Alan Cring Productions in association with the Emergent Light Studio presents the Illinois
State Collegiate Compendium, academic lectures in business and economics.
This is Business Finance, FIL 240 for spring semester 2024.
Today, financial institutions and we'll step into chapter three if I have time, trying
to slowly catch up to where we should be at this time.
But before we do anything else, we have a look at the numbers to see what the stocks
are doing today.
And as a matter of fact, what are they doing?
Just to start the ball rolling.
Is this a bear day or a bull day?
Bull.
You've got to be confident.
You say bull.
It is a bull day.
It's not much of a bull.
I mean it's not a moo.
But it's a bull.
We take our gifts where we can get them.
And this one, notice that we have a classic pattern here.
The Dow, which is these huge companies, very low risk, they're up 0.29%.
But then the Standard Port is 500, which represents a portfolio that is of higher risk, is up
more, 0.48, almost half a percent.
And then the NASDAQ, the riskiest of the portfolios, is up 0.79%.
So you have a decent, it's not a spectacular day, but we take this one for what it's worth.
It's not bad at all.
And there is a positive sentiment.
You notice that the markets have been a little choppy.
There's uncertainty out there, but there's still continuing positive news.
We have some of the big S&P 500 companies releasing their quarterly earnings today.
Now every company gives an estimate weeks in advance of what they think the earnings
will be for the quarter.
But then this would be the earnings when they say, well, this is what it actually was.
So the investors are formulating their prices based upon the expectations forward looking.
And then when the stock, when the company issues the report, then that is all off the table
and it's what the report is saying that drives the stock price at that point.
That was Netflix last week.
I think it was Netflix.
They said we're going to make a little, our earnings will be a little positive.
Turned out that they were dramatically positive.
And so of course it turned from Netflix going up a nice little bit to Netflix going through
the roof that day when they released the information.
Information, new information is what drives the market.
Not old information at all.
It's what the expectations are based upon the most recent information about the stock.
And there's an old saying among traders back in my time, buy on the rumor, sell on the
news.
So if there's a rumor that the stock is going to be, the earnings are going to be good,
you buy on that.
But when the earnings come out, even if they are great, you sell.
Why?
Because you're never going to be able to benefit.
Those big dogs are going to come in there and they're going to knock that price through
the roof.
So you just sell the stock based on the news.
You buy it when the rumors are there or if the rumors are bad, you sell it on the rumors
and then you buy it on the news.
Because if it's bad news, that the rumors are bad news, then you get out of it and then
when the news comes out that it's bad, well then that's when you want to buy it because
the price has been pushed down so much.
Okay, enough of that.
But crude oil, and as I had mentioned before, over the past year or so, it keeps wanting
to find its way back into this trading band between 72 and 79.
It pushed way above that for just a little while and then a couple of months ago it was
below that somewhat.
But then it just keeps wanting to find itself right in that nice trading band right there
between 72 and 79.
How long will it stay there?
Probably it will stay there unless something dramatic happens like war in the Middle East.
We're getting a little bit, I'm seeing some traders getting a little bit skittish that
we're getting a little too close to a war and what we need of course are cool heads
in the world's capitals to react to the problems without turning it into World War III.
Not that that's my problem, you'd be the ones drafted and I'd like to have you send
postcards.
But anyway, moving on, working our way over here, as you can see gold has been bouncing
up and down and up and down as the gold bugs see the possibility of an apocalypse and then
they say, oh darn, it's not happening.
And then there's another rumor that something horrible is going to happen.
So the gold kind of has its own mind.
Silver on the other hand, it's a little bit more mature.
It moves more on supply and demand and all of that.
But it is up rather well for the day, 1.6 something percent, not bad for oil.
Now bonds, this is not a price, again, this is a yield.
The price is exactly mathematically inversely related.
So if the yields, as you see there, are falling, that means that the prices are rising.
In other words, investors are buying bonds, which drives down their yields.
Why are yields falling?
Well there's pretty much, we're pretty sure the Federal Reserve is done with raising interest
rates to fight inflation.
Looks like we do have inflation back under control.
Now the next question would be, what's the Fed going to do?
There are some rumors out there that the Fed is actually going to do a modest interest
rate cut.
Most likely, those bond yields going down is an expectation of that.
Whether or not the Fed does it, we'll see when they have their open market committee
meeting, I think that's this week, maybe next week.
But one way or the other, we have yields going down on the 10-year benchmark.
So that means that that's an indication that overall interest rates are going to ease back.
That will help the economy.
Lower interest rates means lower loan rates, things like that.
So that will stimulate the economy.
Some economists are in fact a little worried that the economy is overheating again, getting
a little too excited.
So the Fed, smart money is that the Fed is probably going to leave interest rates where
they are.
It doesn't want to certainly raise them because we've taken care of the inflation, but it
doesn't want to lower them if that's going to get the economy heated up to the point
where we get an inflation blowback.
Complicated, but anyway, moving over here to the overseas markets.
Last night in Tokyo, the Nikkei finished up respectable 0.77%.
But you notice that it was quietly, slowly climbing through the midday from, if you look
at the spark chart, clear to there, but then it kind of lost its momentum.
That might have just been some profit taking.
Sometimes when you get a nice price increase for a day, you'll sell off some of your stocks
so you can have your money for your three martinis and steak that night.
That might be what was going on there as it slid back down a little bit.
But it still finished up at the end from where it began.
Now London was another story.
When the sun had gone down in Japan, it started rising across Asia and then Europe and then
in London, the bell opened and you see that there was a bull spike.
You see the bull spike right there?
Bind, right off the bat.
Some decent buying.
But then the news turned the other way and the bears took over and then it just kind
of bounced up and down and up and down for the rest of the day.
It finished the day pretty much flat.
I mean, 0.03% down is nothing.
That's a flat day.
So it had a big ride through the day and then it finished on a quiet note.
But of course, as you can see, coming back over here, we've had kind of a rollicking
day.
It's finally getting its feet under it.
You see how especially the Dow was showing a lot of turbulence in the late morning to
early afternoon and then it got its act together.
And so everything seems to be on a positive note, not spectacular, but that just reflects
the fact that our economy is in awfully decent shape, especially after the rough years we
had from 2020 through 2022, seeing the economy getting on its feet.
That's good news for you, for internships, jobs, and all of that good stuff.
And interest rates falling, well that just makes the story even sweeter.
Now let me take you on a few stocks and see how much you remember.
Remember this is early so I'm not holding you too much to it.
Let's look at advanced micro devices, AMD.
Now AMD is the competitor of Intel for microchips and all that good stuff.
Good grief.
Okay, yeah.
Okay.
Lost some energy today, about a third of a percent down, which isn't much at all.
But you can see that AMD, if you want to buy a share, you'll pay $175.94, the ask.
If you want to sell a share, you'll get $175.89.
So the bid ask spread is five cents.
That's not terrible considering that we're talking about $175 stock here.
But as you can see, the AMD is actually near its 52-week high.
Do you see that?
The stock over the last 52 weeks has swung between $72.03 and $184.92.
And right now it's about $176.50.
So you do have that it's reaching near where its highest point has been.
Let me look at the 52-week chart here, one-year chart.
Yeah, see, we're up there near the top right now, just a little off the top.
So it's rolling along.
Now talking about risk, let's take that wild stuff.
Is this a risky or a not risky stock?
I would say not risky.
It is extraordinarily risky.
The beta.
That's OK.
I didn't mean to do it quite that harshly.
This is 1.70.
A beta of one is the fulcrum.
That's the risk of the world portfolio.
Above that, you're getting into risky territory.
Below that, you're in safer, more conservative investment territory.
In fact, at 1.70, technically we'd say that's risky AF.
I mean, that's just a really risky investment.
This is where we get into the very important term in financial advising or in finance in
general, appropriateness of investment.
This is the kind of stock that only a hardcore risk taker would want to grab.
If you're corporate and you've got funds that you want to put into stocks, you would never
do this stock simply because you're not there to put your earnings that you've worked so
hard to create through your operations at this kind of risk.
It wouldn't be that kind.
You would certainly not advise, let's say, a couple in their 60s looking for stock investments.
No way you would do that because they could lose their shirts.
Now technically, yeah, a young investor, someone your age or a little older, even if you lost
money on this, you could win big, but you could also lose a lot.
But you'd have enough time left in your life to be able to recover from a hit like this.
But even at that, there's an old thought that young investors are the risk takers.
When we actually look at their portfolios, they are actually quite conservative.
The typical young investor is not a risk taker at all.
They're not, apparently, they're not stupid.
They keep their investments reasonably, well, not down to 1.0 necessarily, but certainly
not at betas like this.
This is for pros who know exactly what they're walking into, and in a lot of cases, they're
hedging their bets anyway.
Now I saw this this morning.
The P-E ratio, and I just started laughing, my P-E ratio is insane.
A stock would be about valued properly at a P-E ratio of 30.
The price as a multiple of the earnings, 30 times.
Now if it's below that very much, you'd say that the stock is undervalued.
Maybe a stock at a P-E ratio of 15.
It's undervalued.
You might want to grab a few shares to put into your long-term portfolio.
If it's much above 30, well, it's overvalued.
A P-E ratio of 1,603.91, that's insane.
That should not even be allowed to happen.
That's one of those wait, what kind of P-E ratios.
In other words, investors in the stock are willing to pay over $1,600 to claim $1 of
earnings that the company made for its shareholders.
Put another way, investors right now think that the company will turn every dollar of
net income into $1,600.
That's like ain't going to happen kind of territory.
This is way overvalued.
If you had this in a portfolio, your first thought would be get out of it.
Sell this off because this cannot hold this level for very long before something terrible
happens.
This company doesn't even pay a dividend, so the only thing you can do is make money
off the price of the stock going up.
You're not going to get a dividend check in the mail.
This is pure capital gain you would be betting on buying this stock.
At that P-E ratio, there isn't much higher it can go before it starts to pop or something.
I don't know, but definitely not a good idea.
Let me take you over here, show you another one.
My favorite whipping boy, Tesla run by he of the cloven hoof.
There it is, Tesla.
190.33 a share.
Now we're just going to go to the meat of this.
Redeem yourself, risky or not risky?
Yes, stupid risky.
I mean 2.32, you have to work to find stocks at beta's this high.
This is not an appropriate investment for anyone with any common sense.
As a matter of fact, all those Wall Street boys and those banks and those foreign interests
that have bought stock in this, they really want out.
But if they all sell at the same time, of course the stock price will collapse.
Notice the P-E ratio, twice what it should be, which indicates that it's probably got
about half the stock price could go down by half.
As a matter of fact, two of my former students from long ago who are traders, they were both
this consensus is that Tesla will find somewhere between 80 and 90 a share.
Will that happen tomorrow?
No, it's going to happen over a long period of time as all of those heavies quietly, carefully
divest from this stock.
And notice Tesla, and here's something that we'll learn later in the course.
The earnings per share indicates that Tesla is profitable.
However, in finance, profit really isn't what we care about.
It's something called free cash flow, which you have to twist the numbers down from net
income to get to free cash flow, adding things in, subtracting things out.
Free cash flow of Tesla is bloody negative, bloody negative.
And so there is not a lot to advise in a responsible portfolio.
You won't even get a dividend off the stock.
They made all this money, they had to pour it all back into the company.
They didn't leave any to give back to shareholders as dividends.
So there's that in this as well.
So this is one of those investments.
If you want to take a shot on something like this, you pay your money and you take your
chances on it.
This is casino gambling on a table that is definitely rigged against you if you do buy
into this.
But now let's look at something a little more in the normal range.
AT&T.
There you go.
$17.26 a share.
You'd buy a share at $17.21 and you could sell a share at $17.20.
Bid ask.
Make sure you know that.
I always ask something about that on a quiz and or an exam.
Okay, you can see a couple of other things too in this one.
First of all, madam, would you say this is a safe or risky stock?
Safe.
Putting beta into a context, 1.00 is the world portfolio's risk.
That.72 says that in a well-diversified portfolio, AT&T's volatility will be 72% of the world's
volatility, world market portfolio volatility.
That's a good way to interpret the beta.
It's not as crazy as the world.
It's not crazier than the world.
It's just about three-fourths as crazy as the world's world market portfolio, the world
economy.
And that's what makes it a safe investment.
Now the next one, P-E ratio.
Is this stock undervalued or overvalued?
Yes.
Don't ask it as a question.
Show your knowledge.
Be certain.
Yeah, it's undervalued, fat boy.
It's undervalued.
Yes.
As a matter of fact, this is one of those in a responsible portfolio, well-diversified
portfolio.
This is one where you maybe add some shares of AT&T to it because it has the potential
over the next months or couple of years to go up in price fairly respectably because
undervaluation and overvaluation don't correct in a day or even in a month usually.
It's a long-term process.
And that's what we teach in finance.
You people are going to be those leaders of the world where you have to see the long picture
and plan for that, adjusting as needed for short-term circumstances but always keeping
in mind that you're in it for the long haul over a longer period of time.
So this would be something.
Put some shares of AT&T into it, into your portfolio, and they should over a period of
time benefit the portfolio.
It's safe.
And in fact, one thing is you might have a portfolio and, okay, I'm targeting a beta
of let's say 0.9.
Now right now my portfolio's weighted average beta is 1.2.
By putting in stocks below your target, you're going to pull the weighted average beta of
the portfolio downward.
So you could have a portfolio.
You have some 1.1 beta stocks.
But if you don't want 1.1 for the whole portfolio, you might put in some that are 0.72 so that
makes the sort of waters down the risk of the entire portfolio.
That's part of what we call portfolio control theory.
And I'll teach you the basics of it.
You don't need to be a mathematical wizard to do it, especially these days with Excel.
Nothing big.
EPS, it's a profitable company, about $2 a share, and it pays a nice dividend.
That 6.42% dividend yield, that is the $1.11 dividend divided by $17.25.
This is somewhat, and I should be cautious about this, but this is somewhat like checking
a bank account where you put money in and the interest that you bear is 6.42%.
Regardless of what the stock does, you've got 6.42% hauling on the dividend.
So that sure beats what you could do in a savings account these days.
Now, is that guaranteed?
Absolutely not.
The stock market is fickle and has its own mind.
But at the same time, if I invest $17.27 and I know I will get 6.42% on that investment,
just because I'll get a check for $1.11, that's decent.
That's really good.
And one thing about that beta, again, betas are generally lower with stocks that pay a
dividend because there's sort of like an underlying guarantee.
They're also lower, they tend to be lower for stocks that are old companies.
They've gotten through their crazy youth and all of that.
And then there are also betas are lower in industries, in companies that provide more
basic products.
AT&T provides telecommunications products, mobile phones, mobile networks, and a lot
of other products as well.
And so that's essentially in our world, that's an essential.
So that's why you see that beta so calm on that stock.
Competition, basically the big telecommunications companies have just a standing agreement with
each other.
Yeah?
You should only purchase stocks that aren't riskier than why do people buy stocks with
a beta number that's like 1.5 or 1.7?
Two reasons.
One is, and you're going to see a video that's going to come out in a few days that they
did where they were asking me, well, aren't stocks like going to a casino?
And for some investors, that's exactly what they're doing.
They want that risk.
They're the ones who would go to a casino.
And so they will buy into stocks like this.
Another reason that investors will buy into stocks like this is because they're ill-informed.
They believe pop culture.
They believe the latest trends.
They think Elon Musk is a cool, awesome guy because he's an asshole.
They will buy it for all the wrong reasons.
You can even buy a good stock for all the wrong reasons.
My friend works at Target, and so I'm like, he says it's a great company, so I'm going
to buy some Target.
It's a decent investment, but you're buying it for the wrong reason.
You're buying it from your friend.
For all you know, your friend could be a sacrifice humans at night, for God's sake, or something
like that.
There is a lot of this that goes on.
The social media, with the blogs, with the podcasts, with the talking heads, with the
friends recommending to their friends.
And they don't know that there are ways that you can look at these things and do it right.
They play it almost like a game.
And I know a lot of people who do this.
That it's just something they do and they think that their information is right.
It's like the people who get their information from Wikipedia.
When you do that, you don't understand that you haven't even formulated, you don't know
what the background is, what the questions are, and you don't know that Wikipedia is
wrong as much as it is right.
Its information is tainted.
But it's popular, and that drives a lot of people.
That's what we try to do in college, is to get you past that so that you are the leaders.
And if necessary, you're the ones who lie to the fools and suckers.
I shouldn't have said that.
Oh yes, I should have.
But you're asking a darn good question.
And in fact, part of the answer to this goes into the realm of this new field, well it's
not new now, but it's just come along in the last 10 years and got respectable, called
behavioral finance.
It's the same thing as when you go to these payday loan companies.
You'll see later in the semester that a payday loan carries an actual interest rate of several
thousand percent per year.
So why do people do it?
It's irrational by classical economics, but it's part of behavioral finance.
We know why people do things now, and it ain't because of classical, everyone's a rational
person.
People are rational, but they are also short term, something less than rational.
Which unfortunately is being played against the people, most of whom are under very great
economic distress, they go to those companies and they get ripped off by them, those payday
loan companies.
Just like people who are poorly informed go for stocks like AMD, go for stocks like Tesla,
not realizing that there's much better information they could have, they play what is easy for
them to get to, which is popular information, unfortunately.
Let me go into some detail today.
This content is dense and it parallels the book, although I fill in a lot of information
in this.
Okay, madam, I have some money, and you need to borrow some money for food.
Now I'm not going to just give you money, but there's a potential that we could make
a deal.
In this circumstance, you would be called a deficit economic unit, and I would be called
a surplus economic unit.
Now understand that you could be a surplus and a deficit economic unit at the same time.
Someday, madam, you might very well have a really nice fat 401K, but you need to borrow
money to buy a house.
So in a case like that, you're a surplus unit because you're providing capital markets with
money every month, but at the same time, you're a deficit economic unit with respect to the
purchase of this asset.
So you can be both at the same time.
The question is, is there a way to match these?
Well, that's what's called financial intermediation.
Financial intermediation.
Financial intermediation is matching surplus and deficit economic units.
I may have already mentioned this, but if you hear me repeat a definition, you're pretty
sure that that's going to show up on a quiz and or an exam.
Now a lot of people might think, well, financial intermediation is done by banks.
Well, no, not necessarily.
I mean, you might know both of us and you know I got money and you know she needs money.
So you might put us together and work it out.
So it doesn't have to be some official building or something like that.
In fact, the world of the blockchain world has made it so there's no concept of an institution.
Smart contracts happen without the intervention, intermediation of anyone except for this diffuse
thing called the blockchain itself.
So I don't want to get into that because it still makes my head hurt sometimes.
But anyway, there's a problem here.
You need $100, but I have only $20.
So there won't be a match.
So the first criterion for successful intermediation would be the level.
That's a fancy word for the amount.
The level.
So that would have to, the match won't happen unless the levels are compatible.
Okay, well, actually, you know what?
I got $100.
You need $100.
So we've got that.
But the next one.
You want to pay me back in six months.
I need dinner tonight.
You know, I can't lend for six months.
I have cats to feed for heaven's sakes.
So it doesn't work.
So the second criterion would be timing.
The timings have to be the same.
The timings have to match.
Now here's where in real life, this is a huge one.
There are some surplus economic units that want their money back fairly quickly.
Good example of this is a company.
It has, I teach a course in cash management.
So there are times when a typical corporation might have anywhere from $10,000 up to a couple
of million dollars.
But they're going to have to use it for payroll or to pay bills in a few weeks or maybe a
month.
So they do want to engage in some kind of intermediation, but they can't have it for
a long time.
That's why we have, there's a whole vast ocean out there of what's called, comes under the
broad heading of commercial paper.
This is very short term lending and borrowing.
Like for example, Microsoft might need $10 million, might need millions of dollars, but
for only 30 days.
But there are entities out there, institutions, corporations, family trust, whatever, that
want to just put some money somewhere for 30 days, just to make a little money off it.
And that commercial paper market is huge.
There's very short term lending to balance out cash flows and all that kind of stuff.
Commercial paper is 30 day paper.
It's what's called discount paper.
The way that works is, say Microsoft says, we want to borrow $999,000 for 30 days and
we'll pay you back 10 million at the end of 30 days.
So in other words, they get a discounted amount and then they pay, so that interest is that
difference between what they actually got and what they pay in 30 days.
I'll talk about that later in the course.
You don't need to worry about that mathematical thing right now.
But anyway, now let me give you an example on the other end of the spectrum.
Looking for someone here that I can trouble with this one.
Sir, you're going to die someday.
Did you know that?
I mean, you're going to be in pain probably.
You're going to bitch and fuss and finally you'll shut up and die.
But that's not going to happen for many, many years.
Actuarially speaking, you'll probably have lived to be about 100.
You, 30.
No.
Anyway, okay, so the thing though is that there are these things out there that have
vast oceans of money.
Life insurance companies are getting insurance premiums from tens of thousands, hundreds
of thousands, millions of people every month, but they won't have to pay out death benefits
on any given policy holder for decades, many, many decades.
So they want to get that money into extraordinarily long-term investments because they don't want
to get that money, come back to them next month or next year or in 20 years.
They are the ones on the other side.
They want to dump the money off and not have to worry about it for a long, long time.
Even pension funds.
You're in your 20s or 30s.
That money's got to be invested in something for you to have in 30, 40, 50 years.
So that timing is quite a thing.
Now the last thing, we're about to make our deal, $100, but then I find out that you,
madam, are a scoundrel.
You are very unreliable.
As a matter of fact, on social media, people say, someone said, she's unreliable, and someone
says IKR.
And I think, I don't want to do that.
I mean, no.
No.
OK.
That's the third one, risk.
You might have the money to invest in Tesla, but you don't want to take that risk.
You might have the money as a bank to make a mortgage loan, but the borrower has a low,
very low credit score.
You don't want to take that risk.
On the other hand, someone else might say, yeah, bring it on.
I'm that kind of risky person.
Or an investor.
There are some investment houses that they live in a world where they want all the risk
there is.
As a matter of fact, they will take risk off the shoulders of someone else, because that's
what they want.
The other person doesn't want risk, so the risk averse person or entity will pay the
risk taker to bear the risk.
So the risk levels have to match.
So in other words, financial intermediation is matching surplus and deficit economic units
based upon level, timing, and risk considerations.
Now on a quiz or an exam, I usually give you six or seven criteria.
Choose the criteria that make a financial intermediation successful.
And even telegraphing my punches in this class.
Listen carefully.
I go through a lot of the questions as I lecture.
I don't always tell you I'm doing it, but it's there all over the place.
Just a little hint off the bat.
OK, deficit, surplus.
Now who does this?
There is a bestiary of financial intermediaries.
Now a long time ago, these would have been bright lines in this list.
They were established.
You can do this, but you cannot do this, and you cannot do this.
It was what we used to call Chinese walls among financial intermediaries.
That came about in the early 1930s because of the insanity of the 1920s.
It was a free market, laissez faire, let everyone kill or be killed kind of thing.
And then in the 30s, well, that was enough of that after the stock market crash and the
Great Depression started.
Legislation was passed that put all of these into boxes.
You Mr. Bank cannot do investment banking.
You Mr. Financial Services cannot do banking.
All this kind of stuff.
But that expired in 1999, and it's been turning into more and more of a crazy wild west just
like it was 1929 all over again.
It's just amazing how far it's gone.
And we can't reel it back now.
It is baked into the system for better or worse, and eventually it will probably be
worse.
So when I give you these, I'm putting in more bright lines of distinction than really are
out there right now.
The first one of these financial intermediaries is the investment bank.
And I already mentioned these once, and I'll be a little more specific this time.
Investment banks.
Now an investment bank underwrites public offerings of stock and bonds.
I am Jeff Zuckerberg, and you sir are an investment bank.
I want to go public.
Sell a billion dollars worth of stock.
Well I'm not stupid.
I'm not going to try to sell that to people.
You are going to work with me, and you will guarantee underwrite a billion dollars.
You'll buy the stock from me, and that will be fully subscribed.
Now that's a primary market transaction.
The company is getting the proceeds.
You won't do it all by yourself.
You'll get some other investment bankers together with you to create a syndicate.
Well you'll handle 600 million, you'll handle 200, 150, 100, 150.
So in other words, in your group you will subscribe the offering fully.
Now there will be a negotiation price, how much we're going to charge for all the things,
the legal work with the SEC and the states and all that.
But that would be what an investment bank does.
I'm a company and I want to borrow 50 million dollars.
I would go to an investment banker and you would say, I shall lend you 50 million dollars.
That's I will buy your bonds.
I'm going to sell you 50 million dollars in bonds.
You might also have a syndicate.
Again, a primary market transaction.
It can be for equity or it can be for debt.
And that's what investment banks do.
That's their job.
And then they sell some of it to their very best clients and then they pump it up, hype
it and then they get suckers to buy it.
Well I bought, I couldn't believe how many people said they bought the stock in the IPO
on Facebook.
No, they didn't.
They bought it in the secondary market.
The primary market, the IPO was subscribed by the syndicate.
All you did was buy it from an owner of the stock, the investment banker.
That was all you did.
You don't buy, I don't think there's anyone in this room, including me, who will ever
buy in an IPO.
You just won't.
That's not how it works.
You buy in the secondary market and then you'll sell to someone else in that secondary market
and then that sucker will sell his to someone else in the secondary market.
Those stocks that I show you, that's all secondary market activity.
You won't see the primary market activity.
That's not quoted on a stock.
Well, kind of, but not really.
Now investment banks come in different sizes.
It's the global operations that do these massive public offerings of stocks and or bonds, common
stock, preferred stock bonds, corporate bonds, municipals, all that kind of stuff.
What was I saying?
Oh, but then there are regionals that are themselves huge operations.
They just operate more on a national level with, they can do big offerings, big offerings.
I took my students up to about six or seven years ago up to Chicago and they were given
a talks by a regional investment banking firm up there in Chicago.
It was a big place.
I was like, this is huge.
This is gorgeous.
It wasn't as big as when I went to the Chase Tower up on the 55th floor, but it was still
a huge operation.
So the regionals were out there.
And then there are these small ones.
Generally speaking, houses like that are, we call them boutique houses.
They do startups and smaller cap offerings, 10 million, 30 million, something like that.
Those boutique houses do.
But they're out there too.
And there are all sorts of very high paying jobs.
But that's an investment bank.
It's not a bank like you think of a bank.
You walk in there.
I walked into that regional house and I was stopped down on the first, down on the cafe
level by these very big security guards who seemed to be interested in turning me into
a ball of fur.
You're not going to go into one of those.
What you would probably go into is a commercial bank.
Commercial banks are the kind that you probably know about.
They take deposits.
They make loans to people and businesses.
Now as far as checking accounts, this is commercial banks do the checking accounts.
Those are called demand deposits.
In other words, if you wrote me a check on your commercial bank, I could walk back into
your commercial bank another day, the next day or something like that, and they would
honor that check from you on my demand.
Perfect liquidity.
However, you might say, well, that means it's like a credit union.
Well, credit unions are very similar to banks except, and they do offer what they call checking
accounts, but they are not demand deposits.
Now in any given circumstance, if you wrote me a check from your commercial, you have
a credit union account.
I could walk back into the credit union, $100.
They say, okay, but they don't have to.
You see, with the commercial bank, they have to on demand.
In this case though, they probably will, but they don't have to honor it right away.
It's not a demand deposit that you made for that check.
It's what's called, and you don't have to know this now, I'll get back to this a little
later.
What they are is those kinds of checking accounts in quotation marks are actually negotiable
order of withdrawal, now accounts.
So if you wrote me a check for like $10,000 on your credit union account, if I go back
in, they might very well say, well, we're going to hold this check for 30 days and then
we'll honor it.
Yeah, they could do that because it is not a demand deposit.
Only commercial banks can do demand deposits.
Credit unions try to look as much like demand deposit accounts, what they have, but they
don't have to by the banking regulations.
So credit unions are another financial intermediary.
They make loans, they take deposits, but they're not exactly like commercial banks.
Another one here.
The next one are what are called the financial services companies.
Now some of these commercial banks, that's where you really get it is that fuzzing of
that bright line.
We've got a lot of commercial banks now provide financial services, financial wealth management,
things like that.
And even insurance, I guess, now for God's sake.
They didn't used to be allowed to do that.
They can even participate in like IPO type action, kind of.
It's a little bit common.
But you see why that's a problem.
That's why we didn't want this to happen under that old law.
Because you could be the one, your bank could be the one that takes my deposits, but then
you could provide me with wealth management services.
And in those wealth management services, you might recommend that I buy this stock, which
you, your company, had a hand in underwriting in some way.
Do you see how there's a conflict of interest going on now?
We can't do anything about it.
It's done.
This is all baked into the system now.
But that was why we didn't want this to happen.
And now it's a decentralized network.
We couldn't ever stop it.
Okay, enough of that.
Okay, now I did mention this one before.
Life insurance companies.
They are definitely a source, an economic surplus, a source of capital, long-term capital.
So they would be participants in, like, a company wants to raise $30 million through
debt, so it issues $30 million in bonds.
And so these life insurance companies might take that up.
Or a school district might want a bond to build a new high school or a couple of elementary
schools.
The life insurance company might buy the bonds.
There's a whole giant, vast market in the United States and in some other countries
too.
And life insurance companies can reach long.
I'm not talking like 20 years, 30 years.
I'm talking possibly investments that would be 50 to 100 years in duration.
We're living in a very weird age where some of the things that we are starting to throw
heavy, heavy money into might not come to fruition for 50 years or 100 years.
And I can't believe I'm saying this because it sounds like science fiction.
You're already, I'm already hearing about the asteroid mining operations, the infrastructure
to get that started.
Colonies on the moon and Mars funded by private sources.
Space stations that are actually permanent living environments for thousands and thousands
of people.
The fusion reactors.
They are starting to finally light up, but it will be 50 years probably before we have
them so that we can replace all of these fossil fuel and nuke generator plants out there.
Yeah, long.
We are looking into the future.
The idea of artificial intelligence.
The chat GPTs are narrow AI.
One task kind of thing.
One trick ponies.
We're now in the age of the broad AI where we have AIs that are working across a bunch
of things altogether.
Internet of things is that.
Driving your car kind of is broad AI.
But then now we're all in the AI world talking about the next one, which is called general
AI.
In other words, the connected planet, the connected solar system.
It will think for everything.
That's going to be a lot of freaking infrastructure over the next 50 years.
By the time you're old people in your 70s, 80s, everything will be connected.
AI will do everything.
And we may have some way to make a living in it.
But that's where these long, long-term investments will play their hand.
Especially in the general AI that we're just starting to get the infrastructure for now,
but we know it's going to take 50 years.
That's the projection.
Kind of weird, isn't it?
Science fiction is not very fictiony anymore.
Okay, now I'm going to give you another one.
This is for all of us.
Mutual funds.
Now mutual funds are kind of a cool thing because it's a company and its job is to do
investments in stocks and bonds.
Now any given mutual fund will have its sort of take on things.
Well, we buy stocks of this industry.
Or we buy stocks that are around this beta.
Or we do bonds and stocks of very high quality.
It's the kind of things.
Or risky stuff.
Now a mutual fund, you can buy into a mutual fund and you become one of the owners of the
mutual fund.
A fraction of a percent owner.
And like I said, mutual funds, you can get them in all kinds of different flavors and
varieties.
Anything you want.
Now the good thing about mutual funds is that there are so many out there.
There are tens of thousands.
Now we generally break them into families.
Like Fidelity has a bunch of mutual funds.
And you can move in those funds as you wish among them.
PIMCO, Invesco, you name it.
There are just lots and lots of brokerage houses.
You would think of this as a brokerage house, but it actually provides a lot of different
mutual fund possibilities for you.
Now one little downside on a mutual fund is that if you're going to jump out of a family,
you can't do that anytime you want.
You have windows when you can.
Within a family of funds, if I'm not mistaken about how the rules work now, you can shuttle
as you want between the funds, among the funds in a family.
But here's one thing.
Like let me give you an example.
About 10 years ago, I bought 50 units into a mutual fund.
It was a tiny fraction of a percent.
Now I didn't want any dividends that would come from the stocks they invested in.
I said just put it back into the fund.
So over time, as of late last year, I had 61 units.
Because you can just plow it back in with the fund gets and dividends and stuff like
that.
And you can grow your position in the mutual fund.
And of course the value of the funds going up if their investments are doing good.
And so that's one of the nice things about mutual funds is that you can actually just
let it balloon on its own to a certain extent over time, which a lot of people do.
And the mutual funds are a fine investment.
You can choose I want to invest in municipals or I want to invest in the healthcare industry
or I want to do an international kind of flavor or something like that.
You'll find a fund for it.
Now there are three different types of mutual funds based on load.
Load is how much you pay to join.
It's not any investment.
It's just like an application fee.
Like okay there are no load.
You just go in.
You can go in on TD Ameritrade or Robinhood and you can buy into no load funds.
You can just buy.
They have five letter symbols usually.
And you just buy in.
But there are also low load where they charge you a modest fee to join.
And then there are high load where you really have to want to be in there.
It's like an exclusive club.
You have to pay a lot to even get a foot in the door kind of thing.
And just as I'm not saying anything different for most financial advisors in that you have
to be pretty hard up to buy to pay a fee to join a fund when you can have thousands and
thousands that have no load whatsoever.
So keep that in mind.
The other thing that you also want to keep an eye at, and I will show this in another
one here in just a second, it's called the expense ratio.
How much the managers of the fund are charging as a percent of what the fund earns.
Typically I don't like more than 0.3%.
But some people say 0.5.
And if it's a really good management, remember they're working their asses off.
They're doing what they do so you don't have to balance the fund, do the portfolio control,
watch the stocks and bonds day and night.
They're doing it for you.
They're going to charge you something.
They shouldn't charge you a whole lot though.
If the fund is making a lot of money, then they don't have to charge you a lot and still
make enough for their three martini lunch.
That's a mutual fund.
The good investments for people who recognize that this isn't their specialty, stock investment,
but they do know that they want to put their money in.
A lot of pension plans now give you self-management options that you can choose and they offer
you, well you could go into these mutual funds.
Now here's one over here.
I want to carry on about, before I finish up with the last one, I want to stop on my
way to mention one of the darkest of the dark, private equity firms.
They're surplus economic units and they have a really bad reputation for good reason.
You madam, you are a corporation that has made mistakes or you're in trouble maybe even
not by your own devices.
Competition came in, the little COVID lockdown knocked you hard, something like that.
Your supply chain, everything's going up in price.
You're in trouble financially.
You've got bond holders who are about, you have to pay an interest coupon to, you won't
make it.
Now remember, if you don't give your stockholders a dividend, all they can do is cry and bitch.
But if you don't pay an interest payment or the balance due on a loan, those people, those
debt holders can turn you off.
They will, as I said, they can shoot your dog, sell your Bible on Craigslist and make
your parents wear furries.
I recommend Mr. Fox, the starter kid.
But try to stay focused, okay?
Here we go.
So you get a number from her.
He can save your bacon.
So you call me ring ring, Al's private equity, don't ever call me Al.
Al's private equity, hi Al, I said don't call me Al.
You tell me the story.
And I say, we can take care of it.
I go to your board of directors and I say here's what we're going to do.
First things first, we're going to get rid of all of your domestic suppliers and we're
going to move all the production operations over to China, to Guangzhou province.
We're going to fire half of your employees, get your expenses under control.
Now, and then we're going to just work with you to get this company back on its feet with
your lower expenses for production, your lower expenses for your staff.
We're going to fire a bunch of your people, these top executives.
We're going to lean out your operation.
Now we're going to save you and here's what we're going to ask in return.
We are going to want you to give us stock in your company.
That means we've got skin in the game.
You're okay with that.
Okay, and then we're going to lend you all the money you need.
We're going to pay off all these debt holders so they're never a problem for you again and
you'll owe just us.
We'll take care of all of it.
Okay, then what we'll do is we're going to hype that stock up.
We're going to announce that we have done, we have taken over, taken control and the
company is on its feet again and it's on its way to great success.
Stock price goes up.
That's the first thing.
Then I'm going to dump that stock.
Once I've pumped it, I'm going to dump it.
And then you're going to find out that you're still financially in trouble because we didn't
address the fundamental problems.
The fundamental problems with the products themselves, with the competition and all that.
Then you're going to come to us and say, we've got a coupon due to you.
Interest?
Well, yeah, pay it.
We can't.
I turn you off.
I liquidate your company and I take everything you own, kick you out the door and then I
sell the pieces to my friends.
End.
Sears, Staples, the latest one rumored is Panera.
This is how we do it in private equity.
It's dark and dirty.
I'm trying to get a fund started in Central America.
This is how private equity works.
It is not a good idea.
It's payday loan on crack.
That's all it is.
And it's quite a successful thing.
You get involved in private equity, you're going to do very well as long as you don't
have that one weakness called sentimentality.
Moving over to the bright side, one last one I always like to bring up is the ETF, electronically
traded funds.
These look like a stock and they act like a stock, but they aren't a stock.
They are a portfolio, like an index portfolio.
You could buy an index portfolio.
You could buy an ETF.
It doesn't mirror the S&P 500.
It is the S&P 500.
I want you to imagine, you sir, you go into a finance singles bar and someone comes up
to you, hi, what do you do?
Well I invest in stocks like Tesla and AMD.
I'm a risk taker.
You'll go home alone.
But if you say, why I own the S&P 500, wow, you will go home with a friend.
You can do that.
I'll show you one right now.
No swipe left for you.
The S&P 500 is called the SPY.
You buy this, one share of this, any time, day or night, just like any stock, for $491.27,
you own the S&P 500.
They balance it all the time.
Look at the beta of it.
1.00, it is the market portfolio.
Well, I'd rather have bonds.
Okay, AGG, it's the benchmark of bonds.
Beta of 1.00, expense ratio of 0.3.
You want to do something crazy?
PSIL, it's an ETF.
This is a bunch of company stocks that are working in government approved research using
my magic mushrooms to make psychotic people act normal.
You can buy into that.
If you want to walk on the aisle.
What's the beta of that thing?
Oh, it doesn't actually have a beta yet.
Okay.
What you understand, you can do anything or you could just buy maybe 80% SPY, 20% AGG.
If times look a little worse, you can switch it so that you're leaning more toward the
AGG and away from the SPY.
Just two perfectly well balanced portfolios, both managed by professionals who do this
because this is how they make their dime is by getting the portfolio to perform.
There you go.
That's the ETFs.
That's all I have for you today.
I thank you.