And then, if a dragon is interested, comes the tricky negotiation over price and how much of the company pie the dragon will take. Pulses race. Tensions run high.
But the entrepreneurs aren’t just after the cash – they want the dragons’ business experience, support and that brilliant black book of contacts.
In today’s The Right Side, we’re going to show you how you can invest just like a dragon. We’ve found a little-known way of doing it that spreads your risk on day one. It paid out a tax-free yield of around 12% in the last year alone and is available at a knock-down price.
This rarely-used investment tactic can make a 9p dividend that would otherwise be taxed, worth 16.6p in your hands. In other words, it could help you turn £900 into £1,660, tapping into dividends that are completely tax free. Let me show you how...
You’d be investing alongside some proven experts in the world of venture capitalism. In other words, investing in early-stage, high-potential, growth companies. There is a thrill in being involved with brand new businesses as they are born. After all, there are few things more satisfying than bringing ideas to life and making them succeed, are there?
Interested? Read on…
There is outstanding value in these unloved shares
I’m talking about Venture Capital Trusts, or VCTs. But not the fully-priced VCT launches that happen before the end of each tax year. I mean the second-hand shares of VCTs that were launched many years ago.
They are completely bypassed because brokers can’t generate enough commission to justify the expense of writing research. As a result, prices are low and trading volumes are thin. But there’s a very thick silver lining to this cloud. Discounts to asset value of more than 50% have opened up. Let me explain…
VCTs are companies whose shares are listed on the London stock exchange. They use their money to invest in a portfolio of early-stage businesses – ones that are too small or unproven to raise money directly on the stock exchange. VCTs give fledgling businesses the funding they need to grow, and investors in turn have the chance to grab these tiny acorns before they grow into mighty oaks.
But there’s more to these investments than that...
How you can get a pound’s worth of VCT shares for just 70p
If you buy new shares in a VCT on its launch, you receive income tax relief at 30% of any investment of up to £200,000 each year. Put another way, you get £1 of VCT shares for just 70p. What’s more, income and gains from the investment are free of tax, although you can’t offset any VCT losses against tax. To keep the tax breaks, there’s a minimum holding period of five years on VCTs. But we reckon that’s worth it.
If you’re a long-term investor, these are amongst the most tax-efficient investments you can make. Five years may sound like a long time but, in the world of venture capitalism, it is not. You need that length of time for businesses to mature.
Of course, some venture capital investments fail. But this tends to happen early on, while a business is still small, unproven and vulnerable. Others succeed and go on to produce juicy returns, although it can take years.
But here’s the point about the tactic we’re looking at today...
By buying VCTs that launched more than five years ago, portfolios have already taken a hit. First, when early businesses have failed and second when founding shareholders took the opportunity to exit without losing their tax breaks.
However, and this is crucial, what we are left with are some potential future ‘star investments’. Not to mention, a band of shareholders committed for the long term. And the real gem is the depressed share price, which reflects inevitable early teething obstacles of the launch rather than future potential.
By the way, buying VCT’s “second-hand” does not mean foregoing all the tax breaks mentioned above. You still get income and any gains completely free of tax. And the five-year minimum holding period does not apply. That’s the magic of traded VCTs – and it’s too big an opportunity to ignore.
As a great place to start looking for “second-hand” VCTs, take a look at Trustnet. It’s the best place we’ve found for comparing all the available VCTs, together with their daily prices, discounts, net asset values (NAVs) and performance. Follow this link for details.
If you’re after a highly tax-efficient medium- to long-term investment, VCTs should certainly be on your radar.
Good investing,
Andrew Vaughan,
For The Right Side
Editor’s Recommendation: As Investment Director for The Zurich Club, Andrew Vaughan has just released what he believes is the best way to play the “second-hand” VCT market. It’s a VCT priced at an extraordinary 62% discount to asset value and yielding 12.6% tax free. That’s equivalent to 15.75% to a basic rate taxpayer and a whopping 21% gross to a higher rate tax payer. To find out how you, too, could profit from The Zurich Club’s investment ideas, click here.
You can’t argue with Buffett’s 687% in 17 years
BY SHIVVY ARORA
Warren Buffett may have been bruised from the $25 billion hit to the net worth of his shares, but he’s far from battered.
Investment powerhouse, Berkshire Hathaway, recently reported its worst year ever. Its shares are flirting with a six-year low. But unstoppable Buffett’s 44 years leading the Omaha-based company have hardly gone in vain.
Why? Because, in line with a track record of outperformance, his 2008 returns still beat the S&P 500 index by an impressive 6.9%. Berkshire’s market value dropped 30.6% in 2008, but the index fell by 37.5%.
The chart below tracks Berkshire Hathaway’s stock price (red line) versus the S&P 500 (blue line) from mid-1992 to date. You can clearly see a consistently strong outperformance of the S&P 500. The cumulative result is a whopping 687% growth for Berkshire over the 17 years, while the S&P whimpers along at one-tenth the pace with 68%.
Buffett’s market-trouncing long-term performance 
Source: Financial Times
Keep in mind that Buffett’s recent annual letter to shareholders didn’t disclose the number of private companies bought by Berkshire. Nor did it reveal the huge, negotiated loans with various companies for which it doubtless received rates and terms that would leave us drooling.
All this is crystal clear testament to the wise old man’s brilliant long-term track record. He isn’t giving up his ‘world’s most powerful investor’ title anytime soon.
The Daily Reckoning – Sweden to GM/Saab: Drop Dead!
BY BILL BONNER
Paris, France
Finally, a nation with a little backbone... a little integrity... a little good sense.
And guess what, it’s that dreary socialist refrigerator – Sweden. Asked to bailout its GM-owned automaker, Saab, the country’s Prime Minister just said ‘no.’ Good for him...
“Voters did not pick me to buy loss-making car factories...” he explained.
But it’s a time of contradictions, paradoxes and oxymorons. Up is down. Right is left. In is out. Good is bad.
The socialists are the only ones protecting the free market, now. Americans are scuttling it with every chance they get. The stocks of capitalist companies are going up in communist China...in America, they’re going down. Since November, the Shanghai index has outperformed the S&P by 75%.
And back in the US, projects that were considered too marginal to justify spending money a year ago are now thought to be indispensable. And the IOUs of the biggest spendthrift on the planet are the hottest item on the market. Ten-year Treasury notes are now priced to yield only 2.99% – just as the Obama administration announces a $1.75 trillion budget deficit.
Even crooks and criminals are flummoxed. A guy walks into a big downtown bank. He points a gun at the teller and says: “Give me all your money.”
The teller replies calmly: “You don’t understand. This is a bank. We don’t have any money.”
The only people with money now are the people who never earned any...the people who print the stuff.
But back to China:
All the things that used to convince pundits that China was hopeless now persuade them that it’s the hope of the entire world. “China’s autocrats can announce a stimulus – and get on with it,” writes John Authers, admiringly, in the Financial Times. They don’t have to beg and bicker with the dunderheads in Congress. They can just do it.
And China’s banks are more solid, too. “China’s are in good health, with both loans and deposits rising. American counterparts are not.”
But our irony cup runneth over when we read Auther’s next comparison:
“Finally, there is confidence in officialdom.” The markets have lost confidence in Tim Geithner and the rest of the feds, he says. “Meanwhile, hope...is pinned on the audacity of Chinese officialdom and is ability somehow to keep their economy on course.”
Everything is so topsy turvy, dear reader, we think we’re going to throw up...
Read on…
CONTINUED on our website…
To read the Daily Reckoning in full, click here.
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