1 00:00:00,000 --> 00:00:11,180 Alan Kring Productions in association with the Emergent Light Studio presents the Illinois 2 00:00:11,180 --> 00:00:17,960 State Collegiate Compendium, Academic Lecture in Business and Economics. 3 00:00:17,960 --> 00:00:29,400 This is Business Finance, FIL 240 for autumn semester 2023. 4 00:00:29,400 --> 00:00:32,400 Today stock valuation alternatives. 5 00:00:32,400 --> 00:00:41,080 I will talk until about 420 and then we'll have the quiz five. 6 00:00:41,080 --> 00:00:44,600 So everyone get ready for a fun time coming up. 7 00:00:44,600 --> 00:00:47,680 Let me show you a couple of things here. 8 00:00:47,680 --> 00:00:51,120 We'll get to the numbers in just a minute. 9 00:00:51,120 --> 00:00:58,920 First things first, you got an announcement last night that there's now another place 10 00:00:58,920 --> 00:01:02,480 where you can get the podcast lectures. 11 00:01:02,480 --> 00:01:07,480 Now this one is special because this also gives you the transcripts of the lectures 12 00:01:07,480 --> 00:01:09,040 as well. 13 00:01:09,040 --> 00:01:14,800 And I've had this for a long, long time, but in order to put transcripts on it, I had to 14 00:01:14,800 --> 00:01:18,400 up the game and get the highest level service. 15 00:01:18,400 --> 00:01:29,520 But here's what you get when you go to rss.com slash podcasts slash Illinois dash state dot 16 00:01:29,520 --> 00:01:30,520 collegiate dash, I'm sorry, compendium. 17 00:01:30,520 --> 00:01:32,640 You will see that the podcasts are there. 18 00:01:32,640 --> 00:01:37,120 Now I'm going to be back filling from the start of the semester over the weekend so 19 00:01:37,120 --> 00:01:39,900 that everything up to this point will be there. 20 00:01:39,900 --> 00:01:48,880 And once you get into the RSS feed, you just choose your lecture and you'll click here. 21 00:01:48,880 --> 00:01:51,840 Now you'll see here transcript. 22 00:01:51,840 --> 00:01:56,360 You're going to get a transcript and the audio of the lecture all together. 23 00:01:56,360 --> 00:01:58,720 And it's actually very well done. 24 00:01:58,720 --> 00:02:03,080 The only thing that irritates me is they spell my name wrong every time. 25 00:02:03,080 --> 00:02:04,800 But there you go. 26 00:02:04,800 --> 00:02:05,800 There it is. 27 00:02:05,800 --> 00:02:07,640 Look, see they spell my name wrong. 28 00:02:07,640 --> 00:02:09,680 God, that irritates me. 29 00:02:09,680 --> 00:02:11,400 Anyway, enough of that. 30 00:02:11,400 --> 00:02:18,460 But yeah, then you can go to the transcript and when you play it, you'll see that it's 31 00:02:18,460 --> 00:02:22,800 actually running line by line what I'm saying. 32 00:02:22,800 --> 00:02:25,000 Huh, do I have sound? 33 00:02:25,000 --> 00:02:26,000 I don't have sound. 34 00:02:26,000 --> 00:02:27,000 Huh, what do you know? 35 00:02:27,000 --> 00:02:31,200 I don't have any sound here on the board. 36 00:02:31,200 --> 00:02:36,080 What am I doing here wrong? 37 00:02:36,080 --> 00:02:42,320 Huh, I wonder why it's not playing the sound. 38 00:02:42,320 --> 00:02:46,840 Maybe the sound is off on this. 39 00:02:46,840 --> 00:02:47,840 I don't know. 40 00:02:47,840 --> 00:02:52,560 One way or the other, it will be there though and you'll hear sound. 41 00:02:52,560 --> 00:02:55,360 And you'll have the transcript of the lecture. 42 00:02:55,360 --> 00:02:57,000 And like I said, I'll be back filling. 43 00:02:57,000 --> 00:03:01,040 This is the entire lecture in transcripted form. 44 00:03:01,040 --> 00:03:05,640 It's partly as an accommodation, which I've been meaning to do for a long time. 45 00:03:05,640 --> 00:03:13,280 And also, if you want to go back and do a search for a word, well where did he say capital? 46 00:03:13,280 --> 00:03:20,080 Control F, capital, and it'll find it in the lecture by the virtue of just how websites 47 00:03:20,080 --> 00:03:21,080 work. 48 00:03:21,080 --> 00:03:22,080 You can do word searches. 49 00:03:22,080 --> 00:03:26,680 I wish I knew why it was not playing the sound on this. 50 00:03:26,680 --> 00:03:29,160 Huh, I don't know. 51 00:03:29,160 --> 00:03:33,920 But anyway, one way or the other, this is just another place where you can get the podcasts 52 00:03:33,920 --> 00:03:36,440 of the lectures here. 53 00:03:36,440 --> 00:03:44,280 And I'm doing this all for you because I love you so much or something like that. 54 00:03:44,280 --> 00:03:48,940 But yeah, this is a high end site. 55 00:03:48,940 --> 00:03:51,920 It's a rather steep annual fee. 56 00:03:51,920 --> 00:03:54,280 But I mean, you can't beat the transcription. 57 00:03:54,280 --> 00:03:59,420 I tried transcription on YouTube and it is awful. 58 00:03:59,420 --> 00:04:02,040 And this is top of the line. 59 00:04:02,040 --> 00:04:04,840 Of course, that's RSS for you. 60 00:04:04,840 --> 00:04:07,680 But anyway, there you go. 61 00:04:07,680 --> 00:04:10,520 And you might want to bookmark this link. 62 00:04:10,520 --> 00:04:12,320 This is very nice. 63 00:04:12,320 --> 00:04:15,560 The site, they let me lay it out really, really nice. 64 00:04:15,560 --> 00:04:17,120 So there you go. 65 00:04:17,120 --> 00:04:19,760 Anyway, enough of that. 66 00:04:19,760 --> 00:04:21,560 Let's have a look at the numbers. 67 00:04:21,560 --> 00:04:27,340 As grim as these numbers are, they are bloody. 68 00:04:27,340 --> 00:04:37,720 Now here's a little bit of interesting part here is the Dow was down only a third of a 69 00:04:37,720 --> 00:04:39,400 percent. 70 00:04:39,400 --> 00:04:47,360 But then you get to the Standard Port 500 and it was down 1 and 1 half percent almost. 71 00:04:47,360 --> 00:04:49,680 That is quite a larger drop. 72 00:04:49,680 --> 00:04:55,520 And then you get to the NASDAQ and that thing was just taken to the toilet for a beating. 73 00:04:55,520 --> 00:04:58,720 Two and a half, almost two and a half percent down. 74 00:04:58,720 --> 00:05:02,840 The real question is why is it losing its steam? 75 00:05:02,840 --> 00:05:05,240 The economy is decent. 76 00:05:05,240 --> 00:05:09,680 The Fed isn't going to jack up interest rates anytime soon. 77 00:05:09,680 --> 00:05:12,800 But boy, was it a nasty day on the street. 78 00:05:12,800 --> 00:05:18,240 Having a look over here, let's look at the SP500 volume for the day. 79 00:05:18,240 --> 00:05:23,240 The volume was actually still well below the 52 week average. 80 00:05:23,240 --> 00:05:30,520 It was 2.6 billion against the average over the last year, daily average of 3.7 billion. 81 00:05:30,520 --> 00:05:33,520 But it was higher than it has been. 82 00:05:33,520 --> 00:05:36,360 So it was an active day down. 83 00:05:36,360 --> 00:05:38,320 Now notice something interesting. 84 00:05:38,320 --> 00:05:40,760 You see these volume bars here? 85 00:05:40,760 --> 00:05:42,800 Let me get this bigger. 86 00:05:42,800 --> 00:05:46,300 See if I can make it a little bigger. 87 00:05:46,300 --> 00:05:48,440 See those volume bars? 88 00:05:48,440 --> 00:05:51,360 Notice that there was a high bar right there. 89 00:05:51,360 --> 00:05:52,480 That was the first drop. 90 00:05:52,480 --> 00:05:54,320 The bears coming in. 91 00:05:54,320 --> 00:05:57,040 And then it just kind of blipped and farted around. 92 00:05:57,040 --> 00:05:59,680 But look there at the end. 93 00:05:59,680 --> 00:06:07,200 Right toward the end of the trading day, there was a lot of activity coming in. 94 00:06:07,200 --> 00:06:08,640 What does that mean? 95 00:06:08,640 --> 00:06:13,100 I'm not sure, but it didn't look like bear activity. 96 00:06:13,100 --> 00:06:15,280 It was a lot of trading back and forth. 97 00:06:15,280 --> 00:06:21,000 See if that had been a lot of sell orders, that would have been showing a drop in the 98 00:06:21,000 --> 00:06:22,960 price. 99 00:06:22,960 --> 00:06:29,080 But it wasn't a bear, a bull run, because there would have been a rise in the price. 100 00:06:29,080 --> 00:06:36,120 So the volume was sort of balanced between bears and bulls because it just didn't do 101 00:06:36,120 --> 00:06:39,400 much even though there was this steep volume. 102 00:06:39,400 --> 00:06:41,860 It started out, see that drop? 103 00:06:41,860 --> 00:06:47,200 It started out like that, but by the time of this major thing right here, it had already 104 00:06:47,200 --> 00:06:48,200 stabilized. 105 00:06:48,200 --> 00:06:51,200 I'm hard to tell what that means. 106 00:06:51,200 --> 00:06:56,080 But anyway, now let me back down here. 107 00:06:56,080 --> 00:06:59,320 Get back down to 100%. 108 00:06:59,320 --> 00:07:04,080 Okay now, let's go back here and have a look at the rest. 109 00:07:04,080 --> 00:07:09,960 Not surprisingly, well, not surprisingly, crude oil is staying nicely within that trading 110 00:07:09,960 --> 00:07:13,200 band I had told you it would probably stay in there. 111 00:07:13,200 --> 00:07:16,240 There it is, bouncing between 82 and 88. 112 00:07:16,240 --> 00:07:21,320 It's right in the middle right now at about 85 and a quarter. 113 00:07:21,320 --> 00:07:25,160 So we don't have anything to worry about as far as gas prices go. 114 00:07:25,160 --> 00:07:30,280 They're not going to go down, certainly, but they aren't going to go be jumping up. 115 00:07:30,280 --> 00:07:32,200 Now here's a little bit of a concern. 116 00:07:32,200 --> 00:07:33,200 Look at gold. 117 00:07:33,200 --> 00:07:39,520 It is trying to find that resistance at $2,000 an ounce. 118 00:07:39,520 --> 00:07:47,520 That would indicate that the fear mongers and the apocalypse freaks are getting a little 119 00:07:47,520 --> 00:07:53,320 bit more wind in their sails trying to get it, push it past, buying gold to push it past 120 00:07:53,320 --> 00:07:56,160 $2,000 an ounce. 121 00:07:56,160 --> 00:07:58,040 But they haven't gotten there yet. 122 00:07:58,040 --> 00:08:05,200 Now interestingly, the Euro and the British pound and the Japanese yen all depreciated 123 00:08:05,200 --> 00:08:12,200 against the dollar, which would indicate that the dollar is stronger than those currencies. 124 00:08:12,200 --> 00:08:18,680 And it got stronger in the investors' judgments over the day. 125 00:08:18,680 --> 00:08:24,040 So even though the market's down, it seems like the international currency markets are 126 00:08:24,040 --> 00:08:31,120 still in favor of the dollar over the Euro, the pound, and the yen. 127 00:08:31,120 --> 00:08:33,360 Ten-year bonds. 128 00:08:33,360 --> 00:08:38,920 The price, or rather the yield was going way up, but that would mean that the price was 129 00:08:38,920 --> 00:08:40,320 going down. 130 00:08:40,320 --> 00:08:43,920 So there was a sell-off in the bonds. 131 00:08:43,920 --> 00:08:50,200 Now if there's a sell-off in the bonds, that should have shown up in buying of equities, 132 00:08:50,200 --> 00:08:51,760 but it did not. 133 00:08:51,760 --> 00:08:58,320 It was just selling the bonds and putting the money into money market accounts, pulling 134 00:08:58,320 --> 00:09:00,680 the money off the field. 135 00:09:00,680 --> 00:09:04,340 Not pulling the money from one team and giving it to the other team. 136 00:09:04,340 --> 00:09:07,280 It was pulling the money off the field. 137 00:09:07,280 --> 00:09:14,080 So there was money getting out of equities, and there was money getting out of the good 138 00:09:14,080 --> 00:09:16,820 alternative, which is bonds. 139 00:09:16,820 --> 00:09:20,400 So what does that tend to mean? 140 00:09:20,400 --> 00:09:24,960 It means that the investors are really wary. 141 00:09:24,960 --> 00:09:30,360 They're thinking, let's put our money on the sidelines until we see what's about what's 142 00:09:30,360 --> 00:09:32,120 going to happen. 143 00:09:32,120 --> 00:09:35,040 So there you go, that's that part. 144 00:09:35,040 --> 00:09:43,120 Now over on the other side of the Pacific, last night the Nikkei was bullish, but then 145 00:09:43,120 --> 00:09:45,800 it lost its...the bears came in at the end. 146 00:09:45,800 --> 00:09:50,920 They didn't drive it way down, but that strong sediment at the beginning kind of flattened 147 00:09:50,920 --> 00:09:54,240 out and then the bears took over a little bit. 148 00:09:54,240 --> 00:09:57,200 Finished up about two-thirds of a percent. 149 00:09:57,200 --> 00:10:02,960 Now the London was choppy, just bouncing up and down. 150 00:10:02,960 --> 00:10:03,960 More uncertainty. 151 00:10:03,960 --> 00:10:08,400 Finished up, but there was a bear pull there at the end. 152 00:10:08,400 --> 00:10:16,880 But it was certainly...we don't see a global version of what happened in our markets today. 153 00:10:16,880 --> 00:10:23,840 On the bright side, if you look at these, the bear action happened at the beginning, 154 00:10:23,840 --> 00:10:27,400 and then it ended just after lunchtime. 155 00:10:27,400 --> 00:10:28,800 See how it flattened out? 156 00:10:28,800 --> 00:10:30,400 No more selling. 157 00:10:30,400 --> 00:10:32,820 And see how it flattened out? 158 00:10:32,820 --> 00:10:38,480 Right there, it dropped off in the late morning, and then it stabilized and the same thing 159 00:10:38,480 --> 00:10:39,840 happened with the NASDAQ. 160 00:10:39,840 --> 00:10:45,980 So the sell-off didn't continue to the very end and the bell stopped everything. 161 00:10:45,980 --> 00:10:49,960 The sell-off stopped in the very early afternoon. 162 00:10:49,960 --> 00:10:51,840 What does that mean? 163 00:10:51,840 --> 00:10:58,720 Well, it tells us that at least we know that whatever was bothering the equity investors 164 00:10:58,720 --> 00:11:00,400 didn't last for very long. 165 00:11:00,400 --> 00:11:02,360 Just curious, what about bonds? 166 00:11:02,360 --> 00:11:09,520 Oh, that sell-off in the bonds, the yield just kept going up and up, which means that 167 00:11:09,520 --> 00:11:12,440 the prices were going down and down. 168 00:11:12,440 --> 00:11:19,200 So there was a sell-off in the bonds continued all through the day to the very end. 169 00:11:19,200 --> 00:11:21,320 Okay, enough of that. 170 00:11:21,320 --> 00:11:24,880 Let me show you something real quick. 171 00:11:24,880 --> 00:11:28,320 And I've talked about this before. 172 00:11:28,320 --> 00:11:34,480 There's a mistaken idea that you make money in a bull market, you lose money in a bear 173 00:11:34,480 --> 00:11:36,680 market. 174 00:11:36,680 --> 00:11:38,000 That's certainly not true. 175 00:11:38,000 --> 00:11:42,800 All you have to do is know how to make money when stocks are going down. 176 00:11:42,800 --> 00:11:47,880 Now, there is one way called short selling, and I'll teach you how to do that. 177 00:11:47,880 --> 00:11:52,560 It has the disadvantage that you have to have a margin account. 178 00:11:52,560 --> 00:11:59,440 You have to have money with the brokerage house in an account with them before they'll 179 00:11:59,440 --> 00:12:01,720 let you do short selling. 180 00:12:01,720 --> 00:12:08,200 There's another way that you can profit in a bear market. 181 00:12:08,200 --> 00:12:15,360 All you do is buy ETFs that are bearish, that are contrarian. 182 00:12:15,360 --> 00:12:18,280 Let me show you a couple real quick here. 183 00:12:18,280 --> 00:12:22,480 SQQQ, let's try that again. 184 00:12:22,480 --> 00:12:25,480 SQQQ. 185 00:12:25,480 --> 00:12:28,840 Now it's called ultra short. 186 00:12:28,840 --> 00:12:30,620 That short means bear. 187 00:12:30,620 --> 00:12:31,620 Look at that. 188 00:12:31,620 --> 00:12:36,800 The thing was up 7.3%. 189 00:12:36,800 --> 00:12:38,700 That's bear activity. 190 00:12:38,700 --> 00:12:41,080 You're making money in a bear market. 191 00:12:41,080 --> 00:12:45,800 Notice how it's barely up in the aftermarket, so the bear activity is over. 192 00:12:45,800 --> 00:12:48,320 But notice the beta. 193 00:12:48,320 --> 00:12:51,160 Negative 3.42. 194 00:12:51,160 --> 00:12:52,560 Negative beta. 195 00:12:52,560 --> 00:12:56,440 It goes against the world portfolio. 196 00:12:56,440 --> 00:12:57,720 It's going against it. 197 00:12:57,720 --> 00:12:58,720 That's a bear. 198 00:12:58,720 --> 00:13:00,600 In other words, it's bearish. 199 00:13:00,600 --> 00:13:03,480 And that is hellaciously bearish. 200 00:13:03,480 --> 00:13:05,440 That is a multiple of bearish. 201 00:13:05,440 --> 00:13:13,800 As a matter of fact, the ultra gives you an indication that they're leveraging bear action 202 00:13:13,800 --> 00:13:16,240 to get a magnification effect. 203 00:13:16,240 --> 00:13:22,600 And so if it's a bear market, SQQ is really going to benefit from it. 204 00:13:22,600 --> 00:13:30,200 As you see happen, bear market, SQQ up a staggering 7.3%. 205 00:13:30,200 --> 00:13:32,200 Here's another one. 206 00:13:32,200 --> 00:13:36,680 NPXU. 207 00:13:36,680 --> 00:13:38,280 That's a bear market. 208 00:13:38,280 --> 00:13:40,520 See short, bear. 209 00:13:40,520 --> 00:13:42,780 That's on the standard port is 500. 210 00:13:42,780 --> 00:13:46,720 It was up today, 4.22%. 211 00:13:46,720 --> 00:13:48,880 Well everyone loses when it's a bear market. 212 00:13:48,880 --> 00:13:49,880 No you don't. 213 00:13:49,880 --> 00:13:52,640 Not if you play these. 214 00:13:52,640 --> 00:13:54,320 But of course you're looking at it. 215 00:13:54,320 --> 00:13:55,320 There you go. 216 00:13:55,320 --> 00:13:59,120 Beta is negative 2.92. 217 00:13:59,120 --> 00:14:01,560 There's the thing again. 218 00:14:01,560 --> 00:14:02,560 It's negative. 219 00:14:02,560 --> 00:14:04,000 It's contrary. 220 00:14:04,000 --> 00:14:07,280 It operates against the world portfolio. 221 00:14:07,280 --> 00:14:10,520 Oh is that the only two? 222 00:14:10,520 --> 00:14:12,920 Oh no there are tons of them. 223 00:14:12,920 --> 00:14:14,240 UDOW. 224 00:14:14,240 --> 00:14:18,880 UDOW is a short on the Dow 30. 225 00:14:18,880 --> 00:14:20,480 It probably won't be much. 226 00:14:20,480 --> 00:14:21,480 Yeah. 227 00:14:21,480 --> 00:14:24,640 It just kind of peas itself around. 228 00:14:24,640 --> 00:14:29,760 See really, that's not really a short. 229 00:14:29,760 --> 00:14:31,800 That's actually positive. 230 00:14:31,800 --> 00:14:33,960 So that's why that one went down. 231 00:14:33,960 --> 00:14:35,280 Let me try another one. 232 00:14:35,280 --> 00:14:39,280 SPX, no I did SPXU. 233 00:14:39,280 --> 00:14:41,480 What's another one? 234 00:14:41,480 --> 00:14:43,600 Come on. 235 00:14:43,600 --> 00:14:47,880 No. 236 00:14:47,880 --> 00:14:50,480 Those are, well let me show you this one. 237 00:14:50,480 --> 00:14:51,480 S Dow. 238 00:14:51,480 --> 00:14:52,680 That's the one I was looking for. 239 00:14:52,680 --> 00:14:53,680 S Dow. 240 00:14:53,680 --> 00:14:54,680 S Dow. 241 00:14:54,680 --> 00:14:55,680 Short. 242 00:14:55,680 --> 00:15:02,240 So it was up. 243 00:15:02,240 --> 00:15:03,240 S Dow. 244 00:15:03,240 --> 00:15:07,120 In other words, it's contrarian. 245 00:15:07,120 --> 00:15:10,480 Beta is negative 2.60. 246 00:15:10,480 --> 00:15:15,120 So this is how you can do well in a bear market. 247 00:15:15,120 --> 00:15:20,440 If you find these short securities and you just buy into them. 248 00:15:20,440 --> 00:15:21,600 Look at this. 249 00:15:21,600 --> 00:15:28,160 For only $27.39, you could take a position, a bear position. 250 00:15:28,160 --> 00:15:29,640 Let me look at this last one. 251 00:15:29,640 --> 00:15:32,880 Not UDOW, the other one. 252 00:15:32,880 --> 00:15:34,360 SPXU. 253 00:15:34,360 --> 00:15:39,440 $12.85 can buy you a share, a bear share. 254 00:15:39,440 --> 00:15:40,600 Hey, that's cool. 255 00:15:40,600 --> 00:15:41,920 A bear share. 256 00:15:41,920 --> 00:15:42,920 Yeah. 257 00:15:42,920 --> 00:15:47,120 So it doesn't take a lot of money to take a position. 258 00:15:47,120 --> 00:15:51,200 And it doesn't take a lot of money to take a bear position. 259 00:15:51,200 --> 00:15:56,280 So if the market's going to hell, if you think that's what's going to happen, well, you don't 260 00:15:56,280 --> 00:15:58,960 just sit down and hide. 261 00:15:58,960 --> 00:16:02,000 You just go to the bear side. 262 00:16:02,000 --> 00:16:05,000 So you might be saying, well, wait a minute there, Professor. 263 00:16:05,000 --> 00:16:08,880 Didn't you just say a lot of money is getting on the sidelines? 264 00:16:08,880 --> 00:16:10,360 Yeah. 265 00:16:10,360 --> 00:16:17,680 We see a lot of big money investors just taking their money off the playing field and getting 266 00:16:17,680 --> 00:16:19,660 it into cash. 267 00:16:19,660 --> 00:16:21,160 Why would they be doing that? 268 00:16:21,160 --> 00:16:25,480 Because they don't know which way it's going to go. 269 00:16:25,480 --> 00:16:28,160 They haven't decided bear or bull. 270 00:16:28,160 --> 00:16:36,200 So if once they decide, they'll start taking positions on the bull side or on the bear 271 00:16:36,200 --> 00:16:37,200 side. 272 00:16:37,200 --> 00:16:42,020 But right now, they're not doing that so much. 273 00:16:42,020 --> 00:16:48,480 It's just these investors who play in these bull and bear shorts that go for the bear 274 00:16:48,480 --> 00:16:49,480 stuff today. 275 00:16:49,480 --> 00:16:51,320 Boy, it was quite a day. 276 00:16:51,320 --> 00:16:53,160 I want to go back there. 277 00:16:53,160 --> 00:16:54,160 SQQ. 278 00:16:54,160 --> 00:16:55,160 Yeah. 279 00:16:55,160 --> 00:16:57,960 Boy, was that a good day. 280 00:16:57,960 --> 00:17:05,140 But notice that the aftermarket is not doing that giant jump. 281 00:17:05,140 --> 00:17:12,040 So in other words, it's like I said before, it looks like the bear, that bear activities 282 00:17:12,040 --> 00:17:15,120 had already finished off by the end of trading. 283 00:17:15,120 --> 00:17:17,200 See how it leveled out there? 284 00:17:17,200 --> 00:17:18,720 So there was no more bear. 285 00:17:18,720 --> 00:17:24,600 The bears had had theirs early and then everyone was just kind of sitting there looking stupid, 286 00:17:24,600 --> 00:17:27,040 waiting for the next thing to happen. 287 00:17:27,040 --> 00:17:29,680 So there you go. 288 00:17:29,680 --> 00:17:30,680 What does that mean for tomorrow? 289 00:17:30,680 --> 00:17:35,600 Well, it's kind of hard to say because there's always news going on overnight. 290 00:17:35,600 --> 00:17:46,840 But as of right now, that bear throw up vomit that happened earlier has passed for now. 291 00:17:46,840 --> 00:17:55,560 Anyway, that is the fun that I want to have with you on markets. 292 00:17:55,560 --> 00:18:01,120 Now this is sort of a tie up of what I've said in other lectures, at least the first 293 00:18:01,120 --> 00:18:02,120 part of it. 294 00:18:02,120 --> 00:18:07,560 And then just a couple of formulas to finish off this subject. 295 00:18:07,560 --> 00:18:13,160 And essentially I'm talking about stocks here. 296 00:18:13,160 --> 00:18:15,680 Stock. 297 00:18:15,680 --> 00:18:21,440 Otherwise known by the fancy term equity. 298 00:18:21,440 --> 00:18:28,680 So remember, if you are trying to be impressive, you don't say, well, I'm buying stocks. 299 00:18:28,680 --> 00:18:33,640 You say, I'm going long equities. 300 00:18:33,640 --> 00:18:40,760 That's how you get attention at the finance professional singles bar. 301 00:18:40,760 --> 00:18:41,760 Or not. 302 00:18:41,760 --> 00:18:50,640 OK, now stock actually isn't one thing. 303 00:18:50,640 --> 00:18:57,480 There is common stock. 304 00:18:57,480 --> 00:19:00,360 When I say stock, I usually mean common stock. 305 00:19:00,360 --> 00:19:06,280 But you've got to be a little careful about that because there are different flavors of 306 00:19:06,280 --> 00:19:07,280 stock. 307 00:19:07,280 --> 00:19:13,880 On the other side is preferred stock. 308 00:19:13,880 --> 00:19:19,520 Preferred. 309 00:19:19,520 --> 00:19:23,320 Now these are both equity. 310 00:19:23,320 --> 00:19:29,200 So both of them have the residual claim to the cash flow. 311 00:19:29,200 --> 00:19:37,120 In other words, liabilities have to be satisfied in their timely manner before any equity gets 312 00:19:37,120 --> 00:19:38,400 a shot. 313 00:19:38,400 --> 00:19:45,120 Gets some dividends or gets money plowed back into the company to increase stock prices. 314 00:19:45,120 --> 00:19:53,580 However, within this equity, preferred has the prior claim. 315 00:19:53,580 --> 00:20:06,280 So you have to satisfy the preferred shareholders before the common shareholders can get a dime. 316 00:20:06,280 --> 00:20:09,880 Now common stock, for God's sake. 317 00:20:09,880 --> 00:20:14,480 Now there's actually different flavors of common stock. 318 00:20:14,480 --> 00:20:22,560 There is your, for lack of a better term, your standard or normal common stock. 319 00:20:22,560 --> 00:20:28,120 The stuff that you see on the ticker symbols most of the time. 320 00:20:28,120 --> 00:20:36,320 But then there are other kinds where there could be classified. 321 00:20:36,320 --> 00:20:41,540 Class A, Class B, Class C, common stock. 322 00:20:41,540 --> 00:20:56,720 Now the one that can get the most attention in this would be founder stock. 323 00:20:56,720 --> 00:21:02,920 Founder stock is stock that was given to the founders. 324 00:21:02,920 --> 00:21:10,960 It could also have been transferred to the founders to people early on or at some point 325 00:21:10,960 --> 00:21:12,400 like that. 326 00:21:12,400 --> 00:21:18,820 Now founder stock is subject to rule 144. 327 00:21:18,820 --> 00:21:26,880 Founder stock is subject to rule 144 of the Securities Exchange Act of 1934. 328 00:21:26,880 --> 00:21:29,040 It rules 144. 329 00:21:29,040 --> 00:21:32,720 Sometimes we'll call it, well that's rule 144 stock. 330 00:21:32,720 --> 00:21:38,500 Technically another term for it is restricted. 331 00:21:38,500 --> 00:21:46,540 Back when stock certificates were actually printed, restricted stock would have restriction 332 00:21:46,540 --> 00:21:51,480 in a stamp, red stamp right on the certificate. 333 00:21:51,480 --> 00:21:59,160 What that meant was that unlike normal common stock, the holders of this restricted stock 334 00:21:59,160 --> 00:22:02,880 couldn't just sell it whenever they wanted. 335 00:22:02,880 --> 00:22:13,600 The rule 144 gives windows and other times when rule 144 stock can be released from restriction. 336 00:22:13,600 --> 00:22:15,240 Like I'm the CEO of the company. 337 00:22:15,240 --> 00:22:19,200 I have 10 million shares of the common stock of the company. 338 00:22:19,200 --> 00:22:24,260 It's rule 144, it's subject to rule 144, it's restricted. 339 00:22:24,260 --> 00:22:36,160 Now at certain times with the consent of legal counsel, I can leak some of that stock. 340 00:22:36,160 --> 00:22:39,080 I can sell it. 341 00:22:39,080 --> 00:22:41,280 This restricted stamp will come off. 342 00:22:41,280 --> 00:22:47,080 You could actually buy stock from me during one of my windows and what you would get is 343 00:22:47,080 --> 00:22:48,720 freely tradeable stock. 344 00:22:48,720 --> 00:22:56,440 Your stock certificate would not have a restriction on it and I would have gotten it off my plate. 345 00:22:56,440 --> 00:23:01,000 So rule 144 isn't a prohibition on sales. 346 00:23:01,000 --> 00:23:07,160 It makes restrictions on the sales of the stock. 347 00:23:07,160 --> 00:23:12,680 One of the things when I was a consultant, there were times when instead of being paid 348 00:23:12,680 --> 00:23:15,240 in money, I was offered stock. 349 00:23:15,240 --> 00:23:16,960 We'll pay you this. 350 00:23:16,960 --> 00:23:21,600 Well that didn't do me a whole lot of good if I wanted to have dinner that night because 351 00:23:21,600 --> 00:23:23,840 it would be rule 144 stock. 352 00:23:23,840 --> 00:23:24,840 There's no question. 353 00:23:24,840 --> 00:23:26,340 They were just handing it to me. 354 00:23:26,340 --> 00:23:31,840 So it hadn't gone through a public offering or anything like that. 355 00:23:31,840 --> 00:23:38,040 Another place where you'll see rule 144, before a company goes public, it can actually under 356 00:23:38,040 --> 00:23:48,880 certain exemptions sell stock, but it has to be to special investors and it is restricted. 357 00:23:48,880 --> 00:23:52,000 So restricted stock shows up. 358 00:23:52,000 --> 00:23:54,560 It's not that unusual. 359 00:23:54,560 --> 00:24:03,280 Now another interesting thing about it is there are websites where you can see insider 360 00:24:03,280 --> 00:24:04,840 trading. 361 00:24:04,840 --> 00:24:14,840 That is stock that is being released from 144 that's being dumped by the insiders of 362 00:24:14,840 --> 00:24:16,920 the company. 363 00:24:16,920 --> 00:24:28,920 So there's a kind of a mythical idea that, oh look, that CEO sold 50,000 shares of his 364 00:24:28,920 --> 00:24:30,320 stock in the company. 365 00:24:30,320 --> 00:24:32,840 That's a bad sign. 366 00:24:32,840 --> 00:24:36,400 Not really, not necessarily. 367 00:24:36,400 --> 00:24:44,680 I had a lot of companies where the insiders had started a company some years ago. 368 00:24:44,680 --> 00:24:46,420 They had restricted stock. 369 00:24:46,420 --> 00:24:47,760 The company was struggling. 370 00:24:47,760 --> 00:24:50,480 They barely paid themselves enough to eat. 371 00:24:50,480 --> 00:24:59,500 And so once the company got on its feet, then they used their abilities under rule 144 to 372 00:24:59,500 --> 00:25:03,040 sell some of their stock so they'd have some money. 373 00:25:03,040 --> 00:25:10,640 So it's not necessarily the case that just because you see insider stock sales that this 374 00:25:10,640 --> 00:25:12,320 company is going to hell. 375 00:25:12,320 --> 00:25:18,360 What you would be a little concerned about is if you saw a group of insiders all getting 376 00:25:18,360 --> 00:25:20,880 rid of their stock at the same time. 377 00:25:20,880 --> 00:25:26,560 That might be a little more of a, oh, that's the rats abandoning the ship. 378 00:25:26,560 --> 00:25:30,360 Even then though, that's not necessarily the case. 379 00:25:30,360 --> 00:25:35,920 But yeah, this restricted stock, it's just one of those things that's out there. 380 00:25:35,920 --> 00:25:41,840 It's common stock, but it's common stock that is not freely tradeable. 381 00:25:41,840 --> 00:25:43,920 That's just the bottom line of it. 382 00:25:43,920 --> 00:25:52,240 And it can be released, sold, but only under certain conditions like times of the year 383 00:25:52,240 --> 00:25:55,440 or like amounts maybe. 384 00:25:55,440 --> 00:26:02,160 And you also have to have the legal counsel of the company say, yes, you can do this. 385 00:26:02,160 --> 00:26:05,720 And then it's done. 386 00:26:05,720 --> 00:26:08,000 I had a company. 387 00:26:08,000 --> 00:26:14,480 They had some lawyer, he was really a dodgy fellow. 388 00:26:14,480 --> 00:26:19,640 He would just sign off all the time on, yeah, this stock is released for 144. 389 00:26:19,640 --> 00:26:20,820 Go ahead and sell it. 390 00:26:20,820 --> 00:26:28,000 And so the CEO was just making scads of money by having all the stock they had given himself 391 00:26:28,000 --> 00:26:32,280 when the company started and just dumping it out. 392 00:26:32,280 --> 00:26:45,320 But anyway, okay, now, another thing is the founder's stock. 393 00:26:45,320 --> 00:26:52,400 You have to be careful about classified stock because oftentimes classified stock will come 394 00:26:52,400 --> 00:26:59,680 with certain rights that the normal common stock of the company doesn't have. 395 00:26:59,680 --> 00:27:04,680 And I showed you this on one occasion and I'll bring it back up to you again. 396 00:27:04,680 --> 00:27:13,920 My favorite example of this, Berkshire Hathaway has two classes of stock. 397 00:27:13,920 --> 00:27:19,280 The baby Berks, Berk B's, it's just normal stock. 398 00:27:19,280 --> 00:27:26,720 It's $336.90 a share, but it's just normal stock. 399 00:27:26,720 --> 00:27:30,000 You get off there. 400 00:27:30,000 --> 00:27:34,440 Okay, and you can see, you know, that's fancy. 401 00:27:34,440 --> 00:27:38,720 You own a piece of Warren Buffett's company and all that good stuff. 402 00:27:38,720 --> 00:27:44,880 So you can brag that, yeah, me and Warren are in investments together, all that. 403 00:27:44,880 --> 00:27:55,900 But if you look at the big Berks, the BRK classified A's, well, those are the ones. 404 00:27:55,900 --> 00:28:03,320 Right now you could pick up one share for $512,400. 405 00:28:03,320 --> 00:28:11,880 Now I'm sure that many of you are saying, where can I buy this stock? 406 00:28:11,880 --> 00:28:20,860 In other words, to own one share of this stock would cost north of half a million dollars. 407 00:28:20,860 --> 00:28:28,000 It is classified A and that means it has, in this case, it has super majority voting 408 00:28:28,000 --> 00:28:32,760 rights, super voting rights. 409 00:28:32,760 --> 00:28:40,480 Instead of one vote per share for each director's position, you get a lot of votes per share 410 00:28:40,480 --> 00:28:43,840 for each director's position. 411 00:28:43,840 --> 00:28:49,240 And so you have a stronger control over the company. 412 00:28:49,240 --> 00:28:56,240 Even owning one share, I'm not sure how many BRK A's are out there, but it is a ton of 413 00:28:56,240 --> 00:28:57,240 them. 414 00:28:57,240 --> 00:29:04,160 So buying one share, you really wouldn't have any control over Berkshire Hathaway. 415 00:29:04,160 --> 00:29:12,560 Warren would make sure that he and his buddies have majority control over the board of directors 416 00:29:12,560 --> 00:29:15,020 and they won't ever give that up. 417 00:29:15,020 --> 00:29:17,920 But if you want to be in the big leagues, there you go. 418 00:29:17,920 --> 00:29:23,360 If you've got half a million dollars you don't know what to do with, then buy one of these 419 00:29:23,360 --> 00:29:25,200 BRK A's. 420 00:29:25,200 --> 00:29:26,680 Or otherwise, talk to me. 421 00:29:26,680 --> 00:29:32,160 I can make some suggestions about things that you could do with it and I'd help you spend 422 00:29:32,160 --> 00:29:33,160 the money. 423 00:29:33,160 --> 00:29:35,200 Okay, now, stock. 424 00:29:35,200 --> 00:29:42,400 Suppose that you have a seasoned offering of stock, a seasoned offer. 425 00:29:42,400 --> 00:29:45,640 In other words, it's already got stock outstanding. 426 00:29:45,640 --> 00:29:55,000 One thing about common stock that I should bring up is what's called preemptive rights. 427 00:29:55,000 --> 00:30:00,880 Preemptive rights. 428 00:30:00,880 --> 00:30:14,120 Let's suppose there are, right now, outstanding, are 10 million shares. 429 00:30:14,120 --> 00:30:17,920 And this is kind of a wild example. 430 00:30:17,920 --> 00:30:20,040 10 million shares. 431 00:30:20,040 --> 00:30:21,040 Okay. 432 00:30:21,040 --> 00:30:33,000 Now, suppose that you own 1 million of those shares. 433 00:30:33,000 --> 00:30:45,440 So your percent ownership in the company is 1 million divided by 10 million. 434 00:30:45,440 --> 00:30:52,400 So you have a 10% stake in the company. 435 00:30:52,400 --> 00:31:05,880 Now, suppose the company goes out and says, okay, we want to do a seasoned offering for 436 00:31:05,880 --> 00:31:11,640 5 million shares. 437 00:31:11,640 --> 00:31:23,240 So that would take the total outstanding of the company to 15 million shares. 438 00:31:23,240 --> 00:31:31,880 But what that would do to you is it would bring, you still own a million shares, but 439 00:31:31,880 --> 00:31:49,160 now you own a million shares on 15 million, which brings your stake down to 6.67%. 440 00:31:49,160 --> 00:31:52,680 You've lost ownership position. 441 00:31:52,680 --> 00:32:04,720 However, preemptive rights mean that as a stockholder, you have the right to preemptively 442 00:32:04,720 --> 00:32:15,520 get shares, buy shares from this offering to bring your, to keep your stake at 10%, 443 00:32:15,520 --> 00:32:18,420 or something better than what it was. 444 00:32:18,420 --> 00:32:32,940 So in this case, what you would want to do is you would want to buy 500,000 shares. 445 00:32:32,940 --> 00:32:38,220 You would have the right before anyone outside, you would have the right to preemptively say 446 00:32:38,220 --> 00:32:43,560 500,000 of those 5 million, them or mine. 447 00:32:43,560 --> 00:32:45,200 I'm buying them. 448 00:32:45,200 --> 00:33:03,240 And that would take you up to 1,500,000, which for a stake would be 1,500,000 over 15 million. 449 00:33:03,240 --> 00:33:06,920 And you'd be back to your 10% stake. 450 00:33:06,920 --> 00:33:10,200 You'd be back to your 10% stake. 451 00:33:10,200 --> 00:33:11,200 That's preemptive rights. 452 00:33:11,200 --> 00:33:17,320 You have the right preemptively to keep your position. 453 00:33:17,320 --> 00:33:24,480 Now, you could, while I don't really want 500,000 more, you could buy less, fewer than 454 00:33:24,480 --> 00:33:25,480 that. 455 00:33:25,480 --> 00:33:34,640 You have the right to buy up to 500,000, to subscribe, to subscribe for up to 500,000. 456 00:33:34,640 --> 00:33:41,760 But you could subscribe to less, to fewer shares if you wanted. 457 00:33:41,760 --> 00:33:43,920 That's preemptive rights. 458 00:33:43,920 --> 00:33:54,600 Now, the last question in this regard is, do you want to do that? 459 00:33:54,600 --> 00:33:59,240 Think about it this way. 460 00:33:59,240 --> 00:34:01,000 I've done this one before. 461 00:34:01,000 --> 00:34:06,040 This may sound like deja vu, but I'm repeating it here because we're hitting it for the last 462 00:34:06,040 --> 00:34:07,040 time here. 463 00:34:07,040 --> 00:34:09,600 You've got a company. 464 00:34:09,600 --> 00:34:17,720 Now internally, many of you might very well be in the decision making process that leads 465 00:34:17,720 --> 00:34:25,680 to deciding to offer common stock. 466 00:34:25,680 --> 00:34:28,860 We need capital. 467 00:34:28,860 --> 00:34:32,960 So why don't we sell stock to raise that capital? 468 00:34:32,960 --> 00:34:45,880 Well the first thing is that usually the cost of equity capital is noticeably higher than 469 00:34:45,880 --> 00:34:48,840 the cost of debt capital. 470 00:34:48,840 --> 00:34:58,840 Why would a company raise money through selling stock when they could get a loan for what 471 00:34:58,840 --> 00:35:03,520 they need at probably a better rate? 472 00:35:03,520 --> 00:35:07,360 You'll see, I think it's next week or the week after that, maybe next, yeah it's next 473 00:35:07,360 --> 00:35:08,360 week. 474 00:35:08,360 --> 00:35:17,680 You'll see that you can have a cost of equity, do the calculation, might be like 18 percent, 475 00:35:17,680 --> 00:35:24,680 but you could raise the money by issuing bonds at like 7 percent, 8 percent. 476 00:35:24,680 --> 00:35:32,840 Why in God's name would you sell stock that costs more if you could sell bonds that cost 477 00:35:32,840 --> 00:35:34,040 you less? 478 00:35:34,040 --> 00:35:35,720 That's your first question. 479 00:35:35,720 --> 00:35:39,760 Oh, you can't sell bonds, huh? 480 00:35:39,760 --> 00:35:45,720 Because you're so deep that you probably, you have a high default risk and so you'll 481 00:35:45,720 --> 00:35:49,640 pay coupons that are nosebleed on them. 482 00:35:49,640 --> 00:35:53,920 Well there's a second question too, a little deeper. 483 00:35:53,920 --> 00:36:01,840 Why'd a company, and I teach this in some courses, projecting what your stock price 484 00:36:01,840 --> 00:36:07,760 will be based upon free cash flow projections and all that good stuff, I'll mention that 485 00:36:07,760 --> 00:36:10,720 here today as a matter of fact. 486 00:36:10,720 --> 00:36:17,380 If a company says, okay right now our stock is $20 a share, we're projecting that after 487 00:36:17,380 --> 00:36:22,560 we release our earnings it's going to drop to $10 a share. 488 00:36:22,560 --> 00:36:28,100 So what are you going to do when you decide when to sell common stock, to do that seasoned 489 00:36:28,100 --> 00:36:30,860 offering of 5 million shares? 490 00:36:30,860 --> 00:36:38,240 Are you going to decide, yeah we want to sell it for $20 a share, or no we want to wait 491 00:36:38,240 --> 00:36:42,400 until we can get only $10 a share? 492 00:36:42,400 --> 00:36:48,900 Most likely a company is going to sell its stock when it has determined in its best judgment 493 00:36:48,900 --> 00:36:52,120 that the stock is near its peak. 494 00:36:52,120 --> 00:36:57,300 And after that the stock price is going to fall because earnings announcements are something 495 00:36:57,300 --> 00:36:58,920 like that. 496 00:36:58,920 --> 00:37:09,600 So you are probably going to buy stock in a public offering when it is overvalued. 497 00:37:09,600 --> 00:37:11,680 Because it's in the best interest of the company. 498 00:37:11,680 --> 00:37:16,640 Oh it's overvalued so let's sell it now. 499 00:37:16,640 --> 00:37:22,040 That's why preemptive rights might not be exercised. 500 00:37:22,040 --> 00:37:28,760 You might see it that you are going to buy stock, you have the right to first dibs, but 501 00:37:28,760 --> 00:37:32,560 you're going to be buying stock that is overvalued. 502 00:37:32,560 --> 00:37:37,360 Whereas if you just waited, I mean you don't have preemptive rights anymore but you can 503 00:37:37,360 --> 00:37:41,880 just buy it in the secondary market, when the stock price, if you like this company 504 00:37:41,880 --> 00:37:48,080 so much, you can just buy it on your own later to bring your percentage ownership back up 505 00:37:48,080 --> 00:37:50,840 to where it was. 506 00:37:50,840 --> 00:37:57,000 So preemptive rights are not as glowing as they might sound at first. 507 00:37:57,000 --> 00:38:02,920 It might not be a good idea to exercise your preemptive rights. 508 00:38:02,920 --> 00:38:07,620 Because you're going to exercise them and buy stock that's overvalued. 509 00:38:07,620 --> 00:38:09,160 How do you know it's overvalued? 510 00:38:09,160 --> 00:38:10,680 Because the company is selling it. 511 00:38:10,680 --> 00:38:13,760 That's why the company is telling you. 512 00:38:13,760 --> 00:38:16,520 We think the stock is overvalued. 513 00:38:16,520 --> 00:38:22,440 That's why we're selling stock now instead of six months from now when it's going to 514 00:38:22,440 --> 00:38:25,840 fall below its intrinsic value. 515 00:38:25,840 --> 00:38:29,240 So that's that little piece right there. 516 00:38:29,240 --> 00:38:33,440 Okay, a few last things here. 517 00:38:33,440 --> 00:38:34,440 Preferred stock. 518 00:38:34,440 --> 00:38:38,560 And I've said this before, preferred stock used to be kind of popular but it's not really 519 00:38:38,560 --> 00:38:40,140 popular anymore. 520 00:38:40,140 --> 00:38:44,920 The cool thing about preferred stock is that you get the same dividend forever. 521 00:38:44,920 --> 00:38:49,440 And you get your dividend before common can have a dividend. 522 00:38:49,440 --> 00:38:51,400 So that's why it used to be kind of popular. 523 00:38:51,400 --> 00:38:59,040 It was like a fixed income investment for older people maybe or for companies that just 524 00:38:59,040 --> 00:39:03,200 didn't want price changes so much as they just wanted a fixed dividend that they could 525 00:39:03,200 --> 00:39:07,800 use for projecting their investment income. 526 00:39:07,800 --> 00:39:09,840 Let me show you one. 527 00:39:09,840 --> 00:39:29,920 AZL, let's say, 1.75% cumulative, and I'll talk about that in a minute, preferred par 528 00:39:29,920 --> 00:39:44,040 value $80 per share. 529 00:39:44,040 --> 00:39:56,400 This means that forever, every year, you will get a 1.75% times $80. 530 00:39:56,400 --> 00:39:58,280 You notice how this looks like a bond. 531 00:39:58,280 --> 00:40:00,920 Coupon times face value. 532 00:40:00,920 --> 00:40:05,160 Preferred stock works the same mechanical way like that. 533 00:40:05,160 --> 00:40:17,440 So that you will get $1.40 per share forever. 534 00:40:17,440 --> 00:40:21,640 That is a flat perpetuity. 535 00:40:21,640 --> 00:40:31,440 And the formula for finding the present value, the price of a flat perpetuity, would be the 536 00:40:31,440 --> 00:40:40,040 price now would be the dividend divided by the required rate of return of the market 537 00:40:40,040 --> 00:40:44,800 on the stock. 538 00:40:44,800 --> 00:40:52,480 So let's say that right now the market thinks that this dividend should be 2.0%. 539 00:40:52,480 --> 00:40:59,200 Okay, just rock it through. 540 00:40:59,200 --> 00:41:15,960 So in this case, the price of AZL preferred would be nothing but the $1.40 divided by 541 00:41:15,960 --> 00:41:19,720 .020. 542 00:41:19,720 --> 00:41:26,960 Very easy. 543 00:41:26,960 --> 00:41:28,800 Just get this formula down. 544 00:41:28,800 --> 00:41:32,560 It's so easy I don't even make a template for it. 545 00:41:32,560 --> 00:41:39,160 That comes out to be $70 per share. 546 00:41:39,160 --> 00:41:46,280 Yes, I made the numbers so that I don't have to use a calculator. 547 00:41:46,280 --> 00:41:50,160 Notice something interesting. 548 00:41:50,160 --> 00:41:56,960 The market's required rate of return, 2.0%, is higher than the coupon. 549 00:41:56,960 --> 00:42:08,800 So the price of the preferred is below the face value, just like bonds. 550 00:42:08,800 --> 00:42:12,520 It's the same mechanics. 551 00:42:12,520 --> 00:42:22,200 Now if I'd had, let's say, a required rate of return of 1.5%, that would have been lower 552 00:42:22,200 --> 00:42:25,740 than what the stock actually pays. 553 00:42:25,740 --> 00:42:29,480 So this price would have been above $80. 554 00:42:29,480 --> 00:42:39,960 Would have sold at a premium to the face. 555 00:42:39,960 --> 00:42:42,080 Preferred stock is a joy. 556 00:42:42,080 --> 00:42:44,920 It's easy to price. 557 00:42:44,920 --> 00:42:52,520 As you saw in the last lecture, common stock can be an absolute bear to the horizon value 558 00:42:52,520 --> 00:42:59,960 approach, the dividend growth model, CAPM use that to find a discount rate and all that. 559 00:42:59,960 --> 00:43:05,360 In any way you cut it, it's going to be a pain in the butt. 560 00:43:05,360 --> 00:43:12,640 Now one last pointer. 561 00:43:12,640 --> 00:43:26,220 Technically speaking, the intrinsic value of the equity would be, technically, the sum 562 00:43:26,220 --> 00:43:38,400 from i equals 1 out to infinity of the free cash flows per year, FCF sub i, divided by 563 00:43:38,400 --> 00:43:45,520 1 plus the weighted average cost of capital to the i-th power. 564 00:43:45,520 --> 00:43:51,760 In other words, the sum of the discounted values of the future free cash flows. 565 00:43:51,760 --> 00:43:59,320 That's technically the value of a company, intrinsically. 566 00:43:59,320 --> 00:44:04,360 Well that's good, but that means that you would have to project free cash flows from 567 00:44:04,360 --> 00:44:07,960 year one out to year infinity. 568 00:44:07,960 --> 00:44:12,540 And let me tell you, that can take a while. 569 00:44:12,540 --> 00:44:20,720 Usually we go out to do this model, we'll go out maybe 10 years and say any free cash 570 00:44:20,720 --> 00:44:26,060 flows after that, they're discounted so much that they really don't matter much anyway. 571 00:44:26,060 --> 00:44:32,840 But even that isn't such a good idea because the farther out in the future you project 572 00:44:32,840 --> 00:44:39,060 anything, the less certain you are about it. 573 00:44:39,060 --> 00:44:46,040 So yeah, and I do this, I can show you, and I will if you take some of my higher level 574 00:44:46,040 --> 00:44:50,480 courses which I'm sure all of you are saying, just so excited to do. 575 00:44:50,480 --> 00:44:55,960 But I can show you how to project the cash free cash flows out as far as you want. 576 00:44:55,960 --> 00:45:02,400 You build pro forma, we call them, financial statements, and then you grind them down through 577 00:45:02,400 --> 00:45:08,640 that free cash flow formula, you know, the no pat plus depreciation minus capital expenditures 578 00:45:08,640 --> 00:45:11,000 minus change in networking capital. 579 00:45:11,000 --> 00:45:16,400 Yeah you can do it, but when you're projecting out that far, you might as well stop and just 580 00:45:16,400 --> 00:45:22,600 call Madame Zabita's psychic hotline and ask her what it is. 581 00:45:22,600 --> 00:45:29,120 It's probably better than some of us at projecting what it'll be. 582 00:45:29,120 --> 00:45:36,880 Or you could use chat GPT and it'll just make up numbers out of nowhere and give you answers. 583 00:45:36,880 --> 00:45:40,320 Let me show you one last, one little thing. 584 00:45:40,320 --> 00:45:53,180 The book goes into this complicated formula for calculating what's called enterprise value. 585 00:45:53,180 --> 00:45:59,640 This is one approach to finding the value, the intrinsic value. 586 00:45:59,640 --> 00:46:05,660 And they go, and the book goes through this grueling, it's a pain in the ass to do. 587 00:46:05,660 --> 00:46:11,780 This number and that number, return on equity minus, there's actually a shortcut. 588 00:46:11,780 --> 00:46:18,800 The book mentions it, but how we actually do it, this is how we actually do it in real 589 00:46:18,800 --> 00:46:21,420 corporate finance. 590 00:46:21,420 --> 00:46:27,840 This way you go to a service like Standard Importers Global Net Advantage and you say, 591 00:46:27,840 --> 00:46:39,160 okay, I can look up enterprise values for an industry, the average enterprise value 592 00:46:39,160 --> 00:46:43,160 for an industry. 593 00:46:43,160 --> 00:46:49,700 You just tell it, do an industry search, it'll give you all these numbers to find the enterprise 594 00:46:49,700 --> 00:46:50,700 value. 595 00:46:50,700 --> 00:46:54,320 It supports it by industry, by SIC. 596 00:46:54,320 --> 00:47:02,560 And then you look down and you say, okay, now let's find the EBITDA, earnings before 597 00:47:02,560 --> 00:47:10,960 interest and taxes, depreciation and amortization for the industry. 598 00:47:10,960 --> 00:47:12,680 The numbers are right there. 599 00:47:12,680 --> 00:47:17,600 Global Net Advantage gives them, there are other services that do it too. 600 00:47:17,600 --> 00:47:31,520 And then you multiply that by the EBITDA of your company. 601 00:47:31,520 --> 00:47:40,560 That gives you the enterprise value of your company. 602 00:47:40,560 --> 00:47:45,220 It's much shorter way to do it than the formula that the book starts with. 603 00:47:45,220 --> 00:47:49,080 The book ends with saying, oh, by the way, you could do it this way. 604 00:47:49,080 --> 00:47:56,080 But this way is easier and I guarantee you that corporate finance jockeys are going to 605 00:47:56,080 --> 00:47:58,760 use this every time. 606 00:47:58,760 --> 00:48:02,480 Now you take the enterprise value divided by the number of shares outstanding and you've 607 00:48:02,480 --> 00:48:12,160 got a decent picture of what the intrinsic value of each share is. 608 00:48:12,160 --> 00:48:17,400 It's fast, it's dirty, and you can do it even as an outsider. 609 00:48:17,400 --> 00:48:18,840 It's quick. 610 00:48:18,840 --> 00:48:24,560 You just have to go in and get these numbers and you get the EBITDA just on the financial 611 00:48:24,560 --> 00:48:29,720 statements of the company and then just divide by the number of shares outstanding and you've 612 00:48:29,720 --> 00:48:33,200 got the intrinsic value per share. 613 00:48:33,200 --> 00:48:37,760 Anyway, that's all I have for you. 614 00:48:37,760 --> 00:48:43,320 You now have a quiz to take and when you're finished, you can go. 615 00:48:43,320 --> 00:49:11,760 I thank you.