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Alan Cring Productions in association with the Emergent Lights Studio presents

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the Illinois State Collegiate Compendium, Academic Lectures in Business and Economics.

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This is Business Finance, FIL 240 for spring semester 2024.

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Today, financial institutions and then financial statements.

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I'm getting caught up, but there's still a little bit of room to run here.

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But as always, we look at the numbers to start the day.

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And here we have a very quiet day actually in a lot of ways.

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But just overall, is this a bull day or a bear day?

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Looks bull.

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Looks bull. It is bull. It is not a big bull. It is just a very quiet bull.

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And you can see that the markets are all in the green, which of course means that it's a bull day.

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But that's nothing spectacular.

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I guess you could say, well, the NASDAQ is showing some signs of life.

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But if you look at the numbers, the Dow is up a barely up 0.03%.

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And then, as is typically the case, the S&P 500 will move more strongly in the same direction.

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And the S&P 500 is up an unspectacular 0.19%.

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And then the NASDAQ, which you should expect to reflect the same direction but more strongly,

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because of the higher risk of the stocks, is up 0.45%.

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But there's nothing really exciting going on.

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There's generally a positive sentiment in the markets right now.

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But there's also a wait and see.

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Because we have news that is going to be coming out over the next couple of weeks.

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For one thing, this is earnings season for some of the heavies on the S&P 500.

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They're announcing their earnings for the quarter.

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Now, the markets have already formed their expectations of what the earnings will be

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based upon the company's estimates, forecasts of what they will be.

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And so now, whatever they actually come out to be will sort of either confirm the expectation

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or create a new expectation, and you will have either not much movement or something dramatic,

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like happened last week with, I think it was Netflix, was just going bananas last week.

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And then there's another wild card.

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The Federal Reserve is going to have one of its eight meetings a year.

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And the general sentiment is they're not going to raise interest rates,

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because it appears that inflation has been defeated.

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However, there are some who think that the Fed is going to come out with a rate decrease.

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Lowering interest rates would stimulate the economy.

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But that expectation is not very big right now.

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We'll see how it goes.

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Crude oil, it has slid a little bit.

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We're in that trading range right now. There's nothing dramatic about it.

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You can see that it's just kind of bouncing around the 72 to 79,

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which it keeps finding its way back into that trading band.

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As long as it stays there, gasoline prices, diesel prices, jet fuel prices will tend to stay relatively stable,

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which is good for the economy.

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We don't need the fuel prices going up, which would increase costs of delivery, transport, and all that.

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So we've got that going on.

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Gold has been bouncing up and down today.

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The gold bugs have a few thrills, and then it slides back down.

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It's up about half a percent.

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Silver is up really strongly today, for some reason.

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I can't say why.

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Now, the 10-year bond.

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This is the benchmark 10-year treasury bond, which sort of gives us a view of what all bonds are doing,

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hence why we call it a benchmark, sort of.

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But as you can see, now, these aren't prices.

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These are yields.

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You see that the yields are falling.

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That would mean that the prices of these bonds are going up,

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and that would indicate that there is a lot of demand for these bonds.

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The demand is surging, so the price goes up, and mathematically, the yield goes down.

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That's good news for the economy.

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Lower interest rates means that we will get some economic stimulus from that.

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Actually, it's dropped about six basis points so far today, six one-hundredths of a percent.

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So that's a decent move down.

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It's just a sentiment that right now yields are falling,

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and if the Fed actually drops the interest rates, the discount rate that it controls

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and targets a lower federal funds rate, we'll get into some good economic stimulus.

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As a matter of fact, some are beginning to be concerned that the economy is running a little too hot right now.

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But we'll see how that goes over the next few days.

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I think the Fed's meeting is sometime this week or next week.

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Is there some reason why I can't get this to behave itself?

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There we go. Good.

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Now, let me pull over here and get to the other markets.

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The Nikkei had a slow, grinding-up morning that was last night for us, the middle of the night.

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And then it kind of topped off and slid back down a little bit.

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It was not spectacular, but the market, but the other side of the world,

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the Nikkei 225 on the Tokyo exchange, finished up three-quarters of a percent.

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Not a bad showing. But then London.

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London, the sun set in Japan, and it rose across Europe and rose in England,

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and there in Great Britain.

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And you can see that there was a bull spike right here.

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See the bull spike? Something good news.

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But then the bears took over, slapped it back down, and then it bounced around,

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and it finally just kind of tailed off and slowly slid down to virtually flat at 0.03%.

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That's a flat.

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It ended up about the same at the end of the trading day as it did at the beginning.

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Although, wait, no, they should still be trading over in London still right now.

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Maybe. I can't keep the time right on that.

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But anyway, well, then of course the sun rose, went across the Atlantic,

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and rose over on the East Coast here, and our markets started out good,

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but then they kind of lost their will to live.

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They've been bouncing around a lot, although the NASDAQ seems to be doing pretty well.

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Now, a couple of stocks just to get that into your blood,

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because I ask this every day, I show you these every day,

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and I can ask these questions about reading these numbers on a quiz or an exam.

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I mean, advanced micro devices, AMD, they make chips.

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They are the main competitor of Intel for computer chips,

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and we'll see how they look right now.

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Down a little bit so far today.

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Down less than half a percent, but it's still down.

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Let's try a few things. First things first.

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Well, those can't be right.

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Yahoo's quotation system, the bid has to be above,

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the ask has to be above the bid, so I always say, wouldn't do that kind of stuff.

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But as you can see, AMD, this stock price is actually near its 52-week high right now.

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It's sometime over the past 52 weeks, it's gotten up to 184.92,

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and right now it's at 176.38, so it's near that 52-week high.

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But if you look, oh, look at this, the volume, we still got a couple hours left in the trading day,

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and the volume on AMD has already almost hit what it is for a full,

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on the average day over the last 52 weeks.

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Now, a couple things for you.

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Let's start this off.

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Madam, is this a risky stock or a safe stock?

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It's okay if you, you want to take it?

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Yes, why do you say that?

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Beta, that beta is technically what we call risky AF.

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That has a very high risk stock.

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1.7, one is the fulcrum, one is the volatility of the world portfolio, the market risk.

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Now, this is what 1.7 says, it swings in a well-diversified portfolio,

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170% of that, so yeah, this is risky.

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This is inappropriate investment for anything but the risk, the biggest risk takers you would want.

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Now, that PE ratio is insane.

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I'll tell you, right now, 30 would tell us that the price is about at intrinsic value.

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Now, if it's below 30, you have some undervaluation, possibly.

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Over 30, you have some overvaluation.

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And again, 30 is my number.

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Some would say 25, some would say 40, whatever.

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This is insane.

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That price is so far out of line with intrinsic value, you hardly ever see anything that overvalued,

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which would mean this is not something that you would want to grab right now

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because that price is going to find its way back down so that it's at about 30,

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about price divided by earnings per share, price per share divided by earnings per share,

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comes back down more realistically to about 30.

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As you can see, it's got a long way to drop.

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Now, when will that happen?

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That's the key.

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We don't know.

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A stock can stay floating way above its intrinsic value for days, months, even in some cases, years.

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And I'll show you one in a minute here, which I showed you the last time, but we can see that here.

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Now, the one good thing here, AMD is actually profitable.

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That's a lousy 11 cents per share.

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But at least, in other words, the net income has to be positive for net income divided by shares outstanding to be positive.

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So, yeah, it's profitable, not very, but it's profitable.

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It does not, however, pay a dividend.

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So the only way you make money on the stock is if the stock price goes up.

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See, if there's a dividend, you're going to get a check in the mail for the dividend.

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So at least you get something out of that.

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But in this case, you're riding this dog just on the price of the stock alone.

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Now, moving over, take you on another one, and I showed you this one last time just because it's such a fun example.

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Tesla.

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I said Tesla.

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It can't be that hard to find.

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Okay.

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Now, the bid-asked spread.

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You can sell this stock at $187.68 a share.

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You can buy it at $187.69 a share.

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The volume is pretty strong on this today, and that's what keeps the bid-asked spread tight.

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As long as the brokers can sell a lot of the stock, they don't need to make much money on the spread on any given buy and sell.

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Going over now, we'll try this again just to keep this thing rolling.

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Madam, is this a safe or risky stock?

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Very risky.

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I mean, this one's, I mean, this goes as risky as stupid.

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At $2.32, you can't find stocks that are much riskier than this.

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This goes to one of the guiding principles, and it's a rule in financial advising.

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It's called appropriateness of investment.

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This is the kind of stock that you would not recommend to the typical investor at all.

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We'll think about, you've got a couple, they're retired, and they want to put their savings into a good stock for heaven's sake.

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This thing is way too risky for anyone like that.

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What makes a stock risky?

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One thing is if it doesn't pay a dividend, that increases the risk of a stock right there because you have no underlying check that you can get in the mail.

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Another thing has to do with the management is the behavior of the stock based upon the behavior of the management and the prospects for sales.

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Risk also has to do with what kind of a product.

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You've got more like basic goods, things like cereal, toilet paper, even clothing, stuff like that.

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Those stocks tend to have lower betas simply because they are stuff that people won't stop buying even if times get bad.

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And with a stock like this, another factor in it is competition.

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Tesla has competitors, and Tesla is also, the reputation of the cars is getting dinged all the time in social media these days, and it's getting a bad reputation.

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Those things go into the behavior of the stock when you have the bulls and the bears, and there are fewer and fewer bulls holding on to this stock and trying to get people to buy it.

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Then you have bears saying, get the hell out of it.

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Now, in that regard, if you look at the P-E ratio, you see that P-E ratio? See overvalued?

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In other words, this thing has a lot of room.

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If you've got price divided by earnings, and it's about two times what it should be, that would tell you this stock has a lot of room to fall.

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As a matter of fact, a couple of analysts that were former students of mine a long time ago were DMing me on LinkedIn last night talking about the scuttlebutt as $90 a share, 90 to 80 a share, half of what it is now.

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And that would bring the price down by half, so the P-E ratio at 90 to 80 would be more like about 30.

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So there's your risk factors, all in a nutshell right there.

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Definitely not even something for a lot of younger investors.

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We think that they tend to be more risk taking because they have more time to recover if stock goes south.

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However, when we look at their actual investing behaviors, we see the folks your age a little older in their early professional years.

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They're not risk takers at all, so this would not be an appropriate investment for them.

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The question is, well, who would be investing in this?

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Probably the companies that already have put a lot of money in, and they can't afford to do anything but keep plowing forward.

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And that's where we talk about how the banks are quietly, very carefully, without much fanfare, slowly shedding it.

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The Wall Street brokers, the bankers on Wall Street though, they're stuck, and they're wondering how the hell they're going to get out of this without taking a major hit to their balance sheets.

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But that's their problem.

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Let me show you one more, a more normal stock.

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Okay, look at AT&T.

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Okay, here we go.

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AT&T, and this goes to the point that you were making about risk and all that.

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This is a basic service.

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AT&T provides telecommunication services, not just mobile phones, but a whole gamut of stuff.

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It's an old, old company.

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And that's another thing too.

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The old companies tend to be more conservative in their investments, in their management styles, and that tends to bring down the beta of a stock.

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As you can see, below 1.72, that's a conservative investment, something you put in a conservative portfolio, or maybe something, if you had a riskier, a high beta security, you put that in there to tone down the overall beta of the portfolio.

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And PE ratio, there's something interesting with this one.

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This one is saying undervalued.

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So in other words, even if you are not a day trader, you don't buy and sell stocks all the time, this is one of those, putting, when the PE ratio is this low, you know, at least over a period of time, it's going to find its intrinsic value.

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We saw that in the book in that chart of undervalued and overvalued.

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You can see it here.

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This is one of those, no, you're not going to make a fortune tomorrow off it, but putting this into a portfolio when the PE ratio is low gives you the idea that, yeah, it's probably going to be rising over the next months or possibly a couple of years.

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It will work its way back up to a PE ratio of 30, which means that the price will increase over the next couple of years.

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That's not a guarantee, but it's a good trading strategy that doesn't take a lot of math and a lot of genius and that people make it sound like you need.

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Just look for these.

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And when you see a stock, you've got a nice portfolio and you see a stock, well, now the PE ratio is up well above 30, that's when you want to maybe shed some of that from your portfolio.

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Not all at once, but just as a normal practice, you add to your portfolio when the stocks are undervalued and you ease back off those in your portfolio when they're overvalued.

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And it doesn't take day trading.

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This is long-term strategy, which is, again, as I said before, this is what responsible finance is all about.

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And in the world you'll be in, which is the corporate world, it's not about making the kill of the day.

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It's about long-term survival of the company and prospering to increase the shareholder wealth, that is, increase the stock price over a long period of time.

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And that's what we talk about in finance.

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We all have our fun little side portfolio.

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I do, where I take side bets like a casino. You'll see a short video that I did for the College of Business about what the difference is between a casino and the stock market.

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And you'll hear me say this over and over again in that video that they're going to release in a few days, I guess.

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But anyway, as you can see, AT&T is a profitable company, respectable, $2 a share, almost $2 a share positive, which is good news.

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And happy times, that is a really good dividend yield.

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That dividend yield is the dividend, $1.11 here, divided by the price you pay.

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It's sort of like I put $17.18 in the bank, and the bank is saying, well, we'll give you a dividend, we'll give you an interest rate on it of 6.42%.

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You can't beat that. That's a pretty decent.

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For $17.17, you're going to get a check for $1.11 every year.

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Well, that's not guaranteed, obviously. It's a dividend.

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But still, that's decent right there.

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So this is one of those that would be a recommendation for a long-term position.

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Not necessarily to win you some big bucks over the next week or two.

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It's not a casino. Not when you do it, it's the way we do it in the professional world.

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It sounds boring, but that's how we do it.

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But anyway, is there any other stock that's on your mind right now?

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Yeah, I think we'll see.

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But like I said, this is earnings seasons.

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So look right here.

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You see AT&T missed it.

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Every company gives a forecast of what the earnings for the quarter will be, and the investors react to that.

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And then the company releases the actual numbers.

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And if they release numbers that are better than what they estimated, well, the stock markets go to boom.

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We've got new information.

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If it releases information that they overestimated, well, the stock market is going to punish them right that day, right there.

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Now, you see here that AT&T is going to be releasing its next quarterly earnings on April the 18th.

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And it's going to say that its earnings for the quarter will be about zero.

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Now, if AT&T comes in with positive earnings, well, that's going to get the market all kinds of excited within minutes.

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If it releases negative earnings, well, the market's going to beat the heck out of the stock.

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But you can keep that in mind when earnings reports are coming out, because a lot of times the rumors will drive the market.

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Oh, it's coming out two days from now.

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I think they're going to be above, or I think they'll be below.

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So there'll be a lot of activity in the days running up to it.

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There's an old saying, and I'll give you a lot of the old sayings from the folks from my time.

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The saying was, buy on the rumor, sell on the news.

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In other words, when there's rumors, that's usually going to jiggle the price up.

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But when the news comes, well, that was disappointing, and it drops it.

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But the earnings were good.

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But if everyone thought they were good before they came out, then the rumors were going to have already put the price up.

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You're not going to gain anything if you buy on the day that the earnings are released,

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or if you sell on the day that the earnings are released, because they'll already have reacted to it as quickly as they can.

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You can't get in there before the heavy market players do, unfortunately.

261
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Enough of that for a while.

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Let me drop that down.

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Grab my soul back in here.

264
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Let's try to find somebody who looks like he or she needs to be harassed for a while.

265
00:24:28,000 --> 00:24:31,000
No, you sir, I'm ready to bother you.

266
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Now, suppose you need $20 for a couple of weeks.

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Well, the fact of the matter is that I have $20.

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We would call you a deficit economic unit.

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Deficit economic unit.

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And we would call me a surplus economic unit.

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Now, I wouldn't know anything about you.

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I might not ever meet you.

273
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But you see, there are these institutions that this is their job.

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They find surplus and deficit economic units, and they put them together.

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This is called financial intermediation.

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It is the matching of surplus and deficit economic units.

277
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Financial intermediation is the matching of surplus and deficit economic units.

278
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Oh, but there is more to it than this I should point out.

279
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You sir, you need $100.

280
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But I have only $20.

281
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So even if there was a way that we could get together, it wouldn't work.

282
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So financial intermediation relies, number one, on level,

283
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which is a fancy word of saying amount.

284
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I'm a surplus unit, you're a deficit unit, but we don't have the same level of need.

285
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We don't match on the level.

286
00:26:56,000 --> 00:27:01,000
So that one would have to be covered.

287
00:27:01,000 --> 00:27:04,000
So I realized, oh wait, I do have $100.

288
00:27:04,000 --> 00:27:06,000
So let's go on.

289
00:27:06,000 --> 00:27:11,000
Well, you want to pay me back next year, and I said, no,

290
00:27:11,000 --> 00:27:17,000
I need this money back for cheeseburgers tomorrow.

291
00:27:17,000 --> 00:27:25,000
So no match, because the timing is off.

292
00:27:25,000 --> 00:27:30,000
Timing must be matching.

293
00:27:30,000 --> 00:27:35,000
But there's one more.

294
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I'm thinking about, okay, fine, year from now, it'll work, fine, we're good.

295
00:27:42,000 --> 00:27:47,000
But then I find out that you sir are a scoundrel.

296
00:27:47,000 --> 00:27:50,000
You are a creature from the Black Lagoon.

297
00:27:50,000 --> 00:27:52,000
You do not pay your bills.

298
00:27:52,000 --> 00:27:59,000
In fact, you have a reputation on social media.

299
00:27:59,000 --> 00:28:01,000
He does not pay his bills.

300
00:28:01,000 --> 00:28:05,000
Someone else says, IKR.

301
00:28:05,000 --> 00:28:08,000
Okay, screw that.

302
00:28:08,000 --> 00:28:11,000
Not going to do it.

303
00:28:11,000 --> 00:28:15,000
The risk must be compatible.

304
00:28:15,000 --> 00:28:21,000
I must have the same risk tolerance as you have risk.

305
00:28:21,000 --> 00:28:24,000
If that doesn't work, then there's no match.

306
00:28:24,000 --> 00:28:32,000
So in other words, financial intermediation is a matching of surplus and deficit economic units

307
00:28:32,000 --> 00:28:35,000
based upon level, timing, and risk.

308
00:28:35,000 --> 00:28:38,000
So those three factors must be part of it.

309
00:28:38,000 --> 00:28:44,000
As a hint, I usually do this on a quiz or an exam, which is the following.

310
00:28:44,000 --> 00:28:46,000
I'll give you like six.

311
00:28:46,000 --> 00:28:56,000
You have to find the three that are the criteria for the financial intermediation to work.

312
00:28:56,000 --> 00:29:03,000
Now in this example, I've made a point here that this was just you and me.

313
00:29:03,000 --> 00:29:07,000
Financial intermediation doesn't have to be some financial institution.

314
00:29:07,000 --> 00:29:12,000
It can be you know both of us, you know he needed money,

315
00:29:12,000 --> 00:29:15,000
and so you could be the financial intermediary between us.

316
00:29:15,000 --> 00:29:18,000
You're not a bank, but you can do it.

317
00:29:18,000 --> 00:29:24,000
Now we usually think about it though in terms of financial institutions doing this kind of thing.

318
00:29:24,000 --> 00:29:31,000
And there are all kinds, when I say financial institutions, there are all kinds of these out there.

319
00:29:31,000 --> 00:29:36,000
And truth be told, it's getting really confusing.

320
00:29:36,000 --> 00:29:41,000
You see, a little before your time, before you were born,

321
00:29:41,000 --> 00:29:49,000
we had a law or a set of laws that kept one type of financial institution

322
00:29:49,000 --> 00:29:54,000
from doing things that were supposed to be done only by another type of financial institution.

323
00:29:54,000 --> 00:30:07,000
Those laws were passed in the early 1930s in response to the crazy wild west free market activity of the 1920s.

324
00:30:07,000 --> 00:30:15,000
But that law expired in 1999, and I'll get into that more.

325
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You don't need to know the dates here or anything like that right now.

326
00:30:19,000 --> 00:30:22,000
And then it just turned into a crazy quilt.

327
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And to this time now, it's just like madness.

328
00:30:27,000 --> 00:30:32,000
Literally in some of the courses, advanced courses I teach, I have to have this sheet.

329
00:30:32,000 --> 00:30:35,000
Okay, this can do this, this, this, this, and this.

330
00:30:35,000 --> 00:30:39,000
Now, oh, this one started doing this, and they should be doing that, but they're allowed to now.

331
00:30:39,000 --> 00:30:41,000
It's just like a crazy quilt.

332
00:30:41,000 --> 00:30:49,000
So I'm giving you a little bit of a brighter distinction that really exists out there in the real world.

333
00:30:49,000 --> 00:30:55,000
Now, the first one that everyone always brings up is the IB, the investment banks.

334
00:30:55,000 --> 00:30:59,000
The investment banks are very specialized kinds of banks.

335
00:30:59,000 --> 00:31:10,000
If you want a career in finance or actually in a couple of other subjects related, the IBs pay really good money.

336
00:31:10,000 --> 00:31:11,000
I mean, insanely good.

337
00:31:11,000 --> 00:31:18,000
I took my students up to a regional investment bank in Chicago in the financial district.

338
00:31:18,000 --> 00:31:27,000
And I mean, the jobs that they offered had salaries that were probably, starting salaries, probably twice what I make here.

339
00:31:27,000 --> 00:31:28,000
So that gives you an idea.

340
00:31:28,000 --> 00:31:30,000
Now, here's what IBs do.

341
00:31:30,000 --> 00:31:32,000
I think I said something about this last time.

342
00:31:32,000 --> 00:31:36,000
Investment banks, okay.

343
00:31:36,000 --> 00:31:38,000
You are an investment banker.

344
00:31:38,000 --> 00:31:40,000
I am Mark Zuckerberg.

345
00:31:40,000 --> 00:31:46,000
I know I'm better looking than he is, but, fine, whatever.

346
00:31:46,000 --> 00:31:53,000
Okay, so I say I want to do my initial public offering of common stock.

347
00:31:53,000 --> 00:31:55,000
I want to go public.

348
00:31:55,000 --> 00:31:57,000
Well, that's a big process.

349
00:31:57,000 --> 00:32:01,000
And I want to raise a billion dollars.

350
00:32:01,000 --> 00:32:07,000
Well, I, Mark, could just go out there, hey, everybody, want to buy some stocks from me?

351
00:32:07,000 --> 00:32:10,000
Not efficient, not efficient at all.

352
00:32:10,000 --> 00:32:15,000
Not even the companies, anything about what the company is all about.

353
00:32:15,000 --> 00:32:17,000
They wouldn't know what to do.

354
00:32:17,000 --> 00:32:19,000
But you're an IB.

355
00:32:19,000 --> 00:32:24,000
You say I shall buy that one billion dollars of stock.

356
00:32:24,000 --> 00:32:25,000
Really?

357
00:32:25,000 --> 00:32:27,000
Yes, I will.

358
00:32:27,000 --> 00:32:35,000
So you and I have a long negotiation where, for the price that we'll open at, how many shares it is,

359
00:32:35,000 --> 00:32:41,000
and all the consulting fees and the requirements of what documents you'll need and all that kind of stuff.

360
00:32:41,000 --> 00:32:46,000
And you do all the legal paperwork for the SEC and for the states and all that.

361
00:32:46,000 --> 00:32:48,000
Now, you're not going to buy it all on your own.

362
00:32:48,000 --> 00:32:52,000
You will put together a syndicate of investment bankers.

363
00:32:52,000 --> 00:32:55,000
You'll take maybe $600 million of it.

364
00:32:55,000 --> 00:32:58,000
You'll take $100 million, $150 million.

365
00:32:58,000 --> 00:33:01,000
So the syndicate, it's allocated.

366
00:33:01,000 --> 00:33:08,000
The issue is subscribed through these.

367
00:33:08,000 --> 00:33:10,000
That's a primary market transaction.

368
00:33:10,000 --> 00:33:15,000
Because I, Mark, am going to get the money.

369
00:33:15,000 --> 00:33:17,000
Actually, Facebook will get the money.

370
00:33:17,000 --> 00:33:22,000
So in other words, this stock is not going to everybody.

371
00:33:22,000 --> 00:33:23,000
And that's kind of a myth.

372
00:33:23,000 --> 00:33:26,000
Well, I bought Facebook on the IPO.

373
00:33:26,000 --> 00:33:27,000
No, you didn't.

374
00:33:27,000 --> 00:33:28,000
You most certainly didn't.

375
00:33:28,000 --> 00:33:35,000
Not one person in this room will probably ever participate in the primary market.

376
00:33:35,000 --> 00:33:41,000
What you'll do, you investment bankers, you'll buy it and then you guys will pump it up,

377
00:33:41,000 --> 00:33:45,000
make sure that your favorite rich clients get there, get some of it,

378
00:33:45,000 --> 00:33:48,000
and then you'll pump that through the roof to get the stock price up there.

379
00:33:48,000 --> 00:33:54,000
And then it will be dumped out into the secondary market to us.

380
00:33:54,000 --> 00:33:55,000
That's how it always works.

381
00:33:55,000 --> 00:33:56,000
That's how it works.

382
00:33:56,000 --> 00:33:58,000
That's an investment banker's job.

383
00:33:58,000 --> 00:34:03,000
They subscribe, and I'm using some terminology here, and I'll use this over and over.

384
00:34:03,000 --> 00:34:05,000
You'll get used to it.

385
00:34:05,000 --> 00:34:09,000
It doesn't do any good just to give you a stupid definition right off the bat usually.

386
00:34:09,000 --> 00:34:12,000
Helps if I just keep using the terms.

387
00:34:12,000 --> 00:34:18,000
They subscribe the issue, and then that was the primary market,

388
00:34:18,000 --> 00:34:26,000
and then the secondary market got it when the IB sold it to suckers like us.

389
00:34:26,000 --> 00:34:28,000
That's how it works.

390
00:34:28,000 --> 00:34:30,000
And there's nothing illegal about it.

391
00:34:30,000 --> 00:34:32,000
This is just how it's done.

392
00:34:32,000 --> 00:34:37,000
And this makes these offerings of common stock work.

393
00:34:37,000 --> 00:34:43,000
Now, the initial public offering is the one where a company goes public.

394
00:34:43,000 --> 00:34:50,000
It has to do a lot of paperwork for the SEC and for any state's divisions of securities

395
00:34:50,000 --> 00:34:54,000
in which the stock will be offered and sold.

396
00:34:54,000 --> 00:34:59,000
But it's a process, and it's a grueling process.

397
00:34:59,000 --> 00:35:04,000
In my consulting years, I did very small IPOs.

398
00:35:04,000 --> 00:35:11,000
Even at the small level, it was just like, oh, my God, this is way too much like work.

399
00:35:11,000 --> 00:35:15,000
But anyway, what was I going to say?

400
00:35:15,000 --> 00:35:21,000
So we go to the primary market, then it gets to the secondary market,

401
00:35:21,000 --> 00:35:24,000
and investors buy and sell it from each other.

402
00:35:24,000 --> 00:35:26,000
That's what these stock markets I show you.

403
00:35:26,000 --> 00:35:28,000
This is secondary market activity.

404
00:35:28,000 --> 00:35:33,000
Buying investors, buying and selling investors, selling.

405
00:35:33,000 --> 00:35:36,000
That's the way it works.

406
00:35:36,000 --> 00:35:39,000
Okay, that's IB, investment banks.

407
00:35:39,000 --> 00:35:41,000
They're not normal banks.

408
00:35:41,000 --> 00:35:45,000
Not what most people would even contemplate would be a normal bank.

409
00:35:45,000 --> 00:35:49,000
Now, IBs also will participate in seasoned offerings.

410
00:35:49,000 --> 00:35:51,000
In other words, after a company goes public,

411
00:35:51,000 --> 00:35:54,000
maybe it wants to sell some more stock a few years later.

412
00:35:54,000 --> 00:35:58,000
Or maybe it wants to issue bonds to borrow money.

413
00:35:58,000 --> 00:36:02,000
That's how companies borrow money, is they issue bonds.

414
00:36:02,000 --> 00:36:05,000
Okay, an underwriter underwrites.

415
00:36:05,000 --> 00:36:10,000
In other words, the IB underwrites the offering, and that one goes out later.

416
00:36:10,000 --> 00:36:12,000
So there's not just one public offering.

417
00:36:12,000 --> 00:36:17,000
A company can go through its life through a number, first an IPO,

418
00:36:17,000 --> 00:36:22,000
and then afterwards through seasoned offerings every now and then.

419
00:36:22,000 --> 00:36:26,000
In fact, some companies, and I think Microsoft does this,

420
00:36:26,000 --> 00:36:34,000
they will register, do an offering of an insanely large amount of stock,

421
00:36:34,000 --> 00:36:37,000
but they won't do anything with it right away.

422
00:36:37,000 --> 00:36:42,000
They will put it on a shelf, and as they need some equity capital,

423
00:36:42,000 --> 00:36:45,000
they'll pull some of it off the shelf and sell it.

424
00:36:45,000 --> 00:36:48,000
That's called a shelf registration.

425
00:36:48,000 --> 00:36:51,000
It's another way that it can happen.

426
00:36:51,000 --> 00:36:54,000
But anyway, now, banks.

427
00:36:54,000 --> 00:36:59,000
I have the investment banks, the IB.

428
00:36:59,000 --> 00:37:06,000
Now the next type I might mention is a commercial bank.

429
00:37:06,000 --> 00:37:15,000
A commercial bank is what most people would think of as a bank.

430
00:37:15,000 --> 00:37:20,000
They take deposits, and they make loans.

431
00:37:20,000 --> 00:37:26,000
Now, there's another thing that is sort of like a commercial bank.

432
00:37:26,000 --> 00:37:29,000
It's called a credit union.

433
00:37:29,000 --> 00:37:33,000
They take deposits, and they make loans.

434
00:37:33,000 --> 00:37:35,000
Here's the difference.

435
00:37:35,000 --> 00:37:40,000
If you've got a checking account at a bank...

436
00:37:40,000 --> 00:37:43,000
You, sir, you have a checking account.

437
00:37:43,000 --> 00:37:44,000
Yes, sir.

438
00:37:44,000 --> 00:37:45,000
At...

439
00:37:45,000 --> 00:37:46,000
Second.

440
00:37:46,000 --> 00:37:47,000
Yeah.

441
00:37:47,000 --> 00:37:48,000
Huh?

442
00:37:48,000 --> 00:37:49,000
Second year.

443
00:37:49,000 --> 00:37:52,000
No, that's a credit union, the CU.

444
00:37:52,000 --> 00:37:54,000
No, you're a real bank.

445
00:37:54,000 --> 00:37:55,000
You're a big bank.

446
00:37:55,000 --> 00:37:58,000
And I come in, and I've got a check.

447
00:37:58,000 --> 00:38:00,000
You've got a checking account there.

448
00:38:00,000 --> 00:38:02,000
You pay me with a check.

449
00:38:02,000 --> 00:38:07,000
I walk in there, and you have to pay me on demand.

450
00:38:07,000 --> 00:38:13,000
They call checking accounts demand deposits, on demand.

451
00:38:13,000 --> 00:38:16,000
It's not that I produce proper ID.

452
00:38:16,000 --> 00:38:22,000
However, if I've got a check from a credit union, and you are a credit union,

453
00:38:22,000 --> 00:38:25,000
you don't have to give me that money right away.

454
00:38:25,000 --> 00:38:34,000
Now, you probably will, but those kinds of checking accounts are not demand deposits.

455
00:38:34,000 --> 00:38:36,000
They can delay it.

456
00:38:36,000 --> 00:38:39,000
I think the rule now is up to 30 days.

457
00:38:39,000 --> 00:38:45,000
If I came in with a $100,000 check, you could tell me you have to wait 30 days

458
00:38:45,000 --> 00:38:47,000
if you're a credit union.

459
00:38:47,000 --> 00:38:51,000
So that's a big difference between a credit union and a commercial bank.

460
00:38:51,000 --> 00:38:57,000
Commercial bank, its deposits for checking accounts are called demand deposits.

461
00:38:57,000 --> 00:38:59,000
Now, I'll use the next term.

462
00:38:59,000 --> 00:39:01,000
I'll define it more later.

463
00:39:01,000 --> 00:39:06,000
But the ones that look like checking accounts at credit unions are technically what are

464
00:39:06,000 --> 00:39:11,000
called negotiable order of withdrawal, now accounts.

465
00:39:11,000 --> 00:39:13,000
You don't have to know that term yet.

466
00:39:13,000 --> 00:39:15,000
I'll define it later in the semester.

467
00:39:15,000 --> 00:39:16,000
But just know that.

468
00:39:16,000 --> 00:39:20,000
But commercial banks, they make loans, they take deposits.

469
00:39:20,000 --> 00:39:22,000
That's how they work.

470
00:39:22,000 --> 00:39:39,000
Now, there is another animal which is broader, a financial services company or corp,

471
00:39:39,000 --> 00:39:42,000
corporation.

472
00:39:42,000 --> 00:39:44,000
They offer a range of services.

473
00:39:44,000 --> 00:39:53,000
Now, this is where it gets after the time when that law I was talking about expired.

474
00:39:53,000 --> 00:40:00,000
You see, it used to be the case that a bank couldn't do anything but be a bank.

475
00:40:00,000 --> 00:40:06,000
Now, a lot of banks offer you more than just banking services.

476
00:40:06,000 --> 00:40:11,000
They offer you a sort of like a smorgasbord.

477
00:40:11,000 --> 00:40:15,000
In some cases, of banking, of financial services.

478
00:40:15,000 --> 00:40:17,000
So they're a little broader.

479
00:40:17,000 --> 00:40:24,000
And truth be told, and this is where the blur is getting in there, a lot of what we think

480
00:40:24,000 --> 00:40:31,000
of as just plain commercial banks actually do have financial services that they offer

481
00:40:31,000 --> 00:40:32,000
too.

482
00:40:32,000 --> 00:40:37,000
So more and more banks are becoming more than just banks.

483
00:40:37,000 --> 00:40:47,000
It's just the way, and there are some of us old timers who say, oh, down this road is

484
00:40:47,000 --> 00:40:48,000
real problems.

485
00:40:48,000 --> 00:40:57,000
Because if I'm a bank and I take your money as a bank, the old idea was you should not

486
00:40:57,000 --> 00:41:00,000
be able to be like an investment banker.

487
00:41:00,000 --> 00:41:07,000
You shouldn't be able to sell me stock that's right out of an offering.

488
00:41:07,000 --> 00:41:12,000
You shouldn't be able to do that because you have an incentive to profit at my expense

489
00:41:12,000 --> 00:41:13,000
from doing that.

490
00:41:13,000 --> 00:41:19,000
You shouldn't be able to offer me financial planning services because then you're going

491
00:41:19,000 --> 00:41:25,000
to recommend your bank to me instead of looking at all the possible investments out there

492
00:41:25,000 --> 00:41:29,000
for a family looking for investment advice.

493
00:41:29,000 --> 00:41:34,000
But you can do that now in a lot of these financial services firms.

494
00:41:34,000 --> 00:41:41,000
They can be banks, but then they can work in their own interest to promote other services

495
00:41:41,000 --> 00:41:46,000
that maybe they shouldn't because they're not objective about it.

496
00:41:46,000 --> 00:41:50,000
But that's, we're past, that ship has sailed.

497
00:41:50,000 --> 00:41:51,000
We're there now.

498
00:41:51,000 --> 00:41:53,000
So anyway, enough of that.

499
00:41:53,000 --> 00:41:55,000
Now, financial intermediaries.

500
00:41:55,000 --> 00:42:12,000
Well, actually, I should have told you, financial intermediaries.

501
00:42:12,000 --> 00:42:14,000
These are the institutions that do this stuff.

502
00:42:14,000 --> 00:42:18,000
Now, there are other ones too out there.

503
00:42:18,000 --> 00:42:21,000
And they kind of, there's kind of a garden variety.

504
00:42:21,000 --> 00:42:28,000
And you can see a list in the book, but I'll cover some of the noticeable ones out there.

505
00:42:28,000 --> 00:42:33,000
Now, remember, not all financial institutions have anything whatsoever to do with you.

506
00:42:33,000 --> 00:42:39,000
Investment banking, investment banks don't have anything to do with us, even though they

507
00:42:39,000 --> 00:42:41,000
impact our lives.

508
00:42:41,000 --> 00:42:43,000
And you need to know about them.

509
00:42:43,000 --> 00:42:45,000
Now, here's some other ones.

510
00:42:45,000 --> 00:42:48,000
Here's one.

511
00:42:48,000 --> 00:42:56,000
These are generally surplus economic units that interact with some type of deficit economic unit.

512
00:42:56,000 --> 00:43:01,000
Like in an IB, the surplus economic unit is the IB.

513
00:43:01,000 --> 00:43:11,000
The deficit economic unit would be Facebook, which needs the money, and commercial banks.

514
00:43:11,000 --> 00:43:12,000
Financial services.

515
00:43:12,000 --> 00:43:13,000
Okay, here's a couple.

516
00:43:13,000 --> 00:43:25,000
Here's one, life insurance companies.

517
00:43:25,000 --> 00:43:28,000
We are a huge player.

518
00:43:28,000 --> 00:43:34,000
I mean, it's almost incomprehensible the amounts of money that they use.

519
00:43:34,000 --> 00:43:40,000
I'm going to have to tell someone something that's pretty upsetting.

520
00:43:40,000 --> 00:43:44,000
You, sir, you're going to die someday.

521
00:43:44,000 --> 00:43:46,000
Did you know that?

522
00:43:46,000 --> 00:43:48,000
You'll be ugly.

523
00:43:48,000 --> 00:43:49,000
You'll be in pain.

524
00:43:49,000 --> 00:43:53,000
You'll bitch, and you'll fuss, and you'll finally shut up and be dead.

525
00:43:53,000 --> 00:43:55,000
But that will...

526
00:43:55,000 --> 00:43:57,000
Well, that kind of sucks, man.

527
00:43:57,000 --> 00:44:00,000
But that's not going to happen today.

528
00:44:00,000 --> 00:44:03,000
Probably not tomorrow.

529
00:44:03,000 --> 00:44:10,000
Unless an asteroid hits or you skateboard out into traffic while you're watching your smartphone.

530
00:44:10,000 --> 00:44:12,000
No, no, no.

531
00:44:12,000 --> 00:44:13,000
You won't die.

532
00:44:13,000 --> 00:44:20,000
You will probably...actually, you'll probably live maybe to 100 years old.

533
00:44:20,000 --> 00:44:25,000
So if you have a life insurance policy, you're putting premiums in.

534
00:44:25,000 --> 00:44:27,000
I'm the life insurance policy.

535
00:44:27,000 --> 00:44:30,000
You're giving me money every month.

536
00:44:30,000 --> 00:44:36,000
And so are hundreds and millions, hundreds of thousands and millions of other people.

537
00:44:36,000 --> 00:44:48,000
I am accumulating huge amounts of funds that I won't need to use to pay a death benefit for many, many years.

538
00:44:48,000 --> 00:44:51,000
Decades, in fact.

539
00:44:51,000 --> 00:45:01,000
And so these life insurance companies are swimming, actually swimming in oceans of money.

540
00:45:01,000 --> 00:45:03,000
They need to do something with it.

541
00:45:03,000 --> 00:45:05,000
Well, yeah, they will.

542
00:45:05,000 --> 00:45:15,000
They'll probably find...they will be surplus economic units that will find deficit economic units with a very unusual...

543
00:45:15,000 --> 00:45:17,000
with an unusual kind of timing.

544
00:45:17,000 --> 00:45:28,000
If I'm a life insurance company, I don't want to put money into an investment that's going to pay me off in a year or five years or even 10 years.

545
00:45:28,000 --> 00:45:30,000
Maybe not even 20 years.

546
00:45:30,000 --> 00:45:40,000
So these would be a vast source of capital, long-term funds, for a company that was issuing 30-year bonds

547
00:45:40,000 --> 00:45:48,000
or a school district that wanted to do a 20-year bond to build a new high school or a couple of elementary schools.

548
00:45:48,000 --> 00:45:54,000
So these are long haulers in the financial intermediation world.

549
00:45:54,000 --> 00:46:00,000
They fund long-term projects.

550
00:46:00,000 --> 00:46:02,000
And there are even longer-term projects.

551
00:46:02,000 --> 00:46:10,000
There are some projects that could go on 50 years or even longer in some cases.

552
00:46:10,000 --> 00:46:22,000
The funding that will be needed for...we need money right now to fund the preliminary work on...I can't believe I say this.

553
00:46:22,000 --> 00:46:23,000
It sounds like science fiction.

554
00:46:23,000 --> 00:46:36,000
On mining of asteroids, on building of colonies on the moon and on Mars, of space stations that will be permanent residents to thousands,

555
00:46:36,000 --> 00:46:42,000
possibly tens of thousands of people, on projects for the fusion reactors that are just starting to light up.

556
00:46:42,000 --> 00:46:45,000
Those are really long-term things.

557
00:46:45,000 --> 00:46:47,000
But it's happening now.

558
00:46:47,000 --> 00:46:55,000
And I've seen some of these funding needs that are hauling out there 50 years.

559
00:46:55,000 --> 00:47:00,000
I think these are past anyone's lifetime, and the company's starting them.

560
00:47:00,000 --> 00:47:08,000
No one will be alive when these are actually come to the point where they are bending metal or lighting fire.

561
00:47:08,000 --> 00:47:10,000
But there you are.

562
00:47:10,000 --> 00:47:12,000
Strange century we're living in.

563
00:47:12,000 --> 00:47:22,000
Here's another one. Mutual funds.

564
00:47:22,000 --> 00:47:29,000
These are accessible to just about anyone who's got some funds.

565
00:47:29,000 --> 00:47:37,000
Essentially, a mutual fund is a company that you can pay to become a part of.

566
00:47:37,000 --> 00:47:47,000
The company buys stocks and bonds on behalf of its owners, which could be you.

567
00:47:47,000 --> 00:47:51,000
And there are mutual funds of all kinds out there.

568
00:47:51,000 --> 00:48:02,000
Mutual funds that invest in international stuff, or maybe in mutual funds that invest in broad portfolios of domestic stocks,

569
00:48:02,000 --> 00:48:15,000
or healthcare stocks, or environmental green stocks, or drug industries, pharmaceutical industry stocks and bonds.

570
00:48:15,000 --> 00:48:25,000
You can pick something and a beta, and there are tens of thousands of these mutual funds, they are in what we call families.

571
00:48:25,000 --> 00:48:32,000
Different investment houses offer their own family.

572
00:48:32,000 --> 00:48:38,000
You can get a lot of different funds from Fidelity, PIMCO, Investco.

573
00:48:38,000 --> 00:48:42,000
I mean, there are all kinds of these out there.

574
00:48:42,000 --> 00:48:49,000
And you just decide, okay, well, I kind of like Fidelity.

575
00:48:49,000 --> 00:48:50,000
Let's see what Fidelity has.

576
00:48:50,000 --> 00:48:52,000
Oh, heavens to Betsy.

577
00:48:52,000 --> 00:49:01,000
Fifty different funds that I could invest in, choose a risk level, a beta, choose sort of your cause maybe if that's what you want to do.

578
00:49:01,000 --> 00:49:03,000
It's world's open.

579
00:49:03,000 --> 00:49:10,000
Now, as long as you're in the family, you can move your funds from one, move your money from one fund to another.

580
00:49:10,000 --> 00:49:15,000
But generally speaking, you can't just flip your funds any time you want.

581
00:49:15,000 --> 00:49:17,000
There's something else that you can do that with.

582
00:49:17,000 --> 00:49:32,000
But mutual funds, and when the fund earns you money, you can either get a check or you can just use that to buy a larger piece of membership in the mutual fund.

583
00:49:32,000 --> 00:49:45,000
So you could actually have sort of a force multiplier effect over time if you just say, yeah, whatever I get in dividends from the stocks in this fund, you know, all that kind of stuff, or if you sell that stuff, just put it back into the fund.

584
00:49:45,000 --> 00:50:01,000
And over time, you can see your membership go from like, a good example was when I had like 10 years ago, I had 50, I went in 50 shares, and now I've got 62 shares, 62 pieces of this mutual fund.

585
00:50:01,000 --> 00:50:03,000
So it's kind of cool.

586
00:50:03,000 --> 00:50:06,000
They're available to just about anyone.

587
00:50:06,000 --> 00:50:07,000
Now, caution.

588
00:50:07,000 --> 00:50:08,000
Well, two cautions.

589
00:50:08,000 --> 00:50:16,000
One is that there are no-load, low-load, and high-load funds.

590
00:50:16,000 --> 00:50:22,000
Now, the load is how much you pay just for the privilege of membership.

591
00:50:22,000 --> 00:50:25,000
It's not an investment.

592
00:50:25,000 --> 00:50:31,000
You just pay to, it's like a membership application fee.

593
00:50:31,000 --> 00:50:38,000
Now, anyone who would pay the money for a high-load, you're out of your mind.

594
00:50:38,000 --> 00:50:44,000
There are all kinds of incredibly good no-load funds.

595
00:50:44,000 --> 00:50:55,000
You just join low-load or even kind of silly when, well, we charge you $100, and then we'll decide if you can be a member.

596
00:50:55,000 --> 00:50:58,000
No, I'm not going to do that.

597
00:50:58,000 --> 00:51:00,000
So that's something you always want to watch out for.

598
00:51:00,000 --> 00:51:03,000
See if it's a no-load or a load fund.

599
00:51:03,000 --> 00:51:08,000
Another thing, and this is going to be for something else I'm going to show you here in just a minute.

600
00:51:08,000 --> 00:51:14,000
It's, well, it just went out of my mind.

601
00:51:14,000 --> 00:51:15,000
Good grief.

602
00:51:15,000 --> 00:51:17,000
This is a bad day.

603
00:51:17,000 --> 00:51:20,000
I need what's in this coffee cup.

604
00:51:20,000 --> 00:51:25,000
Coffee.

605
00:51:25,000 --> 00:51:27,000
Oh, God.

606
00:51:27,000 --> 00:51:35,000
Oh, okay. We're good.

607
00:51:35,000 --> 00:51:36,000
Okay. We're good.

608
00:51:36,000 --> 00:51:38,000
Management fees.

609
00:51:38,000 --> 00:51:40,000
See how fast that came to me?

610
00:51:40,000 --> 00:51:41,000
Okay.

611
00:51:41,000 --> 00:51:51,000
Now, you look, and I'll show you this in just a minute with another kind, but the people who run the fund, they are experts.

612
00:51:51,000 --> 00:52:02,000
They do all the work for you deciding on investments, keeping the portfolio in balance from day to day, week to week, and all that kind of stuff, doing all the analytics.

613
00:52:02,000 --> 00:52:08,000
You don't have to do any of that, but they will charge a fee.

614
00:52:08,000 --> 00:52:12,000
It's a percentage of the take of the fund.

615
00:52:12,000 --> 00:52:22,000
Now, my rule is.3% should be the maximum I would see for the management fee.

616
00:52:22,000 --> 00:52:24,000
You'll see some that are lower.

617
00:52:24,000 --> 00:52:30,000
I'll show you some that are lower, and you'll see some that are just insane, like 5% fee.

618
00:52:30,000 --> 00:52:33,000
No, no, you're not going to do that.

619
00:52:33,000 --> 00:52:44,000
A well-run fund doesn't need to have managers that are making a fortune off you.

620
00:52:44,000 --> 00:52:55,000
If they're good at what they do, that fund will be earning enough money that.1% is plenty for them to have their three martini lunches.

621
00:52:55,000 --> 00:52:57,000
So keep an eye on that fee.

622
00:52:57,000 --> 00:53:00,000
And like I said, I'm just about to show you that here in a minute.

623
00:53:00,000 --> 00:53:19,000
But before I go to that, let me introduce you to one of the evil, this is dark stuff, private equity, private equity funds.

624
00:53:19,000 --> 00:53:27,000
They are nasty, ill-willed, destructive.

625
00:53:27,000 --> 00:53:34,000
I'm thinking of getting one set up in Central America, but that's just me.

626
00:53:34,000 --> 00:53:37,000
Here's how it works.

627
00:53:37,000 --> 00:53:41,000
Somebody, I think I'm going to pick on you.

628
00:53:41,000 --> 00:53:44,000
You are a company.

629
00:53:44,000 --> 00:53:55,000
You have gone into bad times, bad management maybe, but market trends turned against you.

630
00:53:55,000 --> 00:54:01,000
The economy hit you bad, and you're on the brink of bankruptcy.

631
00:54:01,000 --> 00:54:04,000
You can't pay your next interest payment.

632
00:54:04,000 --> 00:54:11,000
Now remember that if you don't give your stockholders a dividend, all they can do is cry and bitch.

633
00:54:11,000 --> 00:54:23,000
But if you don't pay your bondholders, when you owe them an interest payment or when you owe them the principal, they can shut you off.

634
00:54:23,000 --> 00:54:25,000
They'll just turn you off.

635
00:54:25,000 --> 00:54:26,000
You're done.

636
00:54:26,000 --> 00:54:27,000
That's it.

637
00:54:27,000 --> 00:54:34,000
So you're on that brink right now, and you get a phone number.

638
00:54:34,000 --> 00:54:36,000
Call him.

639
00:54:36,000 --> 00:54:40,000
He's with a private equity firm.

640
00:54:40,000 --> 00:54:42,000
Hello?

641
00:54:42,000 --> 00:54:45,000
Why yes, I can save your company.

642
00:54:45,000 --> 00:54:48,000
What I'll do is we'll sit down.

643
00:54:48,000 --> 00:54:50,000
We'll work it all out.

644
00:54:50,000 --> 00:54:53,000
Well, first we're going to stop buying American.

645
00:54:53,000 --> 00:54:58,000
We're going to move your production facilities over to Guangzhou province.

646
00:54:58,000 --> 00:55:02,000
We're going to get rid of all these American workers.

647
00:55:02,000 --> 00:55:12,000
We're going to slash your sales staff in half, and we're going to – you're going to get – and then here's what's in it for you.

648
00:55:12,000 --> 00:55:19,000
You give us stock in your company, and then we'll hype the stock.

649
00:55:19,000 --> 00:55:27,000
We will also lend you enough to wipe out your debts, and you'll owe just us.

650
00:55:27,000 --> 00:55:34,000
But you'll also sign a consulting agreement with us to keep an eye on you to make sure everything works okay.

651
00:55:34,000 --> 00:55:38,000
That's the upfront of a private equity firm.

652
00:55:38,000 --> 00:55:41,000
And then you'll die anyway.

653
00:55:41,000 --> 00:55:48,000
First we're going to pump the stock up, and then we're going to sell ours to drive the stock, and that will drive the stock price back down.

654
00:55:48,000 --> 00:55:56,000
It will turn out that what we did didn't fix the fundamental problem that the market conditions had changed.

655
00:55:56,000 --> 00:56:01,000
And you will be in trouble, not with all those former bondholders, but with us.

656
00:56:01,000 --> 00:56:03,000
Can't make your payment.

657
00:56:03,000 --> 00:56:06,000
You can't pay that interest payment on that loan we gave you.

658
00:56:06,000 --> 00:56:10,000
Well, I guess we're just going to have to shut you down.

659
00:56:10,000 --> 00:56:12,000
So we kick you out the door.

660
00:56:12,000 --> 00:56:13,000
We take that company.

661
00:56:13,000 --> 00:56:16,000
We liquidate it, and we give it to all of our friends.

662
00:56:16,000 --> 00:56:20,000
That's how private equity works.

663
00:56:20,000 --> 00:56:26,000
Sears, Staples, rumors are that Panera is next on the block.

664
00:56:26,000 --> 00:56:29,000
They stepped into it in 2017 with the P.E.

665
00:56:29,000 --> 00:56:30,000
Okay.

666
00:56:30,000 --> 00:56:33,000
This is how we work in that business.

667
00:56:33,000 --> 00:56:34,000
Private equity.

668
00:56:34,000 --> 00:56:36,000
It is a financial intermediary.

669
00:56:36,000 --> 00:56:39,000
It takes care of itself.

670
00:56:39,000 --> 00:56:41,000
And no one else.

671
00:56:41,000 --> 00:56:47,000
Now, there's a version.

672
00:56:47,000 --> 00:56:54,000
It's not a private equity firm, although they do some P.E. work, but that's not what they're made for.

673
00:56:54,000 --> 00:56:57,000
This is called a hedge fund.

674
00:56:57,000 --> 00:57:17,000
Now, as the name implies, their job is to provide hedges for risks that companies or trusts or families or people don't want.

675
00:57:17,000 --> 00:57:21,000
And I can't remember whether I already did this or not.

676
00:57:21,000 --> 00:57:23,000
You, sir, are a farmer.

677
00:57:23,000 --> 00:57:27,000
You grow corn.

678
00:57:27,000 --> 00:57:29,000
Somehow that just doesn't work for you.

679
00:57:29,000 --> 00:57:31,000
I'm sorry, bro.

680
00:57:31,000 --> 00:57:33,000
Okay, we'll just say you're a corn farmer.

681
00:57:33,000 --> 00:57:36,000
You are in the business of corn.

682
00:57:36,000 --> 00:57:37,000
Okay?

683
00:57:37,000 --> 00:57:39,000
That's what you do.

684
00:57:39,000 --> 00:57:44,000
You are not in the business of corn price volatility.

685
00:57:44,000 --> 00:57:48,000
Now, most people would say, well, the price of the corn, they're like the same.

686
00:57:48,000 --> 00:57:50,000
They're a completely different thing.

687
00:57:50,000 --> 00:57:53,000
You are not a speculator in corn prices.

688
00:57:53,000 --> 00:57:56,000
You just want to go out to your field.

689
00:57:56,000 --> 00:57:58,000
I grow corn.

690
00:57:58,000 --> 00:58:00,000
Look at all that corn.

691
00:58:00,000 --> 00:58:06,000
I grow corn.

692
00:58:06,000 --> 00:58:11,000
You understand what I'm trying to get at here is that you don't want the corn.

693
00:58:11,000 --> 00:58:17,000
You see, when the corn prices are high, you're going to make a lot of money.

694
00:58:17,000 --> 00:58:20,000
Hell, you can buy your kids new clothes, for God's sake.

695
00:58:20,000 --> 00:58:23,000
I've been wearing the same one for 10 years now.

696
00:58:23,000 --> 00:58:27,000
Bubba just got grown out of his.

697
00:58:27,000 --> 00:58:35,000
But then in another year, corn prices are low and you are being, you're in misery.

698
00:58:35,000 --> 00:58:42,000
You have to, you actually tore down the shed so you'd have some heat in your fireplace.

699
00:58:42,000 --> 00:58:47,000
You know, everybody's wondering where the dog went and you know damn well where the dog went.

700
00:58:47,000 --> 00:58:54,000
That was on the dinner table.

701
00:58:54,000 --> 00:59:02,000
Yeah, well, I told you to make Fido some, make Fido dinner and I've been making him some dinner with dog food, not making him the dinner.

702
00:59:02,000 --> 00:59:04,000
Okay, wait.

703
00:59:04,000 --> 00:59:06,000
So, you see, I come in.

704
00:59:06,000 --> 00:59:07,000
You come to me.

705
00:59:07,000 --> 00:59:10,000
A co-op of a bunch of farmers come to me.

706
00:59:10,000 --> 00:59:13,000
And I say, okay, I know what to do here.

707
00:59:13,000 --> 00:59:19,000
I can buy a, I can buy on your behalf a type of security.

708
00:59:19,000 --> 00:59:29,000
When corn prices are low, you lose on the corn but you make a fortune on the contract, on the security.

709
00:59:29,000 --> 00:59:36,000
When corn prices are high, you make money on the corn but you lose on the security that I do.

710
00:59:36,000 --> 00:59:39,000
But what that means is that you've created a hedge.

711
00:59:39,000 --> 00:59:45,000
No matter what corn prices do, your income is fairly predictable.

712
00:59:45,000 --> 00:59:49,000
You get rid of the volatility that you don't want.

713
00:59:49,000 --> 00:59:51,000
That's how a hedge fund works.

714
00:59:51,000 --> 00:59:54,000
You're a, okay, let's try it.

715
00:59:54,000 --> 00:59:57,000
You are the owner of a trucking company.

716
00:59:57,000 --> 00:59:59,000
Your name is Earl.

717
00:59:59,000 --> 01:00:03,000
Earl's trucking company, not surprisingly.

718
01:00:03,000 --> 01:00:07,000
Now, you see, you're in the business of moving things.

719
01:00:07,000 --> 01:00:09,000
Matter of fact, that's your company logo.

720
01:00:09,000 --> 01:00:11,000
We move things.

721
01:00:11,000 --> 01:00:15,000
You're not in the business of diesel prices.

722
01:00:15,000 --> 01:00:22,000
You see, when diesel prices are low, you have a lower expense so you have a higher profit.

723
01:00:22,000 --> 01:00:29,000
But when diesel prices are high, you have a high expense so you have a low profit.

724
01:00:29,000 --> 01:00:33,000
But you should not be doing in the business of diesel prices.

725
01:00:33,000 --> 01:00:36,000
You're in the business of moving things.

726
01:00:36,000 --> 01:00:39,000
Don't forget your core motto.

727
01:00:39,000 --> 01:00:41,000
We move things.

728
01:00:41,000 --> 01:00:43,000
It's not we speculate in diesel prices.

729
01:00:43,000 --> 01:00:45,000
You sure as heck don't.

730
01:00:45,000 --> 01:00:47,000
So you see, I'm a hedge fund.

731
01:00:47,000 --> 01:00:49,000
I can help trucking companies.

732
01:00:49,000 --> 01:00:55,000
Because when diesel prices are low, you'll lose on the diesel's contract,

733
01:00:55,000 --> 01:00:58,000
but you'll win on the price of diesel.

734
01:00:58,000 --> 01:01:02,000
But when diesel prices are high, you lose on the diesel price,

735
01:01:02,000 --> 01:01:06,000
but you win on my contracts that I created for you.

736
01:01:06,000 --> 01:01:08,000
These are types of futures contracts.

737
01:01:08,000 --> 01:01:17,000
I can set it up any way you want and move a risk that is not part of your core business model off you.

738
01:01:17,000 --> 01:01:18,000
I make a little money.

739
01:01:18,000 --> 01:01:19,000
It costs you a little.

740
01:01:19,000 --> 01:01:21,000
It's like an insurance policy.

741
01:01:21,000 --> 01:01:23,000
You pay car insurance.

742
01:01:23,000 --> 01:01:27,000
Do you have a car accident every month after your, well, damn, I paid my insurance premium.

743
01:01:27,000 --> 01:01:29,000
Watch out.

744
01:01:29,000 --> 01:01:30,000
No, you don't.

745
01:01:30,000 --> 01:01:33,000
But it's still there for you.

746
01:01:33,000 --> 01:01:34,000
Got the idea?

747
01:01:34,000 --> 01:01:36,000
Not my roommate on the other hand.

748
01:01:36,000 --> 01:01:39,000
No, you mean the one that drives like a blind trout?

749
01:01:39,000 --> 01:01:43,000
He would be fooled if he wasn't.

750
01:01:43,000 --> 01:01:47,000
You know, I found out here in Illinois on those back country roads,

751
01:01:47,000 --> 01:01:55,000
the speed limit signs are one of the things where people see and they say, hold my beer.

752
01:01:55,000 --> 01:01:57,000
Anyway, where the hell is it?

753
01:01:57,000 --> 01:01:59,000
Okay, so that's a hedge fund.

754
01:01:59,000 --> 01:02:04,000
And they actually do good because if you're in a business,

755
01:02:04,000 --> 01:02:09,000
you do not need uncertainties that aren't part of your core model.

756
01:02:09,000 --> 01:02:11,000
You do not need uncertainties.

757
01:02:11,000 --> 01:02:14,000
You can't even mitigate yourself.

758
01:02:14,000 --> 01:02:15,000
What are you going to do?

759
01:02:15,000 --> 01:02:21,000
Go to the diesel station and beat the crap out of the gas station manager if the diesel prices are high?

760
01:02:21,000 --> 01:02:23,000
No, you can't control it.

761
01:02:23,000 --> 01:02:28,000
Just like you can't enter the corn markets of the world and move the price of corn to what you want it to be.

762
01:02:28,000 --> 01:02:32,000
They're beyond you, but you can just set them aside

763
01:02:32,000 --> 01:02:39,000
and put them somewhere where they're no longer your problem.

764
01:02:39,000 --> 01:02:45,000
Now, some people accuse me of going way off topic, but whatever I do, there's a reason.

765
01:02:45,000 --> 01:02:53,000
Until the COVID lockdown, I had an RSO here that actually did ghost hunting.

766
01:02:53,000 --> 01:02:55,000
We hunted ghosts.

767
01:02:55,000 --> 01:03:00,000
Now, there were times I had some people who went with me and we ran into some ghosts.

768
01:03:00,000 --> 01:03:07,000
And they're running around screaming, why, what, does, and I said, you didn't have to do this.

769
01:03:07,000 --> 01:03:10,000
You could have stayed out here instead of going in there.

770
01:03:10,000 --> 01:03:15,000
Even when you opened the door and you heard something like, get out, you didn't have to do it.

771
01:03:15,000 --> 01:03:23,000
But you see, that's the thing is, you don't do what you don't have to do unless you're on YouTube and you're an idiot.

772
01:03:23,000 --> 01:03:24,000
You understand?

773
01:03:24,000 --> 01:03:33,000
So hedge funds, if you have to do something, it helps you so that you don't face the consequences of it.

774
01:03:33,000 --> 01:03:35,000
Where the heck was I?

775
01:03:35,000 --> 01:03:38,000
Okay, now.

776
01:03:38,000 --> 01:03:39,000
Good.

777
01:03:39,000 --> 01:03:42,000
Okay, now, the last one of these.

778
01:03:42,000 --> 01:03:52,000
This is one that is particularly relevant to investors like you or like a lot of wealthy people, too.

779
01:03:52,000 --> 01:04:04,000
These are called ETFs, electronically traded funds.

780
01:04:04,000 --> 01:04:13,000
Now, at first glance, they sound like a mutual fund, but they are, excuse me, wait.

781
01:04:13,000 --> 01:04:17,000
Oh, that Grand Slam breakfast is coming back.

782
01:04:17,000 --> 01:04:19,000
No, seriously, noobs.

783
01:04:19,000 --> 01:04:29,000
That was the eggs.

784
01:04:29,000 --> 01:04:36,000
Shut up.

785
01:04:36,000 --> 01:04:38,000
Man, I didn't know that he'd get so hard.

786
01:04:38,000 --> 01:04:44,000
Oh, when I get that double stack of pancakes and I put the hot sauce on it.

787
01:04:44,000 --> 01:04:59,000
Four hours later, we're back.

788
01:04:59,000 --> 01:05:01,000
Okay, ETF.

789
01:05:01,000 --> 01:05:11,000
Now, an ETF is a company that is just a portfolio of stocks.

790
01:05:11,000 --> 01:05:24,000
You could have a company, it owns the S&P 500, all 500 stocks, and then you buy a share of that company.

791
01:05:24,000 --> 01:05:28,000
So you actually own the portfolio.

792
01:05:28,000 --> 01:05:37,000
Imagine this, you, sir, are going to a finance singles bar.

793
01:05:37,000 --> 01:05:43,000
Now, someone comes up to you and says, so what do you invest in?

794
01:05:43,000 --> 01:05:45,000
And you say, well, I invest in a couple of stocks.

795
01:05:45,000 --> 01:05:47,000
I've got some Tesla.

796
01:05:47,000 --> 01:05:49,000
You're going to go home lonely.

797
01:05:49,000 --> 01:05:50,000
Swipe left?

798
01:05:50,000 --> 01:05:52,000
I think so.

799
01:05:52,000 --> 01:06:03,000
But if you say, well, I own the S&P 500, well, you will go home with a friend.

800
01:06:03,000 --> 01:06:07,000
You actually own the stock portfolio.

801
01:06:07,000 --> 01:06:12,000
Now, I'm going to show you a couple here, but there are thousands of these.

802
01:06:12,000 --> 01:06:27,000
And you can do like index portfolios, famous ones like the Russell 2000 or the Dow 30 or all kinds of different ones in different sectors, different betas.

803
01:06:27,000 --> 01:06:34,000
And it sounds like a mutual fund, except that you're not a member of a mutual fund.

804
01:06:34,000 --> 01:06:36,000
And this is a stock.

805
01:06:36,000 --> 01:06:41,000
You just go order some from your broker, order two shares, five shares.

806
01:06:41,000 --> 01:06:44,000
Let me show you a couple here real quick.

807
01:06:44,000 --> 01:06:47,000
My favorite is, of course, the S&P 500.

808
01:06:47,000 --> 01:06:54,000
Its trading symbol is SPY, the spider.

809
01:06:54,000 --> 01:07:00,000
That's $489, so obviously it's not something you want to buy, grab a round lot, 100 shares.

810
01:07:00,000 --> 01:07:08,000
But still, $489, you have the action of the S&P 500.

811
01:07:08,000 --> 01:07:11,000
It's not like the S&P 500.

812
01:07:11,000 --> 01:07:20,000
It is the S&P 500, all in one share of stock called spider, and its trading symbol SPY.

813
01:07:20,000 --> 01:07:22,000
Now, look down here.

814
01:07:22,000 --> 01:07:25,000
Remember I was telling you about, first of all, notice this.

815
01:07:25,000 --> 01:07:27,000
See the beta of it?

816
01:07:27,000 --> 01:07:29,000
1.00.

817
01:07:29,000 --> 01:07:32,000
It is the market portfolio.

818
01:07:32,000 --> 01:07:37,000
I mean, those 500 stocks are like two-thirds of the world market.

819
01:07:37,000 --> 01:07:42,000
So of course it's going to have a beta that's approximately the world market.

820
01:07:42,000 --> 01:07:43,000
It's perfectly hedged.

821
01:07:43,000 --> 01:07:46,000
It's managed by professionals day and night.

822
01:07:46,000 --> 01:07:53,000
And as you can see, their expense ratio, their management fee, is 0.09%.

823
01:07:53,000 --> 01:07:55,000
You can't beat it.

824
01:07:55,000 --> 01:08:03,000
It is for a small-time investor who is thinking, I get this all the time.

825
01:08:03,000 --> 01:08:08,000
I've got to find cheap stocks.

826
01:08:08,000 --> 01:08:09,000
No.

827
01:08:09,000 --> 01:08:12,000
Buy a share of the spider.

828
01:08:12,000 --> 01:08:16,000
When you can afford another share, buy another share of it.

829
01:08:16,000 --> 01:08:18,000
Now, let me show you another one.

830
01:08:18,000 --> 01:08:20,000
This is pure stock.

831
01:08:20,000 --> 01:08:22,000
Let me show you one that's pure bond.

832
01:08:22,000 --> 01:08:32,000
As a matter of fact, this one is so famous that it's used as the benchmark for any other bond portfolio.

833
01:08:32,000 --> 01:08:38,000
AGG.

834
01:08:38,000 --> 01:08:40,000
It's a bond portfolio.

835
01:08:40,000 --> 01:08:46,000
So notice here, right here, beta 1.00.

836
01:08:46,000 --> 01:08:49,000
You're riding the world.

837
01:08:49,000 --> 01:08:54,000
Not more than the world, not riskier than the world, not less risky than the world.

838
01:08:54,000 --> 01:08:55,000
You're riding the world.

839
01:08:55,000 --> 01:08:59,000
It has a really modest fee of 0.03%.

840
01:08:59,000 --> 01:09:01,000
Really good stuff.

841
01:09:01,000 --> 01:09:05,000
Now, let me tell you how you do it.

842
01:09:05,000 --> 01:09:11,000
If you're a smart investor, you think, okay, the economy is going to do really well.

843
01:09:11,000 --> 01:09:17,000
You say 80% SPY, 20% AGG.

844
01:09:17,000 --> 01:09:25,000
If you think that the economy is going to suck, maybe 25% SPY, 75% AGG.

845
01:09:25,000 --> 01:09:39,000
In other words, you have only two pieces that you need to move against each other based upon your judgment about the direction of the economy.

846
01:09:39,000 --> 01:09:45,000
If you're kind of on the fence, maybe 50% AGG, 50% SPY.

847
01:09:45,000 --> 01:09:54,000
You don't need to go through nightmares of portfolio allocation and the portfolio control theory, which I'll show you later in the course.

848
01:09:54,000 --> 01:10:03,000
You can just do it this way and you've got well-diversified portfolios professionally managed day and night.

849
01:10:03,000 --> 01:10:06,000
You don't have to sit in front of stock screens worrying.

850
01:10:06,000 --> 01:10:10,000
They sit there looking at you and you buy them as stocks.

851
01:10:10,000 --> 01:10:12,000
They are stocks.

852
01:10:12,000 --> 01:10:23,000
You just order it from, put it in the trade order with Robinhood or TD Ameritrade or Fidelity or whatever, and you've got your instantly well-balanced portfolio.

853
01:10:23,000 --> 01:10:29,000
And you can honestly say you own the S&P 500.

854
01:10:29,000 --> 01:10:31,000
No swipe left for you tonight.

855
01:10:31,000 --> 01:10:33,000
Got it?

856
01:10:33,000 --> 01:10:36,000
I'll pick up Chapter 3 on Wednesday.

857
01:10:36,000 --> 01:10:54,000
That's all I have for you, I think.