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Alan Cring Productions in association with the Emergent Light Studio presents the Illinois

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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 we'll step into chapter three if I have time, trying

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to slowly catch up to where we should be at this time.

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But before we do anything else, we have a look at the numbers to see what the stocks

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are doing today.

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And as a matter of fact, what are they doing?

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Just to start the ball rolling.

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Is this a bear day or a bull day?

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Bull.

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Bull.

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You've got to be confident.

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You say bull.

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It is a bull day.

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It's not much of a bull.

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I mean it's not a moo.

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But it's a bull.

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We take our gifts where we can get them.

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And this one, notice that we have a classic pattern here.

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The Dow, which is these huge companies, very low risk, they're up 0.29%.

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But then the Standard Port is 500, which represents a portfolio that is of higher risk, is up

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more, 0.48, almost half a percent.

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And then the NASDAQ, the riskiest of the portfolios, is up 0.79%.

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So you have a decent, it's not a spectacular day, but we take this one for what it's worth.

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It's not bad at all.

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And there is a positive sentiment.

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You notice that the markets have been a little choppy.

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There's uncertainty out there, but there's still continuing positive news.

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We have some of the big S&P 500 companies releasing their quarterly earnings today.

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Now every company gives an estimate weeks in advance of what they think the earnings

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will be for the quarter.

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But then this would be the earnings when they say, well, this is what it actually was.

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So the investors are formulating their prices based upon the expectations forward looking.

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And then when the stock, when the company issues the report, then that is all off the table

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and it's what the report is saying that drives the stock price at that point.

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That was Netflix last week.

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I think it was Netflix.

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They said we're going to make a little, our earnings will be a little positive.

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Turned out that they were dramatically positive.

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And so of course it turned from Netflix going up a nice little bit to Netflix going through

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the roof that day when they released the information.

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Information, new information is what drives the market.

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Not old information at all.

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It's what the expectations are based upon the most recent information about the stock.

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And there's an old saying among traders back in my time, buy on the rumor, sell on the

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news.

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So if there's a rumor that the stock is going to be, the earnings are going to be good,

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you buy on that.

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But when the earnings come out, even if they are great, you sell.

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Why?

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Because you're never going to be able to benefit.

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Those big dogs are going to come in there and they're going to knock that price through

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the roof.

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So you just sell the stock based on the news.

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You buy it when the rumors are there or if the rumors are bad, you sell it on the rumors

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and then you buy it on the news.

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Because if it's bad news, that the rumors are bad news, then you get out of it and then

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when the news comes out that it's bad, well then that's when you want to buy it because

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the price has been pushed down so much.

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Okay, enough of that.

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But crude oil, and as I had mentioned before, over the past year or so, it keeps wanting

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to find its way back into this trading band between 72 and 79.

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It pushed way above that for just a little while and then a couple of months ago it was

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below that somewhat.

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But then it just keeps wanting to find itself right in that nice trading band right there

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between 72 and 79.

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How long will it stay there?

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Probably it will stay there unless something dramatic happens like war in the Middle East.

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We're getting a little bit, I'm seeing some traders getting a little bit skittish that

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we're getting a little too close to a war and what we need of course are cool heads

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in the world's capitals to react to the problems without turning it into World War III.

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Not that that's my problem, you'd be the ones drafted and I'd like to have you send

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postcards.

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But anyway, moving on, working our way over here, as you can see gold has been bouncing

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up and down and up and down as the gold bugs see the possibility of an apocalypse and then

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they say, oh darn, it's not happening.

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And then there's another rumor that something horrible is going to happen.

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So the gold kind of has its own mind.

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Silver on the other hand, it's a little bit more mature.

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It moves more on supply and demand and all of that.

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But it is up rather well for the day, 1.6 something percent, not bad for oil.

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Now bonds, this is not a price, again, this is a yield.

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The price is exactly mathematically inversely related.

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So if the yields, as you see there, are falling, that means that the prices are rising.

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In other words, investors are buying bonds, which drives down their yields.

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Why are yields falling?

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Well there's pretty much, we're pretty sure the Federal Reserve is done with raising interest

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rates to fight inflation.

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Looks like we do have inflation back under control.

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Now the next question would be, what's the Fed going to do?

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There are some rumors out there that the Fed is actually going to do a modest interest

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rate cut.

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Most likely, those bond yields going down is an expectation of that.

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Whether or not the Fed does it, we'll see when they have their open market committee

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meeting, I think that's this week, maybe next week.

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But one way or the other, we have yields going down on the 10-year benchmark.

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So that means that that's an indication that overall interest rates are going to ease back.

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That will help the economy.

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Lower interest rates means lower loan rates, things like that.

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So that will stimulate the economy.

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Some economists are in fact a little worried that the economy is overheating again, getting

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a little too excited.

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So the Fed, smart money is that the Fed is probably going to leave interest rates where

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they are.

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It doesn't want to certainly raise them because we've taken care of the inflation, but it

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doesn't want to lower them if that's going to get the economy heated up to the point

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where we get an inflation blowback.

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Complicated, but anyway, moving over here to the overseas markets.

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Last night in Tokyo, the Nikkei finished up respectable 0.77%.

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But you notice that it was quietly, slowly climbing through the midday from, if you look

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at the spark chart, clear to there, but then it kind of lost its momentum.

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That might have just been some profit taking.

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Sometimes when you get a nice price increase for a day, you'll sell off some of your stocks

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so you can have your money for your three martinis and steak that night.

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That might be what was going on there as it slid back down a little bit.

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But it still finished up at the end from where it began.

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Now London was another story.

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When the sun had gone down in Japan, it started rising across Asia and then Europe and then

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in London, the bell opened and you see that there was a bull spike.

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You see the bull spike right there?

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Bind, right off the bat.

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Some decent buying.

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But then the news turned the other way and the bears took over and then it just kind

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of bounced up and down and up and down for the rest of the day.

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It finished the day pretty much flat.

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I mean, 0.03% down is nothing.

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That's a flat day.

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So it had a big ride through the day and then it finished on a quiet note.

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But of course, as you can see, coming back over here, we've had kind of a rollicking

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day.

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It's finally getting its feet under it.

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You see how especially the Dow was showing a lot of turbulence in the late morning to

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early afternoon and then it got its act together.

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And so everything seems to be on a positive note, not spectacular, but that just reflects

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the fact that our economy is in awfully decent shape, especially after the rough years we

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had from 2020 through 2022, seeing the economy getting on its feet.

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That's good news for you, for internships, jobs, and all of that good stuff.

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And interest rates falling, well that just makes the story even sweeter.

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Now let me take you on a few stocks and see how much you remember.

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Remember this is early so I'm not holding you too much to it.

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Let's look at advanced micro devices, AMD.

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Now AMD is the competitor of Intel for microchips and all that good stuff.

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Good grief.

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Okay, yeah.

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Okay.

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Lost some energy today, about a third of a percent down, which isn't much at all.

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But you can see that AMD, if you want to buy a share, you'll pay $175.94, the ask.

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If you want to sell a share, you'll get $175.89.

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So the bid ask spread is five cents.

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That's not terrible considering that we're talking about $175 stock here.

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But as you can see, the AMD is actually near its 52-week high.

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Do you see that?

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The stock over the last 52 weeks has swung between $72.03 and $184.92.

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And right now it's about $176.50.

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So you do have that it's reaching near where its highest point has been.

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Let me look at the 52-week chart here, one-year chart.

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Yeah, see, we're up there near the top right now, just a little off the top.

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So it's rolling along.

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Now talking about risk, let's take that wild stuff.

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Is this a risky or a not risky stock?

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I would say not risky.

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It is extraordinarily risky.

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The beta.

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That's OK.

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That's OK.

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I didn't mean to do it quite that harshly.

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This is 1.70.

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A beta of one is the fulcrum.

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That's the risk of the world portfolio.

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Above that, you're getting into risky territory.

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Below that, you're in safer, more conservative investment territory.

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In fact, at 1.70, technically we'd say that's risky AF.

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I mean, that's just a really risky investment.

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This is where we get into the very important term in financial advising or in finance in

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general, appropriateness of investment.

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This is the kind of stock that only a hardcore risk taker would want to grab.

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If you're corporate and you've got funds that you want to put into stocks, you would never

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do this stock simply because you're not there to put your earnings that you've worked so

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hard to create through your operations at this kind of risk.

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It wouldn't be that kind.

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You would certainly not advise, let's say, a couple in their 60s looking for stock investments.

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No way you would do that because they could lose their shirts.

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Now technically, yeah, a young investor, someone your age or a little older, even if you lost

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money on this, you could win big, but you could also lose a lot.

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But you'd have enough time left in your life to be able to recover from a hit like this.

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But even at that, there's an old thought that young investors are the risk takers.

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When we actually look at their portfolios, they are actually quite conservative.

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The typical young investor is not a risk taker at all.

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They're not, apparently, they're not stupid.

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They keep their investments reasonably, well, not down to 1.0 necessarily, but certainly

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not at betas like this.

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This is for pros who know exactly what they're walking into, and in a lot of cases, they're

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hedging their bets anyway.

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Now I saw this this morning.

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The P-E ratio, and I just started laughing, my P-E ratio is insane.

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A stock would be about valued properly at a P-E ratio of 30.

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The price as a multiple of the earnings, 30 times.

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Now if it's below that very much, you'd say that the stock is undervalued.

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Maybe a stock at a P-E ratio of 15.

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It's undervalued.

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You might want to grab a few shares to put into your long-term portfolio.

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If it's much above 30, well, it's overvalued.

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A P-E ratio of 1,603.91, that's insane.

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That should not even be allowed to happen.

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That's one of those wait, what kind of P-E ratios.

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In other words, investors in the stock are willing to pay over $1,600 to claim $1 of

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earnings that the company made for its shareholders.

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Put another way, investors right now think that the company will turn every dollar of

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net income into $1,600.

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That's like ain't going to happen kind of territory.

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This is way overvalued.

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If you had this in a portfolio, your first thought would be get out of it.

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Sell this off because this cannot hold this level for very long before something terrible

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happens.

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This company doesn't even pay a dividend, so the only thing you can do is make money

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off the price of the stock going up.

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You're not going to get a dividend check in the mail.

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This is pure capital gain you would be betting on buying this stock.

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At that P-E ratio, there isn't much higher it can go before it starts to pop or something.

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I don't know, but definitely not a good idea.

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Let me take you over here, show you another one.

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My favorite whipping boy, Tesla run by he of the cloven hoof.

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There it is, Tesla.

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190.33 a share.

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Now we're just going to go to the meat of this.

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Redeem yourself, risky or not risky?

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Yes, stupid risky.

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I mean 2.32, you have to work to find stocks at beta's this high.

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This is not an appropriate investment for anyone with any common sense.

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As a matter of fact, all those Wall Street boys and those banks and those foreign interests

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that have bought stock in this, they really want out.

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But if they all sell at the same time, of course the stock price will collapse.

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Notice the P-E ratio, twice what it should be, which indicates that it's probably got

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about half the stock price could go down by half.

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As a matter of fact, two of my former students from long ago who are traders, they were both

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this consensus is that Tesla will find somewhere between 80 and 90 a share.

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Will that happen tomorrow?

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00:18:37,640 --> 00:18:44,680
No, it's going to happen over a long period of time as all of those heavies quietly, carefully

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divest from this stock.

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And notice Tesla, and here's something that we'll learn later in the course.

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The earnings per share indicates that Tesla is profitable.

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However, in finance, profit really isn't what we care about.

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It's something called free cash flow, which you have to twist the numbers down from net

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income to get to free cash flow, adding things in, subtracting things out.

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Free cash flow of Tesla is bloody negative, bloody negative.

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And so there is not a lot to advise in a responsible portfolio.

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You won't even get a dividend off the stock.

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They made all this money, they had to pour it all back into the company.

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They didn't leave any to give back to shareholders as dividends.

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So there's that in this as well.

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So this is one of those investments.

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If you want to take a shot on something like this, you pay your money and you take your

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chances on it.

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This is casino gambling on a table that is definitely rigged against you if you do buy

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into this.

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But now let's look at something a little more in the normal range.

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AT&T.

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There you go.

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$17.26 a share.

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You'd buy a share at $17.21 and you could sell a share at $17.20.

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Bid ask.

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Make sure you know that.

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I always ask something about that on a quiz and or an exam.

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00:20:29,920 --> 00:20:34,640
Okay, you can see a couple of other things too in this one.

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First of all, madam, would you say this is a safe or risky stock?

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Safe.

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Putting beta into a context, 1.00 is the world portfolio's risk.

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That.72 says that in a well-diversified portfolio, AT&T's volatility will be 72% of the world's

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volatility, world market portfolio volatility.

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That's a good way to interpret the beta.

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00:21:07,720 --> 00:21:10,120
It's not as crazy as the world.

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00:21:10,120 --> 00:21:11,940
It's not crazier than the world.

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It's just about three-fourths as crazy as the world's world market portfolio, the world

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economy.

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And that's what makes it a safe investment.

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Now the next one, P-E ratio.

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Is this stock undervalued or overvalued?

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Yes.

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Don't ask it as a question.

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Show your knowledge.

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Be certain.

283
00:21:34,720 --> 00:21:36,320
Yeah, it's undervalued, fat boy.

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It's undervalued.

285
00:21:37,320 --> 00:21:38,320
Yes.

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As a matter of fact, this is one of those in a responsible portfolio, well-diversified

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portfolio.

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This is one where you maybe add some shares of AT&T to it because it has the potential

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over the next months or couple of years to go up in price fairly respectably because

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undervaluation and overvaluation don't correct in a day or even in a month usually.

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It's a long-term process.

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And that's what we teach in finance.

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You people are going to be those leaders of the world where you have to see the long picture

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and plan for that, adjusting as needed for short-term circumstances but always keeping

295
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in mind that you're in it for the long haul over a longer period of time.

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So this would be something.

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00:22:34,280 --> 00:22:40,160
Put some shares of AT&T into it, into your portfolio, and they should over a period of

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time benefit the portfolio.

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It's safe.

300
00:22:44,400 --> 00:22:51,600
And in fact, one thing is you might have a portfolio and, okay, I'm targeting a beta

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of let's say 0.9.

302
00:22:54,320 --> 00:23:02,160
Now right now my portfolio's weighted average beta is 1.2.

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00:23:02,160 --> 00:23:08,720
By putting in stocks below your target, you're going to pull the weighted average beta of

304
00:23:08,720 --> 00:23:10,800
the portfolio downward.

305
00:23:10,800 --> 00:23:12,840
So you could have a portfolio.

306
00:23:12,840 --> 00:23:15,380
You have some 1.1 beta stocks.

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00:23:15,380 --> 00:23:22,680
But if you don't want 1.1 for the whole portfolio, you might put in some that are 0.72 so that

308
00:23:22,680 --> 00:23:28,400
makes the sort of waters down the risk of the entire portfolio.

309
00:23:28,400 --> 00:23:31,240
That's part of what we call portfolio control theory.

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And I'll teach you the basics of it.

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You don't need to be a mathematical wizard to do it, especially these days with Excel.

312
00:23:39,240 --> 00:23:41,360
Nothing big.

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00:23:41,360 --> 00:23:49,620
EPS, it's a profitable company, about $2 a share, and it pays a nice dividend.

314
00:23:49,620 --> 00:24:01,040
That 6.42% dividend yield, that is the $1.11 dividend divided by $17.25.

315
00:24:01,040 --> 00:24:07,320
This is somewhat, and I should be cautious about this, but this is somewhat like checking

316
00:24:07,320 --> 00:24:16,600
a bank account where you put money in and the interest that you bear is 6.42%.

317
00:24:16,600 --> 00:24:23,800
Regardless of what the stock does, you've got 6.42% hauling on the dividend.

318
00:24:23,800 --> 00:24:28,480
So that sure beats what you could do in a savings account these days.

319
00:24:28,480 --> 00:24:29,880
Now, is that guaranteed?

320
00:24:29,880 --> 00:24:30,880
Absolutely not.

321
00:24:30,880 --> 00:24:35,960
The stock market is fickle and has its own mind.

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00:24:35,960 --> 00:24:46,520
But at the same time, if I invest $17.27 and I know I will get 6.42% on that investment,

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00:24:46,520 --> 00:24:51,200
just because I'll get a check for $1.11, that's decent.

324
00:24:51,200 --> 00:24:52,800
That's really good.

325
00:24:52,800 --> 00:24:59,080
And one thing about that beta, again, betas are generally lower with stocks that pay a

326
00:24:59,080 --> 00:25:03,280
dividend because there's sort of like an underlying guarantee.

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00:25:03,280 --> 00:25:09,880
They're also lower, they tend to be lower for stocks that are old companies.

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00:25:09,880 --> 00:25:13,760
They've gotten through their crazy youth and all of that.

329
00:25:13,760 --> 00:25:19,780
And then there are also betas are lower in industries, in companies that provide more

330
00:25:19,780 --> 00:25:21,360
basic products.

331
00:25:21,360 --> 00:25:27,960
AT&T provides telecommunications products, mobile phones, mobile networks, and a lot

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00:25:27,960 --> 00:25:29,960
of other products as well.

333
00:25:29,960 --> 00:25:34,640
And so that's essentially in our world, that's an essential.

334
00:25:34,640 --> 00:25:39,760
So that's why you see that beta so calm on that stock.

335
00:25:39,760 --> 00:25:49,040
Competition, basically the big telecommunications companies have just a standing agreement with

336
00:25:49,040 --> 00:25:50,040
each other.

337
00:25:50,040 --> 00:25:51,040
Yeah?

338
00:25:51,040 --> 00:25:58,040
You should only purchase stocks that aren't riskier than why do people buy stocks with

339
00:25:58,040 --> 00:26:03,280
a beta number that's like 1.5 or 1.7?

340
00:26:03,280 --> 00:26:04,480
Two reasons.

341
00:26:04,480 --> 00:26:08,180
One is, and you're going to see a video that's going to come out in a few days that they

342
00:26:08,180 --> 00:26:17,600
did where they were asking me, well, aren't stocks like going to a casino?

343
00:26:17,600 --> 00:26:22,960
And for some investors, that's exactly what they're doing.

344
00:26:22,960 --> 00:26:26,200
They want that risk.

345
00:26:26,200 --> 00:26:28,760
They're the ones who would go to a casino.

346
00:26:28,760 --> 00:26:32,320
And so they will buy into stocks like this.

347
00:26:32,320 --> 00:26:39,440
Another reason that investors will buy into stocks like this is because they're ill-informed.

348
00:26:39,440 --> 00:26:41,320
They believe pop culture.

349
00:26:41,320 --> 00:26:43,440
They believe the latest trends.

350
00:26:43,440 --> 00:26:50,340
They think Elon Musk is a cool, awesome guy because he's an asshole.

351
00:26:50,340 --> 00:26:54,040
They will buy it for all the wrong reasons.

352
00:26:54,040 --> 00:26:58,320
You can even buy a good stock for all the wrong reasons.

353
00:26:58,320 --> 00:27:03,240
My friend works at Target, and so I'm like, he says it's a great company, so I'm going

354
00:27:03,240 --> 00:27:05,320
to buy some Target.

355
00:27:05,320 --> 00:27:08,640
It's a decent investment, but you're buying it for the wrong reason.

356
00:27:08,640 --> 00:27:10,600
You're buying it from your friend.

357
00:27:10,600 --> 00:27:19,160
For all you know, your friend could be a sacrifice humans at night, for God's sake, or something

358
00:27:19,160 --> 00:27:20,160
like that.

359
00:27:20,160 --> 00:27:23,960
There is a lot of this that goes on.

360
00:27:23,960 --> 00:27:30,360
The social media, with the blogs, with the podcasts, with the talking heads, with the

361
00:27:30,360 --> 00:27:33,240
friends recommending to their friends.

362
00:27:33,240 --> 00:27:39,760
And they don't know that there are ways that you can look at these things and do it right.

363
00:27:39,760 --> 00:27:43,400
They play it almost like a game.

364
00:27:43,400 --> 00:27:46,600
And I know a lot of people who do this.

365
00:27:46,600 --> 00:27:51,280
That it's just something they do and they think that their information is right.

366
00:27:51,280 --> 00:27:54,760
It's like the people who get their information from Wikipedia.

367
00:27:54,760 --> 00:27:58,920
When you do that, you don't understand that you haven't even formulated, you don't know

368
00:27:58,920 --> 00:28:04,080
what the background is, what the questions are, and you don't know that Wikipedia is

369
00:28:04,080 --> 00:28:06,120
wrong as much as it is right.

370
00:28:06,120 --> 00:28:08,440
Its information is tainted.

371
00:28:08,440 --> 00:28:12,520
But it's popular, and that drives a lot of people.

372
00:28:12,520 --> 00:28:18,680
That's what we try to do in college, is to get you past that so that you are the leaders.

373
00:28:18,680 --> 00:28:24,640
And if necessary, you're the ones who lie to the fools and suckers.

374
00:28:24,640 --> 00:28:26,280
I shouldn't have said that.

375
00:28:26,280 --> 00:28:28,920
Oh yes, I should have.

376
00:28:28,920 --> 00:28:33,720
But you're asking a darn good question.

377
00:28:33,720 --> 00:28:39,000
And in fact, part of the answer to this goes into the realm of this new field, well it's

378
00:28:39,000 --> 00:28:43,880
not new now, but it's just come along in the last 10 years and got respectable, called

379
00:28:43,880 --> 00:28:46,280
behavioral finance.

380
00:28:46,280 --> 00:28:50,360
It's the same thing as when you go to these payday loan companies.

381
00:28:50,360 --> 00:28:57,160
You'll see later in the semester that a payday loan carries an actual interest rate of several

382
00:28:57,160 --> 00:29:00,360
thousand percent per year.

383
00:29:00,360 --> 00:29:02,920
So why do people do it?

384
00:29:02,920 --> 00:29:09,440
It's irrational by classical economics, but it's part of behavioral finance.

385
00:29:09,440 --> 00:29:16,720
We know why people do things now, and it ain't because of classical, everyone's a rational

386
00:29:16,720 --> 00:29:18,000
person.

387
00:29:18,000 --> 00:29:25,280
People are rational, but they are also short term, something less than rational.

388
00:29:25,280 --> 00:29:31,640
Which unfortunately is being played against the people, most of whom are under very great

389
00:29:31,640 --> 00:29:38,000
economic distress, they go to those companies and they get ripped off by them, those payday

390
00:29:38,000 --> 00:29:40,120
loan companies.

391
00:29:40,120 --> 00:29:49,480
Just like people who are poorly informed go for stocks like AMD, go for stocks like Tesla,

392
00:29:49,480 --> 00:29:55,280
not realizing that there's much better information they could have, they play what is easy for

393
00:29:55,280 --> 00:30:02,000
them to get to, which is popular information, unfortunately.

394
00:30:02,000 --> 00:30:07,760
Let me go into some detail today.

395
00:30:07,760 --> 00:30:15,160
This content is dense and it parallels the book, although I fill in a lot of information

396
00:30:15,160 --> 00:30:18,160
in this.

397
00:30:18,160 --> 00:30:30,240
Okay, madam, I have some money, and you need to borrow some money for food.

398
00:30:30,240 --> 00:30:35,660
Now I'm not going to just give you money, but there's a potential that we could make

399
00:30:35,660 --> 00:30:39,520
a deal.

400
00:30:39,520 --> 00:30:57,480
In this circumstance, you would be called a deficit economic unit, and I would be called

401
00:30:57,480 --> 00:31:06,920
a surplus economic unit.

402
00:31:06,920 --> 00:31:16,000
Now understand that you could be a surplus and a deficit economic unit at the same time.

403
00:31:16,000 --> 00:31:26,680
Someday, madam, you might very well have a really nice fat 401K, but you need to borrow

404
00:31:26,680 --> 00:31:29,280
money to buy a house.

405
00:31:29,280 --> 00:31:33,600
So in a case like that, you're a surplus unit because you're providing capital markets with

406
00:31:33,600 --> 00:31:40,440
money every month, but at the same time, you're a deficit economic unit with respect to the

407
00:31:40,440 --> 00:31:42,980
purchase of this asset.

408
00:31:42,980 --> 00:31:45,680
So you can be both at the same time.

409
00:31:45,680 --> 00:31:51,560
The question is, is there a way to match these?

410
00:31:51,560 --> 00:32:01,160
Well, that's what's called financial intermediation.

411
00:32:01,160 --> 00:32:08,040
Financial intermediation.

412
00:32:08,040 --> 00:32:14,120
Financial intermediation is matching surplus and deficit economic units.

413
00:32:14,120 --> 00:32:22,300
Financial intermediation is matching surplus and deficit economic units.

414
00:32:22,300 --> 00:32:30,280
Financial intermediation is matching surplus and deficit economic units.

415
00:32:30,280 --> 00:32:33,760
I may have already mentioned this, but if you hear me repeat a definition, you're pretty

416
00:32:33,760 --> 00:32:40,000
sure that that's going to show up on a quiz and or an exam.

417
00:32:40,000 --> 00:32:46,400
Now a lot of people might think, well, financial intermediation is done by banks.

418
00:32:46,400 --> 00:32:48,920
Well, no, not necessarily.

419
00:32:48,920 --> 00:32:57,340
I mean, you might know both of us and you know I got money and you know she needs money.

420
00:32:57,340 --> 00:33:01,060
So you might put us together and work it out.

421
00:33:01,060 --> 00:33:06,600
So it doesn't have to be some official building or something like that.

422
00:33:06,600 --> 00:33:19,240
In fact, the world of the blockchain world has made it so there's no concept of an institution.

423
00:33:19,240 --> 00:33:28,040
Smart contracts happen without the intervention, intermediation of anyone except for this diffuse

424
00:33:28,040 --> 00:33:31,920
thing called the blockchain itself.

425
00:33:31,920 --> 00:33:36,160
So I don't want to get into that because it still makes my head hurt sometimes.

426
00:33:36,160 --> 00:33:43,200
But anyway, there's a problem here.

427
00:33:43,200 --> 00:33:48,360
You need $100, but I have only $20.

428
00:33:48,360 --> 00:33:51,120
So there won't be a match.

429
00:33:51,120 --> 00:33:58,080
So the first criterion for successful intermediation would be the level.

430
00:33:58,080 --> 00:34:04,080
That's a fancy word for the amount.

431
00:34:04,080 --> 00:34:09,420
The level.

432
00:34:09,420 --> 00:34:14,280
So that would have to, the match won't happen unless the levels are compatible.

433
00:34:14,280 --> 00:34:16,960
Okay, well, actually, you know what?

434
00:34:16,960 --> 00:34:18,200
I got $100.

435
00:34:18,200 --> 00:34:19,200
You need $100.

436
00:34:19,200 --> 00:34:22,120
So we've got that.

437
00:34:22,120 --> 00:34:24,800
But the next one.

438
00:34:24,800 --> 00:34:28,560
You want to pay me back in six months.

439
00:34:28,560 --> 00:34:30,560
I need dinner tonight.

440
00:34:30,560 --> 00:34:33,720
You know, I can't lend for six months.

441
00:34:33,720 --> 00:34:36,840
I have cats to feed for heaven's sakes.

442
00:34:36,840 --> 00:34:38,680
So it doesn't work.

443
00:34:38,680 --> 00:34:44,560
So the second criterion would be timing.

444
00:34:44,560 --> 00:34:47,320
The timings have to be the same.

445
00:34:47,320 --> 00:34:50,000
The timings have to match.

446
00:34:50,000 --> 00:34:58,320
Now here's where in real life, this is a huge one.

447
00:34:58,320 --> 00:35:08,040
There are some surplus economic units that want their money back fairly quickly.

448
00:35:08,040 --> 00:35:10,000
Good example of this is a company.

449
00:35:10,000 --> 00:35:13,360
It has, I teach a course in cash management.

450
00:35:13,360 --> 00:35:20,680
So there are times when a typical corporation might have anywhere from $10,000 up to a couple

451
00:35:20,680 --> 00:35:22,160
of million dollars.

452
00:35:22,160 --> 00:35:27,760
But they're going to have to use it for payroll or to pay bills in a few weeks or maybe a

453
00:35:27,760 --> 00:35:28,800
month.

454
00:35:28,800 --> 00:35:36,280
So they do want to engage in some kind of intermediation, but they can't have it for

455
00:35:36,280 --> 00:35:37,560
a long time.

456
00:35:37,560 --> 00:35:47,120
That's why we have, there's a whole vast ocean out there of what's called, comes under the

457
00:35:47,120 --> 00:35:50,760
broad heading of commercial paper.

458
00:35:50,760 --> 00:35:55,760
This is very short term lending and borrowing.

459
00:35:55,760 --> 00:36:03,640
Like for example, Microsoft might need $10 million, might need millions of dollars, but

460
00:36:03,640 --> 00:36:06,240
for only 30 days.

461
00:36:06,240 --> 00:36:13,680
But there are entities out there, institutions, corporations, family trust, whatever, that

462
00:36:13,680 --> 00:36:20,800
want to just put some money somewhere for 30 days, just to make a little money off it.

463
00:36:20,800 --> 00:36:24,600
And that commercial paper market is huge.

464
00:36:24,600 --> 00:36:32,120
There's very short term lending to balance out cash flows and all that kind of stuff.

465
00:36:32,120 --> 00:36:34,160
Commercial paper is 30 day paper.

466
00:36:34,160 --> 00:36:36,200
It's what's called discount paper.

467
00:36:36,200 --> 00:36:48,040
The way that works is, say Microsoft says, we want to borrow $999,000 for 30 days and

468
00:36:48,040 --> 00:36:53,000
we'll pay you back 10 million at the end of 30 days.

469
00:36:53,000 --> 00:36:57,800
So in other words, they get a discounted amount and then they pay, so that interest is that

470
00:36:57,800 --> 00:37:01,920
difference between what they actually got and what they pay in 30 days.

471
00:37:01,920 --> 00:37:03,400
I'll talk about that later in the course.

472
00:37:03,400 --> 00:37:07,040
You don't need to worry about that mathematical thing right now.

473
00:37:07,040 --> 00:37:13,560
But anyway, now let me give you an example on the other end of the spectrum.

474
00:37:13,560 --> 00:37:18,480
Looking for someone here that I can trouble with this one.

475
00:37:18,480 --> 00:37:21,480
Sir, you're going to die someday.

476
00:37:21,480 --> 00:37:22,480
Did you know that?

477
00:37:22,480 --> 00:37:28,080
I mean, you're going to be in pain probably.

478
00:37:28,080 --> 00:37:32,520
You're going to bitch and fuss and finally you'll shut up and die.

479
00:37:32,520 --> 00:37:36,720
But that's not going to happen for many, many years.

480
00:37:36,720 --> 00:37:41,680
Actuarially speaking, you'll probably have lived to be about 100.

481
00:37:41,680 --> 00:37:44,440
You, 30.

482
00:37:44,440 --> 00:37:45,880
No.

483
00:37:45,880 --> 00:37:55,240
Anyway, okay, so the thing though is that there are these things out there that have

484
00:37:55,240 --> 00:37:58,680
vast oceans of money.

485
00:37:58,680 --> 00:38:05,600
Life insurance companies are getting insurance premiums from tens of thousands, hundreds

486
00:38:05,600 --> 00:38:13,720
of thousands, millions of people every month, but they won't have to pay out death benefits

487
00:38:13,720 --> 00:38:20,680
on any given policy holder for decades, many, many decades.

488
00:38:20,680 --> 00:38:28,400
So they want to get that money into extraordinarily long-term investments because they don't want

489
00:38:28,400 --> 00:38:35,080
to get that money, come back to them next month or next year or in 20 years.

490
00:38:35,080 --> 00:38:37,160
They are the ones on the other side.

491
00:38:37,160 --> 00:38:44,000
They want to dump the money off and not have to worry about it for a long, long time.

492
00:38:44,000 --> 00:38:47,200
Even pension funds.

493
00:38:47,200 --> 00:38:49,720
You're in your 20s or 30s.

494
00:38:49,720 --> 00:38:58,620
That money's got to be invested in something for you to have in 30, 40, 50 years.

495
00:38:58,620 --> 00:39:01,520
So that timing is quite a thing.

496
00:39:01,520 --> 00:39:11,680
Now the last thing, we're about to make our deal, $100, but then I find out that you,

497
00:39:11,680 --> 00:39:14,640
madam, are a scoundrel.

498
00:39:14,640 --> 00:39:17,040
You are very unreliable.

499
00:39:17,040 --> 00:39:23,600
As a matter of fact, on social media, people say, someone said, she's unreliable, and someone

500
00:39:23,600 --> 00:39:24,600
says IKR.

501
00:39:24,600 --> 00:39:27,600
And I think, I don't want to do that.

502
00:39:27,600 --> 00:39:29,800
I mean, no.

503
00:39:29,800 --> 00:39:30,800
No.

504
00:39:30,800 --> 00:39:31,800
OK.

505
00:39:31,800 --> 00:39:42,640
That's the third one, risk.

506
00:39:42,640 --> 00:39:50,280
You might have the money to invest in Tesla, but you don't want to take that risk.

507
00:39:50,280 --> 00:39:57,760
You might have the money as a bank to make a mortgage loan, but the borrower has a low,

508
00:39:57,760 --> 00:39:59,480
very low credit score.

509
00:39:59,480 --> 00:40:01,680
You don't want to take that risk.

510
00:40:01,680 --> 00:40:04,880
On the other hand, someone else might say, yeah, bring it on.

511
00:40:04,880 --> 00:40:08,440
I'm that kind of risky person.

512
00:40:08,440 --> 00:40:10,360
Or an investor.

513
00:40:10,360 --> 00:40:17,480
There are some investment houses that they live in a world where they want all the risk

514
00:40:17,480 --> 00:40:18,480
there is.

515
00:40:18,480 --> 00:40:25,600
As a matter of fact, they will take risk off the shoulders of someone else, because that's

516
00:40:25,600 --> 00:40:26,840
what they want.

517
00:40:26,840 --> 00:40:35,920
The other person doesn't want risk, so the risk averse person or entity will pay the

518
00:40:35,920 --> 00:40:41,480
risk taker to bear the risk.

519
00:40:41,480 --> 00:40:44,760
So the risk levels have to match.

520
00:40:44,760 --> 00:40:52,240
So in other words, financial intermediation is matching surplus and deficit economic units

521
00:40:52,240 --> 00:40:58,280
based upon level, timing, and risk considerations.

522
00:40:58,280 --> 00:41:03,880
Now on a quiz or an exam, I usually give you six or seven criteria.

523
00:41:03,880 --> 00:41:12,320
Choose the criteria that make a financial intermediation successful.

524
00:41:12,320 --> 00:41:14,720
And even telegraphing my punches in this class.

525
00:41:14,720 --> 00:41:15,720
Listen carefully.

526
00:41:15,720 --> 00:41:21,880
I go through a lot of the questions as I lecture.

527
00:41:21,880 --> 00:41:25,320
I don't always tell you I'm doing it, but it's there all over the place.

528
00:41:25,320 --> 00:41:27,680
Just a little hint off the bat.

529
00:41:27,680 --> 00:41:30,040
OK, deficit, surplus.

530
00:41:30,040 --> 00:41:34,680
Now who does this?

531
00:41:34,680 --> 00:41:57,120
There is a bestiary of financial intermediaries.

532
00:41:57,120 --> 00:42:13,600
Now a long time ago, these would have been bright lines in this list.

533
00:42:13,600 --> 00:42:15,680
They were established.

534
00:42:15,680 --> 00:42:19,640
You can do this, but you cannot do this, and you cannot do this.

535
00:42:19,640 --> 00:42:27,560
It was what we used to call Chinese walls among financial intermediaries.

536
00:42:27,560 --> 00:42:33,800
That came about in the early 1930s because of the insanity of the 1920s.

537
00:42:33,800 --> 00:42:41,800
It was a free market, laissez faire, let everyone kill or be killed kind of thing.

538
00:42:41,800 --> 00:42:46,920
And then in the 30s, well, that was enough of that after the stock market crash and the

539
00:42:46,920 --> 00:42:50,960
Great Depression started.

540
00:42:50,960 --> 00:42:56,080
Legislation was passed that put all of these into boxes.

541
00:42:56,080 --> 00:42:59,960
You Mr. Bank cannot do investment banking.

542
00:42:59,960 --> 00:43:04,400
You Mr. Financial Services cannot do banking.

543
00:43:04,400 --> 00:43:06,280
All this kind of stuff.

544
00:43:06,280 --> 00:43:15,600
But that expired in 1999, and it's been turning into more and more of a crazy wild west just

545
00:43:15,600 --> 00:43:19,600
like it was 1929 all over again.

546
00:43:19,600 --> 00:43:22,920
It's just amazing how far it's gone.

547
00:43:22,920 --> 00:43:24,640
And we can't reel it back now.

548
00:43:24,640 --> 00:43:31,440
It is baked into the system for better or worse, and eventually it will probably be

549
00:43:31,440 --> 00:43:33,480
worse.

550
00:43:33,480 --> 00:43:40,840
So when I give you these, I'm putting in more bright lines of distinction than really are

551
00:43:40,840 --> 00:43:42,680
out there right now.

552
00:43:42,680 --> 00:43:49,040
The first one of these financial intermediaries is the investment bank.

553
00:43:49,040 --> 00:43:55,680
And I already mentioned these once, and I'll be a little more specific this time.

554
00:43:55,680 --> 00:43:56,760
Investment banks.

555
00:43:56,760 --> 00:44:07,640
Now an investment bank underwrites public offerings of stock and bonds.

556
00:44:07,640 --> 00:44:17,680
I am Jeff Zuckerberg, and you sir are an investment bank.

557
00:44:17,680 --> 00:44:19,160
I want to go public.

558
00:44:19,160 --> 00:44:23,240
Sell a billion dollars worth of stock.

559
00:44:23,240 --> 00:44:24,240
Well I'm not stupid.

560
00:44:24,240 --> 00:44:27,400
I'm not going to try to sell that to people.

561
00:44:27,400 --> 00:44:36,240
You are going to work with me, and you will guarantee underwrite a billion dollars.

562
00:44:36,240 --> 00:44:44,720
You'll buy the stock from me, and that will be fully subscribed.

563
00:44:44,720 --> 00:44:48,040
Now that's a primary market transaction.

564
00:44:48,040 --> 00:44:49,800
The company is getting the proceeds.

565
00:44:49,800 --> 00:44:52,560
You won't do it all by yourself.

566
00:44:52,560 --> 00:44:57,720
You'll get some other investment bankers together with you to create a syndicate.

567
00:44:57,720 --> 00:45:03,400
Well you'll handle 600 million, you'll handle 200, 150, 100, 150.

568
00:45:03,400 --> 00:45:11,480
So in other words, in your group you will subscribe the offering fully.

569
00:45:11,480 --> 00:45:17,360
Now there will be a negotiation price, how much we're going to charge for all the things,

570
00:45:17,360 --> 00:45:21,560
the legal work with the SEC and the states and all that.

571
00:45:21,560 --> 00:45:27,160
But that would be what an investment bank does.

572
00:45:27,160 --> 00:45:31,360
I'm a company and I want to borrow 50 million dollars.

573
00:45:31,360 --> 00:45:39,840
I would go to an investment banker and you would say, I shall lend you 50 million dollars.

574
00:45:39,840 --> 00:45:41,840
That's I will buy your bonds.

575
00:45:41,840 --> 00:45:46,280
I'm going to sell you 50 million dollars in bonds.

576
00:45:46,280 --> 00:45:48,080
You might also have a syndicate.

577
00:45:48,080 --> 00:45:50,880
Again, a primary market transaction.

578
00:45:50,880 --> 00:45:54,320
It can be for equity or it can be for debt.

579
00:45:54,320 --> 00:45:57,080
And that's what investment banks do.

580
00:45:57,080 --> 00:45:58,080
That's their job.

581
00:45:58,080 --> 00:46:06,560
And then they sell some of it to their very best clients and then they pump it up, hype

582
00:46:06,560 --> 00:46:09,840
it and then they get suckers to buy it.

583
00:46:09,840 --> 00:46:16,760
Well I bought, I couldn't believe how many people said they bought the stock in the IPO

584
00:46:16,760 --> 00:46:17,760
on Facebook.

585
00:46:17,760 --> 00:46:19,680
No, they didn't.

586
00:46:19,680 --> 00:46:22,280
They bought it in the secondary market.

587
00:46:22,280 --> 00:46:27,680
The primary market, the IPO was subscribed by the syndicate.

588
00:46:27,680 --> 00:46:34,320
All you did was buy it from an owner of the stock, the investment banker.

589
00:46:34,320 --> 00:46:35,320
That was all you did.

590
00:46:35,320 --> 00:46:39,560
You don't buy, I don't think there's anyone in this room, including me, who will ever

591
00:46:39,560 --> 00:46:42,340
buy in an IPO.

592
00:46:42,340 --> 00:46:43,340
You just won't.

593
00:46:43,340 --> 00:46:45,260
That's not how it works.

594
00:46:45,260 --> 00:46:52,320
You buy in the secondary market and then you'll sell to someone else in that secondary market

595
00:46:52,320 --> 00:46:58,440
and then that sucker will sell his to someone else in the secondary market.

596
00:46:58,440 --> 00:47:02,240
Those stocks that I show you, that's all secondary market activity.

597
00:47:02,240 --> 00:47:04,320
You won't see the primary market activity.

598
00:47:04,320 --> 00:47:07,320
That's not quoted on a stock.

599
00:47:07,320 --> 00:47:13,480
Well, kind of, but not really.

600
00:47:13,480 --> 00:47:17,520
Now investment banks come in different sizes.

601
00:47:17,520 --> 00:47:26,960
It's the global operations that do these massive public offerings of stocks and or bonds, common

602
00:47:26,960 --> 00:47:35,040
stock, preferred stock bonds, corporate bonds, municipals, all that kind of stuff.

603
00:47:35,040 --> 00:47:36,040
What was I saying?

604
00:47:36,040 --> 00:47:42,020
Oh, but then there are regionals that are themselves huge operations.

605
00:47:42,020 --> 00:47:50,240
They just operate more on a national level with, they can do big offerings, big offerings.

606
00:47:50,240 --> 00:47:58,720
I took my students up to about six or seven years ago up to Chicago and they were given

607
00:47:58,720 --> 00:48:05,920
a talks by a regional investment banking firm up there in Chicago.

608
00:48:05,920 --> 00:48:06,920
It was a big place.

609
00:48:06,920 --> 00:48:07,920
I was like, this is huge.

610
00:48:07,920 --> 00:48:09,760
This is gorgeous.

611
00:48:09,760 --> 00:48:15,560
It wasn't as big as when I went to the Chase Tower up on the 55th floor, but it was still

612
00:48:15,560 --> 00:48:17,680
a huge operation.

613
00:48:17,680 --> 00:48:19,320
So the regionals were out there.

614
00:48:19,320 --> 00:48:21,880
And then there are these small ones.

615
00:48:21,880 --> 00:48:27,320
Generally speaking, houses like that are, we call them boutique houses.

616
00:48:27,320 --> 00:48:38,000
They do startups and smaller cap offerings, 10 million, 30 million, something like that.

617
00:48:38,000 --> 00:48:40,520
Those boutique houses do.

618
00:48:40,520 --> 00:48:42,440
But they're out there too.

619
00:48:42,440 --> 00:48:47,760
And there are all sorts of very high paying jobs.

620
00:48:47,760 --> 00:48:50,480
But that's an investment bank.

621
00:48:50,480 --> 00:48:53,120
It's not a bank like you think of a bank.

622
00:48:53,120 --> 00:48:54,160
You walk in there.

623
00:48:54,160 --> 00:49:00,360
I walked into that regional house and I was stopped down on the first, down on the cafe

624
00:49:00,360 --> 00:49:08,600
level by these very big security guards who seemed to be interested in turning me into

625
00:49:08,600 --> 00:49:14,640
a ball of fur.

626
00:49:14,640 --> 00:49:16,800
You're not going to go into one of those.

627
00:49:16,800 --> 00:49:25,420
What you would probably go into is a commercial bank.

628
00:49:25,420 --> 00:49:30,600
Commercial banks are the kind that you probably know about.

629
00:49:30,600 --> 00:49:32,160
They take deposits.

630
00:49:32,160 --> 00:49:38,960
They make loans to people and businesses.

631
00:49:38,960 --> 00:49:45,920
Now as far as checking accounts, this is commercial banks do the checking accounts.

632
00:49:45,920 --> 00:49:49,240
Those are called demand deposits.

633
00:49:49,240 --> 00:49:58,960
In other words, if you wrote me a check on your commercial bank, I could walk back into

634
00:49:58,960 --> 00:50:05,800
your commercial bank another day, the next day or something like that, and they would

635
00:50:05,800 --> 00:50:11,680
honor that check from you on my demand.

636
00:50:11,680 --> 00:50:13,520
Perfect liquidity.

637
00:50:13,520 --> 00:50:18,480
However, you might say, well, that means it's like a credit union.

638
00:50:18,480 --> 00:50:26,040
Well, credit unions are very similar to banks except, and they do offer what they call checking

639
00:50:26,040 --> 00:50:31,280
accounts, but they are not demand deposits.

640
00:50:31,280 --> 00:50:36,160
Now in any given circumstance, if you wrote me a check from your commercial, you have

641
00:50:36,160 --> 00:50:37,480
a credit union account.

642
00:50:37,480 --> 00:50:40,880
I could walk back into the credit union, $100.

643
00:50:40,880 --> 00:50:44,360
They say, okay, but they don't have to.

644
00:50:44,360 --> 00:50:48,960
You see, with the commercial bank, they have to on demand.

645
00:50:48,960 --> 00:50:56,080
In this case though, they probably will, but they don't have to honor it right away.

646
00:50:56,080 --> 00:51:01,200
It's not a demand deposit that you made for that check.

647
00:51:01,200 --> 00:51:04,800
It's what's called, and you don't have to know this now, I'll get back to this a little

648
00:51:04,800 --> 00:51:05,800
later.

649
00:51:05,800 --> 00:51:12,220
What they are is those kinds of checking accounts in quotation marks are actually negotiable

650
00:51:12,220 --> 00:51:16,720
order of withdrawal, now accounts.

651
00:51:16,720 --> 00:51:22,960
So if you wrote me a check for like $10,000 on your credit union account, if I go back

652
00:51:22,960 --> 00:51:27,200
in, they might very well say, well, we're going to hold this check for 30 days and then

653
00:51:27,200 --> 00:51:28,680
we'll honor it.

654
00:51:28,680 --> 00:51:34,320
Yeah, they could do that because it is not a demand deposit.

655
00:51:34,320 --> 00:51:37,400
Only commercial banks can do demand deposits.

656
00:51:37,400 --> 00:51:43,600
Credit unions try to look as much like demand deposit accounts, what they have, but they

657
00:51:43,600 --> 00:51:48,840
don't have to by the banking regulations.

658
00:51:48,840 --> 00:51:52,040
So credit unions are another financial intermediary.

659
00:51:52,040 --> 00:52:01,840
They make loans, they take deposits, but they're not exactly like commercial banks.

660
00:52:01,840 --> 00:52:03,160
Another one here.

661
00:52:03,160 --> 00:52:21,400
The next one are what are called the financial services companies.

662
00:52:21,400 --> 00:52:27,000
Now some of these commercial banks, that's where you really get it is that fuzzing of

663
00:52:27,000 --> 00:52:28,000
that bright line.

664
00:52:28,000 --> 00:52:36,360
We've got a lot of commercial banks now provide financial services, financial wealth management,

665
00:52:36,360 --> 00:52:38,960
things like that.

666
00:52:38,960 --> 00:52:43,040
And even insurance, I guess, now for God's sake.

667
00:52:43,040 --> 00:52:45,440
They didn't used to be allowed to do that.

668
00:52:45,440 --> 00:52:53,600
They can even participate in like IPO type action, kind of.

669
00:52:53,600 --> 00:52:55,120
It's a little bit common.

670
00:52:55,120 --> 00:52:57,200
But you see why that's a problem.

671
00:52:57,200 --> 00:53:01,440
That's why we didn't want this to happen under that old law.

672
00:53:01,440 --> 00:53:07,560
Because you could be the one, your bank could be the one that takes my deposits, but then

673
00:53:07,560 --> 00:53:12,720
you could provide me with wealth management services.

674
00:53:12,720 --> 00:53:20,000
And in those wealth management services, you might recommend that I buy this stock, which

675
00:53:20,000 --> 00:53:25,200
you, your company, had a hand in underwriting in some way.

676
00:53:25,200 --> 00:53:29,080
Do you see how there's a conflict of interest going on now?

677
00:53:29,080 --> 00:53:30,560
We can't do anything about it.

678
00:53:30,560 --> 00:53:31,560
It's done.

679
00:53:31,560 --> 00:53:34,440
This is all baked into the system now.

680
00:53:34,440 --> 00:53:37,600
But that was why we didn't want this to happen.

681
00:53:37,600 --> 00:53:43,920
And now it's a decentralized network.

682
00:53:43,920 --> 00:53:46,040
We couldn't ever stop it.

683
00:53:46,040 --> 00:53:48,040
Okay, enough of that.

684
00:53:48,040 --> 00:53:51,000
Okay, now I did mention this one before.

685
00:53:51,000 --> 00:54:03,480
Life insurance companies.

686
00:54:03,480 --> 00:54:15,760
They are definitely a source, an economic surplus, a source of capital, long-term capital.

687
00:54:15,760 --> 00:54:22,480
So they would be participants in, like, a company wants to raise $30 million through

688
00:54:22,480 --> 00:54:26,620
debt, so it issues $30 million in bonds.

689
00:54:26,620 --> 00:54:30,540
And so these life insurance companies might take that up.

690
00:54:30,540 --> 00:54:36,000
Or a school district might want a bond to build a new high school or a couple of elementary

691
00:54:36,000 --> 00:54:37,000
schools.

692
00:54:37,000 --> 00:54:41,600
The life insurance company might buy the bonds.

693
00:54:41,600 --> 00:54:46,160
There's a whole giant, vast market in the United States and in some other countries

694
00:54:46,160 --> 00:54:47,960
too.

695
00:54:47,960 --> 00:54:51,640
And life insurance companies can reach long.

696
00:54:51,640 --> 00:54:55,240
I'm not talking like 20 years, 30 years.

697
00:54:55,240 --> 00:55:04,080
I'm talking possibly investments that would be 50 to 100 years in duration.

698
00:55:04,080 --> 00:55:09,560
We're living in a very weird age where some of the things that we are starting to throw

699
00:55:09,560 --> 00:55:19,760
heavy, heavy money into might not come to fruition for 50 years or 100 years.

700
00:55:19,760 --> 00:55:23,160
And I can't believe I'm saying this because it sounds like science fiction.

701
00:55:23,160 --> 00:55:30,000
You're already, I'm already hearing about the asteroid mining operations, the infrastructure

702
00:55:30,000 --> 00:55:32,520
to get that started.

703
00:55:32,520 --> 00:55:39,340
Colonies on the moon and Mars funded by private sources.

704
00:55:39,340 --> 00:55:45,340
Space stations that are actually permanent living environments for thousands and thousands

705
00:55:45,340 --> 00:55:46,920
of people.

706
00:55:46,920 --> 00:55:49,160
The fusion reactors.

707
00:55:49,160 --> 00:55:55,440
They are starting to finally light up, but it will be 50 years probably before we have

708
00:55:55,440 --> 00:56:04,840
them so that we can replace all of these fossil fuel and nuke generator plants out there.

709
00:56:04,840 --> 00:56:06,080
Yeah, long.

710
00:56:06,080 --> 00:56:08,300
We are looking into the future.

711
00:56:08,300 --> 00:56:11,480
The idea of artificial intelligence.

712
00:56:11,480 --> 00:56:17,880
The chat GPTs are narrow AI.

713
00:56:17,880 --> 00:56:19,480
One task kind of thing.

714
00:56:19,480 --> 00:56:20,800
One trick ponies.

715
00:56:20,800 --> 00:56:26,600
We're now in the age of the broad AI where we have AIs that are working across a bunch

716
00:56:26,600 --> 00:56:29,040
of things altogether.

717
00:56:29,040 --> 00:56:31,320
Internet of things is that.

718
00:56:31,320 --> 00:56:34,500
Driving your car kind of is broad AI.

719
00:56:34,500 --> 00:56:40,760
But then now we're all in the AI world talking about the next one, which is called general

720
00:56:40,760 --> 00:56:42,200
AI.

721
00:56:42,200 --> 00:56:48,040
In other words, the connected planet, the connected solar system.

722
00:56:48,040 --> 00:56:50,120
It will think for everything.

723
00:56:50,120 --> 00:56:56,320
That's going to be a lot of freaking infrastructure over the next 50 years.

724
00:56:56,320 --> 00:57:02,480
By the time you're old people in your 70s, 80s, everything will be connected.

725
00:57:02,480 --> 00:57:04,800
AI will do everything.

726
00:57:04,800 --> 00:57:08,920
And we may have some way to make a living in it.

727
00:57:08,920 --> 00:57:14,920
But that's where these long, long-term investments will play their hand.

728
00:57:14,920 --> 00:57:22,160
Especially in the general AI that we're just starting to get the infrastructure for now,

729
00:57:22,160 --> 00:57:25,360
but we know it's going to take 50 years.

730
00:57:25,360 --> 00:57:26,360
That's the projection.

731
00:57:26,360 --> 00:57:31,360
Kind of weird, isn't it?

732
00:57:31,360 --> 00:57:35,760
Science fiction is not very fictiony anymore.

733
00:57:35,760 --> 00:57:38,480
Okay, now I'm going to give you another one.

734
00:57:38,480 --> 00:57:41,320
This is for all of us.

735
00:57:41,320 --> 00:57:44,520
Mutual funds.

736
00:57:44,520 --> 00:57:53,200
Now mutual funds are kind of a cool thing because it's a company and its job is to do

737
00:57:53,200 --> 00:57:57,200
investments in stocks and bonds.

738
00:57:57,200 --> 00:58:02,160
Now any given mutual fund will have its sort of take on things.

739
00:58:02,160 --> 00:58:04,920
Well, we buy stocks of this industry.

740
00:58:04,920 --> 00:58:07,960
Or we buy stocks that are around this beta.

741
00:58:07,960 --> 00:58:12,080
Or we do bonds and stocks of very high quality.

742
00:58:12,080 --> 00:58:13,720
It's the kind of things.

743
00:58:13,720 --> 00:58:15,240
Or risky stuff.

744
00:58:15,240 --> 00:58:21,880
Now a mutual fund, you can buy into a mutual fund and you become one of the owners of the

745
00:58:21,880 --> 00:58:23,760
mutual fund.

746
00:58:23,760 --> 00:58:28,120
A fraction of a percent owner.

747
00:58:28,120 --> 00:58:33,320
And like I said, mutual funds, you can get them in all kinds of different flavors and

748
00:58:33,320 --> 00:58:34,320
varieties.

749
00:58:34,320 --> 00:58:36,160
Anything you want.

750
00:58:36,160 --> 00:58:41,480
Now the good thing about mutual funds is that there are so many out there.

751
00:58:41,480 --> 00:58:43,520
There are tens of thousands.

752
00:58:43,520 --> 00:58:46,320
Now we generally break them into families.

753
00:58:46,320 --> 00:58:49,240
Like Fidelity has a bunch of mutual funds.

754
00:58:49,240 --> 00:58:54,120
And you can move in those funds as you wish among them.

755
00:58:54,120 --> 00:58:57,000
PIMCO, Invesco, you name it.

756
00:58:57,000 --> 00:59:01,040
There are just lots and lots of brokerage houses.

757
00:59:01,040 --> 00:59:05,400
You would think of this as a brokerage house, but it actually provides a lot of different

758
00:59:05,400 --> 00:59:08,680
mutual fund possibilities for you.

759
00:59:08,680 --> 00:59:15,620
Now one little downside on a mutual fund is that if you're going to jump out of a family,

760
00:59:15,620 --> 00:59:17,680
you can't do that anytime you want.

761
00:59:17,680 --> 00:59:20,200
You have windows when you can.

762
00:59:20,200 --> 00:59:25,360
Within a family of funds, if I'm not mistaken about how the rules work now, you can shuttle

763
00:59:25,360 --> 00:59:29,480
as you want between the funds, among the funds in a family.

764
00:59:29,480 --> 00:59:32,200
But here's one thing.

765
00:59:32,200 --> 00:59:34,680
Like let me give you an example.

766
00:59:34,680 --> 00:59:40,640
About 10 years ago, I bought 50 units into a mutual fund.

767
00:59:40,640 --> 00:59:43,600
It was a tiny fraction of a percent.

768
00:59:43,600 --> 00:59:47,760
Now I didn't want any dividends that would come from the stocks they invested in.

769
00:59:47,760 --> 00:59:49,840
I said just put it back into the fund.

770
00:59:49,840 --> 00:59:57,160
So over time, as of late last year, I had 61 units.

771
00:59:57,160 --> 01:00:02,560
Because you can just plow it back in with the fund gets and dividends and stuff like

772
01:00:02,560 --> 01:00:03,560
that.

773
01:00:03,560 --> 01:00:05,960
And you can grow your position in the mutual fund.

774
01:00:05,960 --> 01:00:10,160
And of course the value of the funds going up if their investments are doing good.

775
01:00:10,160 --> 01:00:15,320
And so that's one of the nice things about mutual funds is that you can actually just

776
01:00:15,320 --> 01:00:22,480
let it balloon on its own to a certain extent over time, which a lot of people do.

777
01:00:22,480 --> 01:00:26,560
And the mutual funds are a fine investment.

778
01:00:26,560 --> 01:00:32,060
You can choose I want to invest in municipals or I want to invest in the healthcare industry

779
01:00:32,060 --> 01:00:37,280
or I want to do an international kind of flavor or something like that.

780
01:00:37,280 --> 01:00:38,800
You'll find a fund for it.

781
01:00:38,800 --> 01:00:45,920
Now there are three different types of mutual funds based on load.

782
01:00:45,920 --> 01:00:49,120
Load is how much you pay to join.

783
01:00:49,120 --> 01:00:50,560
It's not any investment.

784
01:00:50,560 --> 01:00:53,280
It's just like an application fee.

785
01:00:53,280 --> 01:00:55,480
Like okay there are no load.

786
01:00:55,480 --> 01:00:56,880
You just go in.

787
01:00:56,880 --> 01:01:02,360
You can go in on TD Ameritrade or Robinhood and you can buy into no load funds.

788
01:01:02,360 --> 01:01:03,560
You can just buy.

789
01:01:03,560 --> 01:01:05,200
They have five letter symbols usually.

790
01:01:05,200 --> 01:01:07,240
And you just buy in.

791
01:01:07,240 --> 01:01:12,480
But there are also low load where they charge you a modest fee to join.

792
01:01:12,480 --> 01:01:18,880
And then there are high load where you really have to want to be in there.

793
01:01:18,880 --> 01:01:20,360
It's like an exclusive club.

794
01:01:20,360 --> 01:01:27,280
You have to pay a lot to even get a foot in the door kind of thing.

795
01:01:27,280 --> 01:01:36,000
And just as I'm not saying anything different for most financial advisors in that you have

796
01:01:36,000 --> 01:01:42,760
to be pretty hard up to buy to pay a fee to join a fund when you can have thousands and

797
01:01:42,760 --> 01:01:46,240
thousands that have no load whatsoever.

798
01:01:46,240 --> 01:01:47,880
So keep that in mind.

799
01:01:47,880 --> 01:01:53,720
The other thing that you also want to keep an eye at, and I will show this in another

800
01:01:53,720 --> 01:01:58,300
one here in just a second, it's called the expense ratio.

801
01:01:58,300 --> 01:02:06,560
How much the managers of the fund are charging as a percent of what the fund earns.

802
01:02:06,560 --> 01:02:10,160
Typically I don't like more than 0.3%.

803
01:02:10,160 --> 01:02:12,200
But some people say 0.5.

804
01:02:12,200 --> 01:02:17,240
And if it's a really good management, remember they're working their asses off.

805
01:02:17,240 --> 01:02:24,840
They're doing what they do so you don't have to balance the fund, do the portfolio control,

806
01:02:24,840 --> 01:02:27,540
watch the stocks and bonds day and night.

807
01:02:27,540 --> 01:02:28,540
They're doing it for you.

808
01:02:28,540 --> 01:02:30,480
They're going to charge you something.

809
01:02:30,480 --> 01:02:32,480
They shouldn't charge you a whole lot though.

810
01:02:32,480 --> 01:02:38,040
If the fund is making a lot of money, then they don't have to charge you a lot and still

811
01:02:38,040 --> 01:02:42,960
make enough for their three martini lunch.

812
01:02:42,960 --> 01:02:44,760
That's a mutual fund.

813
01:02:44,760 --> 01:02:54,440
The good investments for people who recognize that this isn't their specialty, stock investment,

814
01:02:54,440 --> 01:02:56,760
but they do know that they want to put their money in.

815
01:02:56,760 --> 01:03:04,540
A lot of pension plans now give you self-management options that you can choose and they offer

816
01:03:04,540 --> 01:03:09,560
you, well you could go into these mutual funds.

817
01:03:09,560 --> 01:03:12,160
Now here's one over here.

818
01:03:12,160 --> 01:03:19,200
I want to carry on about, before I finish up with the last one, I want to stop on my

819
01:03:19,200 --> 01:03:29,880
way to mention one of the darkest of the dark, private equity firms.

820
01:03:29,880 --> 01:03:42,640
They're surplus economic units and they have a really bad reputation for good reason.

821
01:03:42,640 --> 01:03:51,120
You madam, you are a corporation that has made mistakes or you're in trouble maybe even

822
01:03:51,120 --> 01:03:55,160
not by your own devices.

823
01:03:55,160 --> 01:04:04,720
Competition came in, the little COVID lockdown knocked you hard, something like that.

824
01:04:04,720 --> 01:04:07,680
Your supply chain, everything's going up in price.

825
01:04:07,680 --> 01:04:09,600
You're in trouble financially.

826
01:04:09,600 --> 01:04:15,720
You've got bond holders who are about, you have to pay an interest coupon to, you won't

827
01:04:15,720 --> 01:04:16,720
make it.

828
01:04:16,720 --> 01:04:24,480
Now remember, if you don't give your stockholders a dividend, all they can do is cry and bitch.

829
01:04:24,480 --> 01:04:31,360
But if you don't pay an interest payment or the balance due on a loan, those people, those

830
01:04:31,360 --> 01:04:34,440
debt holders can turn you off.

831
01:04:34,440 --> 01:04:40,260
They will, as I said, they can shoot your dog, sell your Bible on Craigslist and make

832
01:04:40,260 --> 01:04:43,320
your parents wear furries.

833
01:04:43,320 --> 01:04:47,040
I recommend Mr. Fox, the starter kid.

834
01:04:47,040 --> 01:04:51,200
But try to stay focused, okay?

835
01:04:51,200 --> 01:04:53,280
Here we go.

836
01:04:53,280 --> 01:04:57,480
So you get a number from her.

837
01:04:57,480 --> 01:05:01,400
He can save your bacon.

838
01:05:01,400 --> 01:05:07,960
So you call me ring ring, Al's private equity, don't ever call me Al.

839
01:05:07,960 --> 01:05:14,360
Al's private equity, hi Al, I said don't call me Al.

840
01:05:14,360 --> 01:05:16,440
You tell me the story.

841
01:05:16,440 --> 01:05:19,520
And I say, we can take care of it.

842
01:05:19,520 --> 01:05:22,920
I go to your board of directors and I say here's what we're going to do.

843
01:05:22,920 --> 01:05:26,840
First things first, we're going to get rid of all of your domestic suppliers and we're

844
01:05:26,840 --> 01:05:32,600
going to move all the production operations over to China, to Guangzhou province.

845
01:05:32,600 --> 01:05:38,880
We're going to fire half of your employees, get your expenses under control.

846
01:05:38,880 --> 01:05:44,840
Now, and then we're going to just work with you to get this company back on its feet with

847
01:05:44,840 --> 01:05:49,240
your lower expenses for production, your lower expenses for your staff.

848
01:05:49,240 --> 01:05:53,480
We're going to fire a bunch of your people, these top executives.

849
01:05:53,480 --> 01:05:55,540
We're going to lean out your operation.

850
01:05:55,540 --> 01:05:59,440
Now we're going to save you and here's what we're going to ask in return.

851
01:05:59,440 --> 01:06:05,120
We are going to want you to give us stock in your company.

852
01:06:05,120 --> 01:06:08,400
That means we've got skin in the game.

853
01:06:08,400 --> 01:06:09,400
You're okay with that.

854
01:06:09,400 --> 01:06:14,740
Okay, and then we're going to lend you all the money you need.

855
01:06:14,740 --> 01:06:19,320
We're going to pay off all these debt holders so they're never a problem for you again and

856
01:06:19,320 --> 01:06:21,360
you'll owe just us.

857
01:06:21,360 --> 01:06:24,080
We'll take care of all of it.

858
01:06:24,080 --> 01:06:28,840
Okay, then what we'll do is we're going to hype that stock up.

859
01:06:28,840 --> 01:06:33,880
We're going to announce that we have done, we have taken over, taken control and the

860
01:06:33,880 --> 01:06:38,360
company is on its feet again and it's on its way to great success.

861
01:06:38,360 --> 01:06:39,940
Stock price goes up.

862
01:06:39,940 --> 01:06:40,940
That's the first thing.

863
01:06:40,940 --> 01:06:44,120
Then I'm going to dump that stock.

864
01:06:44,120 --> 01:06:46,480
Once I've pumped it, I'm going to dump it.

865
01:06:46,480 --> 01:06:51,360
And then you're going to find out that you're still financially in trouble because we didn't

866
01:06:51,360 --> 01:06:53,500
address the fundamental problems.

867
01:06:53,500 --> 01:06:59,400
The fundamental problems with the products themselves, with the competition and all that.

868
01:06:59,400 --> 01:07:03,320
Then you're going to come to us and say, we've got a coupon due to you.

869
01:07:03,320 --> 01:07:04,320
Interest?

870
01:07:04,320 --> 01:07:05,560
Well, yeah, pay it.

871
01:07:05,560 --> 01:07:07,880
We can't.

872
01:07:07,880 --> 01:07:09,320
I turn you off.

873
01:07:09,320 --> 01:07:15,800
I liquidate your company and I take everything you own, kick you out the door and then I

874
01:07:15,800 --> 01:07:20,240
sell the pieces to my friends.

875
01:07:20,240 --> 01:07:21,240
End.

876
01:07:21,240 --> 01:07:26,560
Sears, Staples, the latest one rumored is Panera.

877
01:07:26,560 --> 01:07:29,140
This is how we do it in private equity.

878
01:07:29,140 --> 01:07:30,280
It's dark and dirty.

879
01:07:30,280 --> 01:07:35,240
I'm trying to get a fund started in Central America.

880
01:07:35,240 --> 01:07:37,800
This is how private equity works.

881
01:07:37,800 --> 01:07:40,240
It is not a good idea.

882
01:07:40,240 --> 01:07:43,600
It's payday loan on crack.

883
01:07:43,600 --> 01:07:44,600
That's all it is.

884
01:07:44,600 --> 01:07:46,840
And it's quite a successful thing.

885
01:07:46,840 --> 01:07:52,600
You get involved in private equity, you're going to do very well as long as you don't

886
01:07:52,600 --> 01:07:59,320
have that one weakness called sentimentality.

887
01:07:59,320 --> 01:08:08,960
Moving over to the bright side, one last one I always like to bring up is the ETF, electronically

888
01:08:08,960 --> 01:08:13,060
traded funds.

889
01:08:13,060 --> 01:08:21,080
These look like a stock and they act like a stock, but they aren't a stock.

890
01:08:21,080 --> 01:08:28,160
They are a portfolio, like an index portfolio.

891
01:08:28,160 --> 01:08:31,040
You could buy an index portfolio.

892
01:08:31,040 --> 01:08:32,920
You could buy an ETF.

893
01:08:32,920 --> 01:08:36,480
It doesn't mirror the S&P 500.

894
01:08:36,480 --> 01:08:38,640
It is the S&P 500.

895
01:08:38,640 --> 01:08:48,400
I want you to imagine, you sir, you go into a finance singles bar and someone comes up

896
01:08:48,400 --> 01:08:51,080
to you, hi, what do you do?

897
01:08:51,080 --> 01:08:55,320
Well I invest in stocks like Tesla and AMD.

898
01:08:55,320 --> 01:08:56,920
I'm a risk taker.

899
01:08:56,920 --> 01:08:58,400
You'll go home alone.

900
01:08:58,400 --> 01:09:09,760
But if you say, why I own the S&P 500, wow, you will go home with a friend.

901
01:09:09,760 --> 01:09:13,440
You can do that.

902
01:09:13,440 --> 01:09:18,200
I'll show you one right now.

903
01:09:18,200 --> 01:09:22,800
No swipe left for you.

904
01:09:22,800 --> 01:09:29,240
The S&P 500 is called the SPY.

905
01:09:29,240 --> 01:09:37,840
You buy this, one share of this, any time, day or night, just like any stock, for $491.27,

906
01:09:37,840 --> 01:09:42,540
you own the S&P 500.

907
01:09:42,540 --> 01:09:44,680
They balance it all the time.

908
01:09:44,680 --> 01:09:47,800
Look at the beta of it.

909
01:09:47,800 --> 01:09:51,360
1.00, it is the market portfolio.

910
01:09:51,360 --> 01:09:54,120
Well, I'd rather have bonds.

911
01:09:54,120 --> 01:09:59,120
Okay, AGG, it's the benchmark of bonds.

912
01:09:59,120 --> 01:10:07,640
Beta of 1.00, expense ratio of 0.3.

913
01:10:07,640 --> 01:10:10,480
You want to do something crazy?

914
01:10:10,480 --> 01:10:14,080
PSIL, it's an ETF.

915
01:10:14,080 --> 01:10:21,720
This is a bunch of company stocks that are working in government approved research using

916
01:10:21,720 --> 01:10:27,480
my magic mushrooms to make psychotic people act normal.

917
01:10:27,480 --> 01:10:31,480
You can buy into that.

918
01:10:31,480 --> 01:10:32,840
If you want to walk on the aisle.

919
01:10:32,840 --> 01:10:35,120
What's the beta of that thing?

920
01:10:35,120 --> 01:10:39,640
Oh, it doesn't actually have a beta yet.

921
01:10:39,640 --> 01:10:40,880
Okay.

922
01:10:40,880 --> 01:10:51,640
What you understand, you can do anything or you could just buy maybe 80% SPY, 20% AGG.

923
01:10:51,640 --> 01:10:56,240
If times look a little worse, you can switch it so that you're leaning more toward the

924
01:10:56,240 --> 01:10:59,120
AGG and away from the SPY.

925
01:10:59,120 --> 01:11:06,200
Just two perfectly well balanced portfolios, both managed by professionals who do this

926
01:11:06,200 --> 01:11:12,640
because this is how they make their dime is by getting the portfolio to perform.

927
01:11:12,640 --> 01:11:15,200
There you go.

928
01:11:15,200 --> 01:11:18,000
That's the ETFs.

929
01:11:18,000 --> 01:11:19,000
That's all I have for you today.

930
01:11:19,000 --> 01:11:36,600
I thank you.