appreciated at an even faster clip.  McDonald’s share price has increased at a 12% compound annual rate, and VF Corp.’s at a 14% compound annual rate. Jackson’s investment coup, though impressive, is really within the means of any ordinary investor.
That is, it’s within the means of any investor who will heed a few important takeaways.
First, a rising stream of income will lead to higher investment value, be it a music catalog or a share of stock. In this regard, Jackson’s music catalog was akin to a blue-chip dividend-growth stock.
Second, investment value becomes clear if you can think far enough afield. Jackson could justify the price tag of his ATV purchase by factoring in the income stream it could produce over many years. To be sure, there was a risk the songs might fail to produce the royalties he had projected, but that’s a risk every investor takes. It’s unavoidable. But, really, what’s the risk that “Hey, Jude,” “Yesterday,” and “Revolution” will diminish in value? It’s there, but it’s hardly unbearable.
Concurrently, what’s the risk Exxon Mobil will no longer produce usable energy? What’s the risk that McDonald’s will no longer sell hamburgers, or Coca-Cola  cans of Coke?  Do you think that VF Corp.’s Lee jeans will become unfashionable in the near future? The risk is there, though again, it’s hardly unbearable.
There’s one more takeaway, and perhaps it’s the most important one of all: When you find a quality investment with a high probability of producing income growth, it’s best to take the plunge. A lower entry price might prevail; then again, as Paul McCartney learned, it might not.
(Postscript: Paul McCartney was again thwarted in his effort to acquire the publishing rights to his Beatles songs. This time, it was Sony, which acquired a 50% interest in ATV from the Jackson estate earlier this year.)

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