Alan Kring Productions and Associations with Emergent Light Studio presents the Illinois
State Collegiate Compendium, academic lectures in Business and Economics.
This is Business Finance, FIL 190 for spring semester 2024.
Today Fundamentals of Business.
This is actually Chapter 1.
I'm catching up here, some of Chapter 1.
But before I do anything in terms of content on a given day, I open up the lectures by
saying let's look at the numbers.
And every day we do this.
Now some of you may be more informed about how to read the stock markets and the bond
markets and commodity markets.
Some of you aren't.
But I bring you up to the speed and I use the terminology, oftentimes the lingo of the
field.
In other words, as a practitioner in finance having owned a penny stock house, having worked
in the industry and provided consulting and having students, former students out there
now, I sometimes use terminology or I give you insights that are not part of the normal
flow.
And understand that what I am doing in this course and what we do in finance at a university,
one of the ranked universities of the country, we are taking you down the path of finance
that is for finance professionals.
Not for day traders, not necessarily for arbitrageurs, although we'll talk about those speculators.
These are the kinds of thinking patterns and data collection that we do when we are in
charge of a lot of money.
Now obviously no one in here, including me, has a lot of money.
And when I say a lot, it used to be kind of funny to talk about a billion dollars and
now that ship is sale.
We're now in the trillions.
But you'll be dealing with money either in corporate life, lots of money, or you will
be dealing in a brokerage house environment or in the real estate industry where the numbers
are large beyond imagination and your responsibilities are serious.
You make a mistake in these businesses.
It can be a lot of money that is lost.
Another warning to you, the SEC is the federal body that oversees securities law.
It is an agency, and I'll give you this again, one of the things you'll get used to in my
lectures is I say the same things over and over again from one lecture to the next, just
laying on this knowledge and just beginning to use it commonly at first and then later
giving you more firmer definitions.
But the SEC is the heavy duty body.
They set up regulations that are then promulgated to brokerage houses and to other industry
participants.
These are the thou shalt nots.
In other words, an agency is an interpreter of laws and then the agency is responsible
for seeing to it that those laws are turned into regulations that are doable by the industry
in which regulations are set.
However, there are a lot of overlapping agencies that watch us.
Public is the SEC.
You make a mistake, the SEC can take civil action against you.
If you make big mistakes, they can refer for criminal action to the Department of Justice,
the DOJ.
That's one level.
Then you have the states that have their own divisions of securities and other regulatory
bodies of interest and they can come after you as they have in my past.
In matter of fact, there are some states that I still would not go to to this day because
of trouble that I got into.
I'll tell you more about that in time.
However, then there are the self-policing organizations like the NASD, the National Association
of Securities Dealers.
They will watch over you and they were the ones with whom I interacted the most over
when I was working in the consulting industry.
And then we have another body, FINRA.
FINRA is overseeing us as well.
They are proud of bragging about how many of these brokers and advisors that they crack
down on and fine and get out of the business.
Well here's the reality of FINRA.
FINRA will go after the little people and they will squash them by literally the thousands.
But they will leave the giants alone.
They won't even touch them.
That's FINRA.
FINRA is really be careful because they're watching and they want feathers in their cap.
I'm being honest with you about this.
This is not the traditional text.
FINRA is there to protect the average investor from activities that are not in the average
investor's good.
Bullshit.
They'll do that at the low level but they will not do it at the high level.
Just like the SEC is afraid at a certain level, even the SEC is not in the mood to get into
a fight with some of the heaviest and the dirtiest players in our business.
But that's the reality of it.
We behave responsibly in our business.
We're not in it for ourselves.
We are agents of some larger entity, generally speaking.
Now we can play for our own hand.
Hell, I do all the time.
And sometimes I violate my own rules about what you should and should not do.
But when we get into that environment where we are managing a portfolio for some wealthy
client, where we are in a corporation and we are managing cash flows, some of which
will go to the pensions of everyday hardworking people, when we are in the real estate industry
and our main job is not to make ourselves big wigs and fancy people but to make sure
that housing is moved to its best possible use, that means that we have to watch what
we're doing and we have to think in a longer term framework.
We're not trading to make a buck tomorrow.
We're trading over a long period of time and I will show you a lot about that.
If you, in other words, buy and hold strategies are superior by the data, year after year
after year, to these jump in, jump out, dance around like a chihuahua.
No, you hold on and you don't get scared.
I'll tell you a story about this from my own military experience many, many years ago.
Our job is to hold our cool, stay frosty.
Our other job is to make our enemies scatter, freak them out, make them panic.
This goes clear back to the Roman legions, goes back to the 300 of Sparta.
The commander would say, Spartans hold or legio hold, stand your ground, let them come
to us and we don't panic.
If it's a down market, I don't care if it's a black swan, a black swan is a really, really
bad day.
You know, a bad day where people jump off buildings.
Even in a black swan, you don't shit yourself.
You just stand there and say, okay, it goes down and it will come back up.
That's the reality of it.
During the 2008 catastrophe, the people who freaked out and ran, well, they were selling
out after the prices had gone down.
It took them an average of five to seven years to get back to where they were right before
hell broke loose.
The people who just held on, rode it down, rode it back, two and a half years they were
back to where it had been.
That's just reality and that's the data.
That's not an opinion, that's the hard data of it.
Now, it sounds like I'm getting a little harsh here, but I've got to get you guys to the
point where you are pros.
Pros don't panic.
Pros don't look for the quickie, the fast deal, the arbitrage or some recommendation
from some idiot talking head on the internet in financial news network or some blog.
You can think for yourselves and I want to make sure you come out of my class able to
look at these numbers that I'm going to pull up here and know for yourself what they are
telling you.
It's not that hard.
There's an old rule back from my time in probability theory.
You can either use simple statistics or statistics that need a PhD.
If you're trying to play in the middle with self-designed weird stuff, you're wasting
your time.
Simple numbers can tell a story that will carry you on past this course.
So without further ado, now I do apologize for using Yahoo!
Fidance for these, but that's just the way it is.
I mean, I can go into Standard Poor's Global Net Advantage and I'm going to show you that.
You should have been shown that in your Business 100 class, but I'm going to take you into
Standard Poor's Global Net Advantage.
I want to take you into my own TD Ameritrade account, but I pulled that TD Ameritrade account
up and my account number is there and I can't figure out how to get rid of it.
I've had some of their techs help me, but no, I'm not going to let you have a chance
at my account.
Yeah, Drebaugh.
Well, there's not much in there now.
You have to be honest about this.
Several times I'm up really good and there are other times when I am so poor, I am PO
PO, I can't afford the OR, so I'm just PO.
And that's what's happened a couple of times recently, so I'm down nasty.
I was straight up, in my fund money, I was up to almost 12 grand.
Right now I've got $600 in there.
Boy, was that a nasty options play.
Anyway, okay.
Now I'm going to talk to you about the numbers.
Listen to the words that I use.
Whether or not you know anything about this or not, I want to use terminology.
We're going to look at the broad numbers.
First of all, there are two kinds of numbers that are going to come up here.
The ones that have a number after them, see like the Standard Poor's 500, the Dow 30,
Russell 2000, those are just index portfolios.
They're hypothetical portfolios.
Well we put together 500 ginormous companies and we track the portfolio day to day.
Okay.
That would tell you something.
The Dow 30, that is 30 of the giants of the earth.
We used to call it, and you may even hear me slip once in a while, the Dow industrials.
They're not industrials anymore.
I think the originators of the Dow 30 would turn over in their graves if they knew that
Mickey Mouse was one of the Dow 30 now.
But there you are.
And then the Russell 2000.
This is kind of a hodgepodge and it's kind of hard to say, well what does this mean?
We're going to talk about that in this class.
You want to get a sense of different parts of the economy.
The NASDAQ is a full blown exchange.
It's an actual exchange.
It is an electronic exchange.
It's been around forever.
I mean I was using NASDAQ screens back in the 1980s and in my brokerage house we were
using the NASDAQ electronic BBS for buying and selling, doing trades.
This was in the early 90s.
So it's purely electronic.
There's no floor, no physical place.
It's just everywhere.
Now another exchange would be the giant New York Stock Exchange, the NYSE.
I mean those are the big, big heavies that are on the NYSE and other ones are out there
too.
I keep bringing up the American Stock Exchange, the Amex, but it kind of doesn't exist anymore.
But do know that exchanges are everywhere and there are not just the national exchanges.
There are regional exchanges too like the Philly X and others like that where they're
limited in their region and in the scale of the companies on them, but they're out there.
Now all over the world there are exchanges and there are also index portfolios.
Generally speaking in Europe they're not called exchanges.
They're called BORSEs, B-O-U-R-S-E-S.
Well the London BORSE or the Swiss BORSE or something like that.
It's an exchange.
I guess that's their term for it.
The Han, the Tokyo exchange, the Hong Kong exchange and all of these.
They're just all over the world.
Exchanges are by country.
Interestingly I teach in third world, third world, second world countries.
Boy that could get me hanged in those countries, second world countries.
And even those have their own exchanges.
I had this experience with these representatives.
They were delegates that I taught finance to from the Republic of Ghana and they wanted
me to go on our exchange.
You've got to see this.
We have a real exchange.
And I thought, oh, that surprises me.
So I went on it.
There were like a handful of companies.
Trading volume was a couple of hundred shares a day.
So I was polite.
I thought, this is great.
But look at that one.
It just traded 10 shares.
That company did.
Some of them are huge.
But it's a place where buying and selling can happen.
The whole name of the game for us is liquidity of the markets.
Liquidity.
And man, that word comes up all the time for us.
Now understand, liquidity is the efficiency with which an asset can be converted to another
asset.
Liquidity is the efficiency with which an asset can be converted to another asset.
By the way, if I repeat a definition two or three times,
guarantee it's gonna be on a quiz or an exam.
Now you gotta be careful because you go on Wiccustupedia
or Investo-stupedia, they'll give you another definition.
It sounds almost like mine, but it's incorrect.
Now let me explain liquidity in terms of markets.
You need to have enough efficiency, in other words,
a low enough transactions cost,
that you can get trades done quickly,
these days, almost instantaneously.
In fact, early in the morning, one of the places
where you can play markets a little bit,
and I've been successful too,
is in those first few minutes when the market opens,
you see the liquidity building.
And once in a while, you'll see slight price defects,
because there's not enough liquidity to move orders
from the buyer-sell column that were pending
in the overnight market out into the actual execution
of the trade.
So it happens.
Now I'm using a lot of terminology here.
Don't worry, I just keep talking about it over and over again
until you get to the point
where you can use the same terminology.
But that liquidity is a very important thing.
Our markets are so damn liquid, it's ridiculous though.
The trading volume, let me show you something here,
real quick.
Let's look at the S&P 500 index portfolio.
The average volume on a given day
is almost four billion shares.
This is those 500 stocks.
The total amount of trading in those stocks
on an average day over the last day,
on an average day over the last 52 weeks,
has been almost four billion.
Now it's obviously gonna be smaller now
because the market's just ding dinged about an hour,
hour and a half ago, something like that, I don't know.
But you can see that that, I mean,
this is ludicrous kind of trading volume.
And by the way, once in a while,
you'll hear me use the term OBV, on balance volume.
I'm throwing a lot at you here.
Just get used to it, we just go keep going through this
over and over again.
But on balance volume,
going back to the ancient times
where we used paper and pencils and pens,
we always had what's called an open order book.
Every broker had it,
where you would have open orders listed.
The name, the trading symbol, whatever,
and the number of shares,
it's a buy or a sell and all of that.
And through the day, you would be filling in
that open order book, line by line, down,
as trades came in and then they were executed.
And then at the end of the day,
those were aggregated and you got the on balance volume
for the day, the OBV.
But there are other markets now, dark markets,
where a lot of trading is happening too.
So when you see that almost four billion,
it's probably maybe about a billion more than that,
half a billion to a billion more than that
because of the dark market activity.
This is illegal activity.
It's just transactions that happen in the dark web
and with proprietary prop houses
and all that kind of stuff.
And so that's becoming somewhat noticeable now.
Once in a while, now eventually,
something that happens in the dark market,
the trade, it will percolate back up into the open volume
when it's traded at some point later on.
And so sometimes you'll have,
where the hell did that come from?
It would probably something that happened
in the dark markets months ago and now,
whoever got the order filled in the dark
when it came into the light to get rid of the order
or something like that.
But yeah, so this isn't the whole thing now.
So you'll hear me say OBV, open the on balance volume,
because that's the one we see.
What's happening in the dark?
There are ways that I could see parts of it,
but it's distributed and decentralized, it's defied.
So I couldn't tell you how much is actually there
on any given day.
Not even a guess would probably be legit.
But anyway, we'll take you back up to the front end here
and get you into this.
Okay, now, these are indexes and exchanges, okay?
However, they aren't the whole world
because the world is made up of commodities as well.
There's a pretty one right there, crude oil.
Crude oil is a world of its own and it affects us
because eventually wither goes the crude oil prices,
so goes our gasoline prices.
Now this is just one benchmark.
This is light sweet Brent,
but there are literally dozens of grades of oil.
I did work in the oil and gas industry
down in Texas years ago.
And I mean, what came out of the ground there
was this what we call sour sludge, almost tar,
stunk like the dead dinosaurs it came from.
It was just awful, worth nearly the barrel per barrel price
of this light sweet stuff.
And then there are grades in between,
intermediates of all kinds, intermediate crews,
and those all have their own prices.
The crude that you see here is just a benchmark
because usually the other ones follow the price of this
and this is the price per barrel.
It is affected by supply and demand dynamics,
but as is the truth of all finance,
it is not based upon what happened yesterday.
It's what is the case now and what we think it will be
tomorrow and the days after tomorrow.
So when I see the price of crude,
see how it popped a little bit this morning?
That by the way, right there,
what you see there is called a spark chart.
Now you can do these for yourself in Excel
that are kind of fun to do, make a quick note.
So you notice that crude has been sinking
and then something spooked the market a little bit
and then something really spooked the market
and it popped a little more.
What spooked the market?
I didn't check on what was going on today
to be honest with you, but it's probably something like,
oh yeah, we've got a little more activity
among those combatants in the Middle East
and that's going to affect the price of oil
and if we piss off Iran too much,
they're going to close the Strait of Hormuz
and start putting land mines in there
and firing sunburn and silkworm missiles
at anything that comes through.
That's a disruption of the supply chain
and so that should make the price of oil go up a little bit.
I want you to start thinking in these terms,
supply and demand, expectations of what's
going to happen next, not what happened yesterday,
what's going to happen next.
So yeah, we got a little bit of an excitement there.
Seems like the Ukrainian situation is pretty much
in a stable mood right now.
There is oil shipped through the Black Sea
and of course, that becomes a target for the combatants,
Ukraine on one side and Russia on the other,
although they've agreed not to shoot each other's ships
with commodities in it.
But anyway, there you go.
That's crude oil.
It tends to like to play in bands.
In other words, right now it's got a trading ban
from about 72 to 79 and it's going to work in there.
Now it's popped above that band, obviously,
a couple of years ago.
It's skyrocketed up 125, something like that.
But then it found its way back into this band right here.
It went a little below that band at one point.
So the oil prices went up.
So that means that gas prices are
going to go up, not necessarily and not right away.
You also have to look at how much crude oil is
in the reserve tanks, on the high seas,
how much is made to the refineries.
You also have to ask, what are the competitors
and what are their supply conditions for that crude oil?
Oil can be turned into gasoline, but it can also
be turned into distillates like diesel, kerosene, jet fuel.
So if the diesel is way high in price,
well, there's probably going to be an effort by the refineries
to take some of that oil that would have been used to make
gas and use that to make some of the diesel.
Just the way it works.
So it's a complex scenario.
It's not something, understand this,
and I think I've already said this a little bit.
You are learning and you are going
to become more knowledgeable than easily 99%
of the people in this country.
It's your responsibility to know what's really going on.
Let them have their bread and circuses.
Let them have their conspiracy theories.
Let them think whatever they will,
as long as they leave us alone and let us get the real work
done of the big people.
So just a little elitism there.
And don't think that you're a common person.
You're in this class, so you ain't no common person anymore.
Gold.
Gold is a metal.
Gold is a little different from silver and copper,
because gold has this weird ass cult around it.
We call them the gold bugs.
You should buy gold right now, because the world
is going to come to an end.
Quit.
Stop it.
So they sometimes have surges that spike the price of gold
when they get together on some back channel on the internet
and start getting spooked by things.
And then it settles back down after a while.
More likely, you're going to get a picture of what
the commodities are if you're interested in metals
by looking at silver.
So notice how gold did not pattern silver.
Now gold and silver are gold is highly speculative.
It has an underlying supply and demand.
Gold for electronics, gold for cosmetic jewelry,
that kind of stuff.
But it is heavily affected by those loopies that come in
and run around and then run back out.
Silver is not so likely to be affected
by those random, bizarre things that happen.
Although once about a year ago, was it?
Some idiots on Reddit told everyone to buy silver.
And for some bizarre reason.
So there was one of those unexpected and very rare
odd behaviors of silver.
But mostly silver is driven just like copper and titanium
and all those by the supply and demand
dynamics of the markets that are constituents for those metals.
Now I'm going to go in next week and talk to you
about currencies, how you think about them.
One of the classes that I teach here is international finance.
Currencies and international finance are actually fun.
The math is not hard, but you get
to talk about geopolitics and geoeconomics and stuff
like that.
And so they can actually be kind of fun markets.
OK, now let me go over here.
Bonds.
This is a benchmark 10-year treasury.
A benchmark.
There are bond maturities of all kinds.
You'll see that later in the course.
And but we use the 10-year treasury
as a benchmark for where all bond prices are going.
Now understand that what you're seeing there is not a price.
It is a yield.
The yield and the price are mathematically inversely
related.
They are inversely related.
You'll see that as I said.
You'll see that later in the course.
So when I see that the bond market has dropped,
see that?
Yields have gone down.
That would mean that the price has gone up.
There's buying activity.
Demand is pushing to push prices up.
Mathematically, that makes the yields go down.
That's good news for us, because as those yields go down,
that is an indication that interest rates in general
are sliding, which will increase business activity.
So that's kind of a good thing there.
Yeah, apparently, all these investors are buying bonds.
A lot of investors are grabbing up bonds.
Demand goes up.
Price goes up.
Yield goes down.
One of those chains of logic we have to rely on.
You had your economics courses here, right?
Yeah, OK.
I used to teach economics.
In a typical class, I'm assuming that you're probably
a little sharper on remembering supply and price
and demand and quantity demand and all that kind of stuff.
But I'll still emphasize it over and over again in here,
just so that you bake that into your thinking.
You see, bonds are safer than stocks in general.
That means that if you are worried about stock prices
or companies and the economy, you will move.
You will sell stocks and buy bonds.
You'll move away from the risk.
We call that flight to quality.
Flight to quality is the movement
of a large-scale movement of investors' funds
from riskier assets to safer assets.
It is the large-scale movement of investors' funds
from riskier assets to safer assets.
Flight to quality.
There's an old saying going back decades.
From stocks to bonds, from bonds to gold, from gold to bullets.
Let's hope that we don't get that scared.
But literally, you will see, sometimes, you
will see investors bailing out of stocks.
You'll see stock prices going down and bond yields going
down, which means bond prices are going up.
The investors are selling their stocks,
using the proceeds to buy bonds.
But if it's really bad, well, hell, we're
going to sell our stocks and our bonds.
We're going to buy ourselves some gold,
because you could trade that even during the zombie apocalypse.
And don't forget, zombie apocalypse, double tap,
cardio, all that.
Some of you know what I meant.
Some of you don't.
OK, whatever.
But yeah, so look here.
Look.
OK.
We see that the stocks are going up in price,
and the bonds are going up in price.
Well, that's good news.
I mean, there's general, oh, buy some stocks, buy some bonds,
make a nice balanced portfolio.
Everyone's excited.
Gold's going down.
So no one's going for gold.
That's a good sign when both of those markets
are showing strength, because that means that investors are
not in any kind of panic.
They're just filling in their portfolios,
balancing some stocks with some bonds,
and all that kind of stuff.
That's a nice day.
It's a good day.
Now, before I go any further, let me make a point very clear
here.
See that, well, S&P 500 has gone up $7.97.
$7.97.
Well, you know what?
We don't give a rat's ass about that.
All that matters are percentages.
All that matters are percentages in our business.
The Dow went up 700 points.
How big whoopty-doo, who cares?
How poor was the percentage gain?
Let me explain.
You buy a stock for $10, and it goes up $1.
That's a 10%.
Well, you also bought a stock for $100,
and it went up $1.
Same amount.
But, well, spank me, Jesus.
They are not going to be able to buy a stock.
They are not the same.
You see, percentages are all that matter to us.
And it will drive people crazy sometimes
when you just kind of ignore the prices.
All that matters are the percentage changes
from one minute to the next, from one day to the next,
from one year to the next.
Because we convert everything.
Well, remember I told you about liquidation.
We want everything in dollars.
But then we want anything that's a change in percentages.
Because the dollar amounts themselves
really don't matter much.
So keep that in mind.
But here we see, before I go any further,
you notice that the Dow at the ginormous end of the economy
and the NASDAQ, which is small scrappy companies,
small caps as we call them for the most part,
they went up pretty good too.
But there's that big giant swath in the middle, the S&P 500,
that's just peeing along at about 15%, 16%, 5%, 0.16%.
So apparently that big, heavy 500 big companies of the world.
And by the way, those 500 are about 2 thirds
of the entire world economy, which is kind of scary.
That's the one you would look at if you wanted a world
portfolio, which we'll talk about later.
But it's not doing as well.
It's still up.
And you see all of them up for the day.
So we have a bull market today.
A bull market is a market going up.
A bear market is a bear market going down.
The old joke is if it's going up and down,
we call it a kangaroo market.
So tomorrow, or rather on Wednesday,
I'll bring up the number and I'll say,
is it a bull day or a bear day?
And you'll say, well, it's a bull day.
No, you say bull.
It's a bull day.
You've got to be positive about it.
But this one isn't a spectacular bull day.
I mean, I'm not going to say no to the money
that I'm making here today.
But it's not one of those big, big upswing days.
But from minute to minute, notice
how it was rolling upward at the start.
You see all the spark charts were coming up.
On the opening bell, there was buy pressure.
The buy volume was larger than the sell volume.
So that was overall.
So that was bringing up the prices.
But then the bears came in and they started saying,
no, I'm not going to let you do that today.
And so you notice that they've all topped
and they're drifting downward now.
Nothing major going on here.
This is just how it works.
You can get into this thing where you just kind of stare
at it from minute to minute because it begins
to have kind of a fascination all of its own.
But keep in mind that greed is driving everyone.
There is no charity in this.
This is all objective.
The heavies and the hard players,
they don't give a rat's ass about the political environment.
Well, this politician said, or that politician,
we don't care about that at all.
We're looking at our expectations of the future
at any given point in time.
So if I am up there at that peak, well, that's a peak.
We better run.
How do you know that's the peak?
You're running because you got some news that something bad
was going to happen.
Not something major bad, but that gave the bears
the incentive to ride in, sell, and the bull said, OK, I'll
sell.
It happens from minute to minute,
and it's from hour to hour.
And that's what's driving this, not some spooky conspiracy
theory.
These are just the actions of a physical system
driven by greed, pure and simple.
Mother's work is never done here.
I've got to get down to the other part of the lecture here.
But let me show you something real quick here.
And no, I'm not going to do cryptocurrencies.
If you think for one minute that I'm going to look at the crypto
markets, you are wrong.
But look here.
These are just a couple.
Notice these are indexes.
But they are indexes from other exchanges.
The Nikkei, that's 225 big stocks on the Tokyo Exchange.
It gives us a sort of a pulse of what's
going on in the overall exchange itself.
But that market was happening last night.
They're all asleep now.
While we were in bed, they were rolling.
So if you are going to be a global player, a global warrior
in the future economies, you've got to be a clocker.
Some place is always awake and alive and rolling.
Now, as the sun, it was nighttime here.
And that Nikkei was trading.
They were yelling and chopping each other and screaming
and all that kind of stuff.
And then the sun set in Japan.
And it was rising across Europe and lighting up
their exchanges.
And then it lit up the London Exchange,
the Financial Times Securities Exchange, 100 stocks
on the London Exchange.
And then they were alive and rolling.
And then as the sun was going down,
the East Coast of the United States was waking up.
And there's a little bit of an overlap
between when the closing bell happens in London
and when the opening bell happens in the United States.
I think we're past it now.
But you can see that the FTSE, I'm pretty sure that's done.
No, it's still awake.
You see it?
Look, see how the numbers are still changing?
So they're still at the end of their day.
They're about to say, Jolly good.
Let's go have tea and crumpets or something like that.
And then this comes up over here, and we wake up to sausage,
gravy, and five eggs, extra cholesterol on our side.
And we are alive now.
And they're getting ready to close.
They're near to see how they're really close to the end.
But you see how each market, each country, each exchange
has its own players.
But they all work on the same forward leaning analysis.
And so over there, Nikkei had a decent day.
But notice that it started out up.
But then it just kind of drifted a little bit up.
But most of the real change happened right
off the bat in Tokyo.
In London, you can see that it started out up.
But then, just like it happened here, oddly enough,
the Bears took over, drilled it, actually
went to negative for the day, about a little
after lunchtime in London.
But then the Bulls came back.
They lost their losing a little bit of their mojo
here at the end.
That could be some profit taking.
You see, if I've made money through a day,
sometimes I will dump a little bit of my stock at the end,
take the profit, and wait for what happens tomorrow.
So sometimes you will see a little bit of a drop
towards the end of a day as some of the players
what we call skim the cream off their portfolio
and wait for what's going to be exciting for the next day.
But whatever happened in London, then we come over here
to the United States.
And the opening bell.
However, make no mistake, these markets
are not asleep before the bell rings in the morning
and after the bell rings to close at night.
There is the aftermarket.
These are buy and sell orders that are being put in
after hours.
And they build pressure.
Like if there are a lot of sell order or buy orders,
let's say, overnight, and then there's
the pre, the pre-market, where more buy and sell orders are
being put in before the bell rings.
Those create pressures either for a price drop or price rise.
So those can actually cause some interesting things to happen.
At the beginning, you can see there on the Nikkei.
Did you see how that thing started out up there
in the green?
That was a lot more on balance buy orders than sell orders.
And when the bell opened, that floodgate
trade because the orders were there to clear off
the open order book.
So you get that too.
And sometimes, if you take one of my late classes,
matter of fact, you'll see that all the stock price activity
is still changing.
But it's aftermarket activity, where the price is changing,
but it's not official until the next trading day opens.
And then, surprise, sometimes it's
something big that happens.
And that can cause some interesting things
on liquidity in the first few minutes after the bell opens.
As those orders start getting executed, your liquidity
can drain out if it's a lot of sell orders real fast.
Or suddenly, the liquidity could go through the roof
within seconds if it's a lot of buy orders that are suddenly
being filled, and that liquidity is flowing into the brokerage
house coffers.
Had enough of that?
I'll take you through a stock on Monday,
and we'll start looking at the nuts and bolts
of financial, of basic investment analysis.
It's not hard.
You just have to remember what numbers tell you what things.
But for the remainder of this class for today,
I've got to step back here a little bit.
Most of what I am going to tell you here
and what's in the book, you should have
been taught in business 100.
In some cases, you didn't hear it.
You're a new student.
In other cases, they didn't even push it too hard on you.
But in our world, we have to know these things.
Let's see.
You, sir, you are an entrepreneurial sort.
You have decided that you want to make some money,
a side hustle.
So you buy yourself a lawn mower and a truck,
and you go around and you mow lawns for rich people.
Well, who do I make this check out to?
It's you.
You are that company.
That means, for one thing, that all of the money
that you make after you pay bills is yours.
There's no question about it.
But so is all of the risk.
You're going along mowing some rich person's house here
in town, and you don't see their poodle.
Oh, you give that animal a show dog trim.
Well, they sue you.
They can sue everything they are suing you.
They will take your mower.
They will take your truck.
And they will take, as a matter of fact,
they will shoot your dog, sell your Bible on Craigslist,
and make your parents wear furries.
They can do that.
Because you are all at risk.
You are a sole proprietor.
You are all at risk.
And when you die, the company dies.
That's all there is to it.
There's nothing else about this.
It's very simple.
Simplest organizational form there is.
And it has been happening by volume.
Sole proprietorships are the largest category
of businesses on Earth.
We're pretty sure.
We know sole proprietorships go back far into the past
to the Romans, the Greeks, the Egyptians.
We have some reason to believe that we even
saw pre-modern humans that were engaging in business.
From some of the evidence of production activity happening
on some of the Greek islands, possibly Neanderthals
were going there to get the really nice flints and all
that.
And then they were taking them back.
And we find those same flints from those islands
all over the place.
So they must have been doing some kind
of entrepreneurial work.
But that's the sole proprietorship.
Now understand that this puts you all at risk.
As you know, I have my own company,
I Emergent Light Studio.
It began as a sole proprietorship many years ago.
And it was called, at that time, it was Digital Images
by Alan Crane.
And then you can actually change the name
so that you have a fictitious name.
You're allowed to do that.
In almost every state, you can file some forms and paperwork
and wait a while.
And you can actually have a usable alternate name.
In my case, just many years ago, I
filed forms with the state of Illinois
to change it to Emergent Light Studio.
So I could go to my bank, and I'd
show them that I was authorized to use this name.
And they'd say, OK, if a check comes in under Emergent Light
Studio, that's your bank account.
You can do that.
If you're interested, I can tell you how.
It's not hard.
It may cost about $50, something like that.
But you can do that too.
But it's still you.
It's still you, even if you have an assumed name
or a fictitious name, depending on what state you're in.
They call it different things.
That's fine.
It's a good thing.
And you do have to fill out.
You have to report your income.
You fill out your ordinary income from your W-2.
But then you fill out an extra form called this.
You don't need to know this yet.
But it's called Schedule C. And you just say, OK,
I made this extra money, and I had these extra expenses,
and this is how much net I made.
And then that reports straight as a line on your 1040.
Unfortunately, there's another form
you report that profit to.
That's called the Schedule SC, where
they calculate your Social Security tax.
And then that number goes to your total taxes owed.
So you get whacked twice on this.
That becomes taxable income.
And then there's the extra tax that you
have to add on to your regular income tax.
And it gets to be kind of a hurtful thing.
And the IRS has gotten very aggressive
in catching these little small enterprises
over the last 10 years.
I have found that I go to art shows.
And these big art shows, you've got a lot of mom and pop
operations selling soy candles or whatever.
And you get these people all coming in and looking
at your stuff.
And some of them just ask too many questions.
You can tell they're field agents for the IRS
trying to catch the non-reporters,
the small businesses that are non-reporters.
So you do have to watch it, because they're
getting more aggressive now.
A little small entrepreneurs are destroying
the national treasury, ruining our budget, and all that.
Anyway, so that's the game with the sole proprietorship.
Now, there's a little step up where you can get
a couple of people together.
It's a little more of a formality.
You decide that you're going to do a business with this person.
Now, you have to understand that that
means that you are both jointly and severally
liable for anything that happens bad.
So if he screws up, you have screwed up.
What are you going to do about it?
Well, aside from beat the shit out of him,
you are stuck as much as he is.
And if either of you dies, the partnership is dead.
It's gone, because it was nothing but two mortals.
Just like the sole proprietorship, when he dies,
well, I'm going to give this business to my daughter.
No, you're not.
The business is dead.
As soon as you're dead, the business is dead.
Same thing, as soon as one of the partners in a partnership
is dead, then the business is dead.
And you're saying, now, wait a minute, fat boy.
I've seen these partnership law firms where a partner dies
and the partnership doesn't go away.
That's because they formed it properly
with the articles of formation, which
you have to file with the state for a partnership.
You can make it so that it folds up and becomes
a new partnership under the same name in the blink of an eye.
But you have to form the partnership well
to be able to pull that off.
That's a partnership.
Now, there's an intermediate form
that I won't go through here with you,
because in the United States, it's being done so wrong.
And it just keeps the limited liability companies.
Very briefly, limited liability companies
are supposed to be limited in the liability.
In other words, the company bears
the liability of everything.
But there are a couple of caveats on that.
Membership, once the members have,
they're called members, the owners of an LLC.
Once the members are there, you can't really get rid of them
or bring in new members, not without collapsing the whole
thing and starting over.
A cool thing about limited liability companies
is that you can separate owners into two types, one that
gets the cash flows and the other that
gets the proceeds at the closure of the LLC.
And that's the key.
LLCs are not supposed to go forever.
They are supposed to be a project.
And then when that project is over,
you go on with your life.
The LLC collapses.
They are ideal, and I found them ideal back many years ago
when I was in consulting, for certain types
of entertainment projects where you could set up, OK,
we're going to be the distributors of a movie,
an indie movie.
That's all we're going to do.
We will distribute the movie for, let's say, two years.
And then we'll spin it off on VHS and beta.
Yes, it's that old.
And we will just give it over to a large retailer
to deal with from there.
So we'll get the distribution for a few years,
and then we'll walk away from it.
Now, there's a version of this called a limited partnership,
which I did a number of, where you have one class of partners,
general partners.
They're paid salaries.
They pay themselves big salaries.
But then there's a limited partners.
They put in the money, and then they
get the benefits of the free cash flows.
The limited partners are not allowed
to do any management whatsoever.
They have to stay on the sidelines.
To give you an idea of one that I did a couple of times
with several entrepreneurial types, low income
housing for the elderly, there was a program,
the state and the feds were both supporting,
where if you raised a certain amount of money,
they would match it, the state and the fed, either grants
or zero interest loans to make nice housing.
So the way we played it was this.
OK, we're going to sell units of this limited partnership,
$50,000 each.
We'll raise $5 million, and then the state and federal government
will match it with $5 million more.
And then we will also get a guarantee
from the federal government and from the state
that they will subsidize the housing, the rent,
of old people.
We'll build them for old people.
Really nice painted walls, a nice kitchenette,
and a community area, community and all that,
and maybe some kind of lightweight medical nurse
on duty some hours during the day.
And we ran them.
Three times I was involved in it.
We paid ourselves really, really good salaries.
And then we would send the investors two documents, K1.
One would recognize the profit we had made for them,
and the other would recognize the depreciation.
Now in both of those cases, those investors
were getting negative numbers.
Massive losses on cash flow, massive losses
on the depreciation.
And they loved it, because then they
had those to write off against their real income.
They were professionals, doctors, lawyers, dentists,
architects, things like that.
We would give them these for $50,000.
They would get maybe five to seven years of huge losses
that would take down what was their income that
was taxable on their 1040s.
And they would call us, when are you going to do the next one?
We love this.
So in other words, it was a tax loss vehicle.
And all we did, we didn't care.
We made our money off the salary.
And then at the end of the time, we would end the partnership.
We would close it out and sell the complex
to some real estate management company.
So there you go.
Partnerships can be cool.
LLCs can be cool.
Just don't abuse them.
Finally, the ultimate, the corporation.
Corporations, the perception often
is that corporations are a pretty modern thing.
A corporation separates the liabilities
from the owner's equity.
In other words, the corporation is a legal entity.
It is fully recognized as a person
under the laws of the United States.
It is responsible for its own bills.
It has no, well, let me put it this way.
The owners are just the owners.
They could be partly the management, the board
of directors, whatever.
But they are not the corporation.
11 years, no, 12 years ago in February,
I think February the 12th, I had a Business 100 class
and it was in the evening.
And I went in and I said, I'm going, with you watching
and giving me a little help, I'm going
to turn my sole proprietorship, Emergent Light Studio,
into a corporation under Illinois law.
Did it that in front of them.
It was quite a kind of a rush for them too.
But understand, first of all, corporations
are state entities.
They are not federal entities.
They are formed in a state.
So Emergent Light Studio, my company, is domestic in Illinois.
It is foreign in all other states.
So when I do a show in New York, I'm
a foreign company doing a business operation
in the state of New York or in Missouri or in some other place.
It's a state entity.
Now the feds get involved in all kinds of ways,
and I'll talk about that in a minute.
But anyway, they had just started it online.
You could incorporate online.
So I brought it up.
It was in this building on the first floor.
I remember distinctly over on that side
or on the south side.
And you fill out, well, what's the name of the corporation?
What business?
How many shares are authorized, which is hugely important?
Because once you've authorized, let's say, a million shares,
you cannot sell more than a million shares.
That's it.
That's your cap forever.
So that's why you'll see, I learned my lesson,
it's a double edged sword.
But normally, in this one, it was
going to be a private corporation.
I was going to own the majority of shares,
and then I might grant some shares
through a very carefully crafted private sale.
But overall, it was going to be a private corporation.
So I authorized 1,000 shares, and I gave myself
501 of those shares.
So I would have majority even if I sold all the other shares.
OK, so anyway.
OK, where is its primary business operation?
And then they want you to name the agent
for the service of process and the address.
So in other words, give them a name and an address
so that if there's any legal paperwork of any kind,
they know where to send it.
And there were all these other things.
And then I went through, and I looked, OK.
And I submitted it.
And I thought, back in the old days with paper, six weeks.
You filed the Articles of Incorporation on paper,
triplicate, and the Secretary of State
of the State of Incorporation looked at it six weeks later.
But this came back.
I was actually shocked.
Within 10 minutes, it came back qualified.
Now, the government never approves anything.
The term is qualified.
In other words, you have met the minimum requirements
for this.
And so it was qualified.
That was a birth certificate.
It showed the number of my corporation.
The Articles of Incorporation was qualified on it.
That's a birth certificate, just like a child.
But then you don't stop there, because then you
go to the federal government, and you
apply for an FEIN, a Federal Employer Identification
Number.
And there you go.
I filed that.
And it was kind of interesting, because the FEIN, it said,
what did you put in this box on your articles?
What did you put here?
Back and forth, just shuttling between the two.
And I hit Go, and it was 30 seconds, and I got an FEIN.
That's a corporation's social security number.
It is like a child.
It is fully recognized under the law as its own legal entity.
It has a birth certificate, and it has a Social Security
Number.
The birth certificate is the Qualified Articles
of Incorporation.
The Social Security Number is the Federal Employer
Identification Number.
So there you go.
That is how you create a corporation.
But just like a corporation, just like a child,
the corporation is a corporation.
The corporation must be stewarded.
That would be the board of directors.
They oversee the corporation on behalf of the shareholders.
Their job is to maximize the wealth of the shareholders.
That's all their job is.
They are the parents of that little entity
called a full corporation under US law.
And that's why the board of directors
carries a major responsibility that I'll
get to later in the course.
It's called fiduciary responsibility,
and it is not being taught these days,
but it is the reality of it.
So now you have a corporation, and it will live forever,
theoretically.
Because it's not like, madam, did you
know you're going to die someday?
It's true.
And I mean, most people kind of think in their early years
now.
But someday, you'll start getting old like I am,
and then you'll bitch and fuss, and finally you'll die,
and everyone will be happy.
You're not fussing anymore.
That's the reality of it.
A corporation doesn't have that limit.
Sure, corporations die all the time by their own stupidity
or whatever, but they don't have to.
That's why a major part of this course
is going to be free cash flows we've
got to see forever out into the future
and collapse those back to the present,
because the corporation is a going concern,
as the accountants call it.
It will live forever.
Unlike us, and we will all be dust at some point,
but the companies that we create will go on.
And that's why it is such a major responsibility
to be a business person in a developed country.
We are living well past ourselves.
What we do, as King Leonidas said, what we do in this life
echoes an eternity.
Don't ever forget that.
That's all I have for you today.
I thank you.
Thank you.