Bitcoin and Cryptocurrency: Don't Believe the Bitcoin Hype | Greg Vanderford | Skillshare

Bitcoin and Cryptocurrency: Don't Believe the Bitcoin Hype

Greg Vanderford, Knowledge is Power!

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16 Lessons (1h 49m)
    • 1. Bitcoin and Cryptocurrency Promo

      1:14
    • 2. Lesson 1 Cryptocurrency Introduction

      7:12
    • 3. Lesson 2 Warren Buffett on Bitcoin

      6:11
    • 4. Lesson 3 The Problem with Bitcoin

      4:33
    • 5. Lesson 4 The Hacking Problem

      3:39
    • 6. Lesson 5 It Can't Be Valued

      7:31
    • 7. Lesson 6 Violation of Fundamental Investing Principles

      6:33
    • 8. Lesson 7 The Supply and Demand Factor

      4:31
    • 9. Lesson 8 Safety of Principal and an Adequate Return

      6:00
    • 10. Lesson 9 Mr

      8:52
    • 11. Lesson 10 Holistic Investment Analysis

      16:00
    • 12. Lesson 11 The Blockchain

      6:44
    • 13. Lesson 12 Economic History Lessons

      8:01
    • 14. Lesson 13 What Now

      5:15
    • 15. Lesson 14 Conclusion

      3:32
    • 16. Bonus Lecture- Margin of Safety Principle

      13:19

About This Class

CRYPTOCURRENCIES ARE SUPER INTERESTING AND EXCITING.  

They are based on a very clever and exciting new technology called the "BLOCKCHAIN". 

As you'll learn in this course, the Blockchain may have as large of an impact on the world as the internet and PC has had over the past several decades.

BUT, Bitcoin and Cryptocurrencies are extremely dangerous "investments" and actually shouldn't even be thought of as an "asset class" worthy of your money, if your goal is to build wealth.

IN THIS COURSE, YOU WILL LEARN:

1. Why Bitcoin and Cryptocurrencies make such a bad investment

2. How to invest safely and responsibly to build wealth over time without taking virtually ANY risk

3. How to think about CAPITAL ALLOCATION

4. How to understand the fundamentals of the stock market, real estate, gold, and other asset classes

5. How the Blockchain works and why it's getting so much hype

6. What the Blockchain may be able to do for the world outside of  investments

7. How to AVOID LOSING MONEY on any investment

8. Much more

JOIN THE COURSE, AND LEARN HOW TO BUILD WEALTH SUCCESSFULLY AND WHY YOU SHOULD ABSOLUTELY STAY AWAY FROM INVESTING IN BITCOIN AND CRYPTOCURRENCY!

Transcripts

1. Bitcoin and Cryptocurrency Promo: how many's bring banner forward. And I've been a investor at businessman and a business teacher for many, many years, and I've also been following the Cryptocurrency story from the very beginning and this course we're going to dive into everything that makes up cryptocurrencies what they are, but especially how them analyze them as an investment vehicle in terms of how to value them compared to other investments. This is going to be an investment course. You're going to learn how to value investments in all asset classes, that we're going to compare the crypto currencies with all the other asset classes, that we learn how to value investments and we'll learn how cryptocurrencies work and what we can expect from them in the future. As you can tell from the title of the course, I'm very skeptical at about the merits of securities as an investment in this course, I'm going to tell you why in great detail and we're going to analyze these assets is very new technological assets to see where the value is and what we can expect them to do in the future. So join the chorus and we'll see you inside 2. Lesson 1 Cryptocurrency Introduction: so welcome to the course. Bitcoin and Cryptocurrency don't believe the Bitcoin hype. I'm obviously telegraphing to you that I'm a skeptic of this technology as an investment in this course. I'm gonna make my case as to why I have a lot of experience investing. I've been studying this finance for my entire life. Basically, since I was a kid, my parents were business people. I got a degree in business school and I've been doing it both as a practitioner of business opening possesses. But managing for this is investing as well as teaching in schools. So it's pretty much my expertise. And I'm gonna show you guys in this course why investing in complete currencies extremely risky and it's really hard to value. And we're also gonna talk a bit about the technology itself, which was much more promising. It has a lot going for it, but as an investment class, it's Actually it's quite perplexing in some ways why so much money is being put into it. But im as well see, it actually mimics other bubbles very, very closely that happened in the past. So we'll dive right, So technology is obviously taking the world by storm. If you're in this course, you, you at least are following its been in the news. It's been going up and down. Bitcoin reached $20,000 in value not too long ago. It is sense. Has huge corrections gone back down about 40% and just that kind of volatility. Being able to change 30 or 40% in one week's time makes it, you know, proof that it's not really an asset class that's worthy of an investment. It's speculation. Is he gambling? And if you're willing to gamble, you know you feel like gambling your money and hoping to get, you know, a big rush, a big profit quickly, then by all means, go ahead and do it. Just make sure that you understand that that's what you're doing. You're speculating, and you're hoping to get a quick profit. But as an investment, an investment is, uh, defined as something that, um, guarantee virtually guarantee safety of principal and an adequate return. And so obviously Cryptocurrencies fail that first test. Um, and it's a big trend right now, which immediately should make a stop and think everyone's diving into it. The reason it keeps going up because people are putting money into it. But once people stop dumping money into the market, it will go down. And that's just one of the many, many reasons why the complete currencies, especially Bitcoin, is going to end up going and down and crashing over time. We have no idea when that will happen, but we know that it will. Sometimes these bubbles can last for many years, but in this case you don't have this one asset like Bitcoin. That's one currency you have now over 1000 cryptocurrencies and they're competing with each other. And one of the reasons that Bitcoin has been going down now is because people are favoring some of the other cryptocurrencies. And so this is a problem. Which one do you choose that you want to invest in one? That's another big problem. Another problem is this is something that is favored by criminals and rogue regimes like North Korea, and I don't know if you want to be associated with that. I mean, it's an amazing technology because it's a decentralized platform that can be controlled the governments and it's anonymous. Hence the name crypto. It's encrypted, and so that gives people a lot of comfort. Nobody can see your investment in it. But that's also the reason that criminals are using it and that terrorist regimes are using it and by investing in it were actually helping those people because the more money we put into it, the higher the price goes, were actually helping criminals and rogue regimes to have more money. I would have ever thought about it that way. That is directly what is going on and also just the fact that it's something new, exciting people are intrigued by and everyone wants to get in on the action. And so these are all things that make me sceptical of it, and it's also it just makes it. It makes it a risky thing and this happening right now, I wouldn't want to put my money into it. It's being lifted as I mentioned on Lee, by an increase in cash inflow and not by any intrinsic value, as we're gonna learn throughout this course, I'm going to you teach you guys about intrinsic value, how to value an asset, especially how to value a stock, and why Bitcoin and other cryptocurrencies they cannot be valued and therefore they're not really ingress. Mint investment grade assets at all. The technology itself has amazing potential but virtually no long term value as an investment for many, many reasons. But the biggest of which is that I just mentioned, it's hard or impossible to put a value on. And as a financial analyst business analyst, we need to be able to value our investments and know that they have some sort of intrinsic worth, not just a number on a screen that goes up because other people put money into it. So in this course I'm going to explain why all of the above is true. And hopefully you guys much more educated in terms of how to invest in general, how to keep your money and your investments safe and why, uh, Cryptocurrency is a perfect example of a place that you do not want to put your hard earned money unless you're willing to lose it all. Basically, cryptocurrencies violate fundamental investing principles. It cannot be valued because it's not a value producing asset. None other than Warren Buffett, arguably the greatest investor in history, says that it's a mirage. Basically, all a Bitcoin is is a way to transfer money and pay for things. That's why it's called a currency crypto currency. All it is is like a check. I can pay for something with this Bitcoin if some reason people have been dumping money into it as an investment. So it's really weird thing that really has no value except transmitting money. But check in, transmit money to we can transfer money with paper. How and so there's no huge value because of this. And also, most places still don't accept Bitcoins as payment anyway. So it's really perplexing phenomenon. And the only way to explain it is mass psychology. This trend is going on of everyone thinking it's going up. I've got a fear of missing out. I'm going to put money into X. I don't want everyone else to make money. I wanna lose out. And so it's being driven up just like all other bubbles. And at some point the bubble has to pump because it's not based on any intrinsic value. So again, it cannot be value because it is not value producing asset like a business is. Do we believe in check is valuable simple because it allows us to make payments. Of course not. Check it. Check. It has fertility of being able to transfer money and pay for things. And this is exactly what a crypto currency does? Nothing more. And so the rather course, we're gonna dive into why all these things are true based on fundamental business principles and also based on common sense. 3. Lesson 2 Warren Buffett on Bitcoin: So I'm gonna stop and ask. You know what does Warren Buffett thing? He's the greatest investor of our time, Maybe the greatest investor in history. He has become a time the richest man in the entire world, doing nothing other than investing in businesses through the stock market. And he has very strong language against Cryptocurrencies as an investment. I want to keep emphasizing this is on Lee as an investment, the Cryptocurrency technology that's based on the block chain. That decentralized ledger that Crips the information and doesn't need a central government or central bank technology is amazing. You can do amazing things and in the future is going to be doing all kinds of things that we can't even foresee. So the technology itself is extremely interesting as amazing utility. So I just want to emphasize that we're talking about as an investment, though it cannot be value because it is not a value producing asset, and he's called it rat poison is dangerous and for more than one of the reasons I already mentioned, because criminals use it because it actually can be hacked. A lot of the proponents say that it's unhappy herbal that the Blockchain technology itself is virtually on hackable. But as we'll see later in the course, I got a whole bunch of examples of all the wallets where all the Bitcoins are kept. They have been having a lot, and there have been billions and billions of dollars that have been stolen. But criminal hackers. And so let's say you invest all your money Bitcoin and you made you 1000% on your investments. You were lucky enough to do it at the right time. Then you're still a risk of your wallet getting hacked, losing everything. And once you lose that money, there's nothing to do about it. There's no one of the good things about having financial markets be regulated by governments is that they can attempt to recoup losses, that there's a fraud or going stolen. Like if you own stocks, well, that's not gonna happen after because you've attacked you, lose it is gone. So that's another thing that makes it very, very risky. He also calls it a mirage and simply says, Stay away. OK, so that's Warren Buffett's opinion. We don't necessarily have to take it at face value we make may want to think for ourselves . But that's what the greatest investor in the world says about putting your money into Bitcoin or other crypto currency. So I think he knows something about investing. Obviously, we should probably listen to him. Um, again. He says that Cryptocurrencies cannot be valued If Warren Buffett says that cryptocurrencies cannot be valued because they're not a value producing asset. We should listen to that. It violates basic value investing principles. Why would you put your money into something that you have no idea what it's worth and how much it might, how much it might be worth tomorrow or a year from now or 10 years now? It doesn't make any sense, Warren Buffett says. We should be investing in businesses that we would be comfortable holding for 10 years, that the stock market closes doors today. It wouldn't bother us at all, just like we don't care if anyone quotes us on our our real estate every day. Giving us a quote is how much your house is worth. This, how much your house is worth. It's the same thing with the business. You have a partial ownership in a business when you own stocks that that business is making money and thriving and growing, and it's gonna be worth more in the future than it is now. And you can actually put a dollar amount value on that because it has profits, it has income, and you could multiply a certain number of years of that income to come out with very, very accurate in perfect value on that business. And you can know what it's worth and been valued at, and you can put your money into it with confidence. Right? Stocks have never lost money over any 20 year period, and that includes the Great Depression. That's because stocks are based on businesses. Earn profits and profits are mawr overtime. On average, his prices go up because inflation and because companies that aren't making money, they actually get dropped off the stock market indexes. They get kicked out basically, and so they get delisted. And that means that if you're investing in just index funds, just mutual present index funds, history shows that you won't lose money. You actually make a lot of money if you hold on to them for a long time. And of course, the cryptocurrencies we have no idea what the future brings. They could go to 100,000 per coin, as some people predict, they can also go to zero. And there's just no way to know it violates basic value investing principles. You know, we're in love. It was doubted during the 19 nineties, he famously avoided all the Internet stocks. When that big bubbles going on, people called him a dinosaur. They said that he didn't you know he's losing his touch. He didn't know anything about technology. But what he understands is investing. And if a company is training at 100 times its earnings, he knows that's a much, much too high of a price to pay for a business that in many cases in the nineties, those businesses weren't even making profits. Yet The orders these dot com companies that had some potential that maybe they would in future profits, and then they imploded. We never actually made money and his crazy valuations put on them. There are a few exceptions, of course, like Microsoft ended up coming out really, really strong and continuing to produce very, very high margins and had a profitable business. But 90% of those dot com stocks. They worked. They were overvalued, he said. You know, this is not going to end well. And of course, he was 100% correct. The bubble plot and most people that were investing those businesses lost extraordinary amounts of money up to 90 to 99% of their investments in many cases. And Warren Buffett to stay true to fundamental investing principles. He stuck to his guns. He held on to his businesses that were making consistent profits. And while the market crashed around him, his stocks of covered very quickly because they were actually priced a reasonable level and they just marched on and he came out way ahead with everything else. Everyone losing all their money. He was just plugging along slowly but surely, his stock we're going up. And this is why he has outperformed the markets by thousands of percentage points over more than 50 year career. So when he speaks about investing, we should listen, and he speaks unequivocally against Cryptocurrencies as investment 4. Lesson 3 The Problem with Bitcoin: So we're gonna turn first year to Bitcoin. Because, of course, is that was the first Cryptocurrency That's the most famous one. But now it's only one of over 1000 cryptocurrencies. Here's the problem with that. Competition means lower prices if you can choose between lots of different products, which in this case is what you're doing when you're choosing a Cryptocurrency, that's competition that drives prices down. Why would become a Can you go up? Money is flowing increasingly to the other coins. It's not gonna go up. And so the number of particulars is being over 1000 growing rapidly. It tells us that there's going to be downward pressure on the price, and what happens in basic economics is that with competition, it will lead to lower price because they become commoditized commodities that can only compete on competition because they are substitutes of each other. Typical commodity would be oil, right, getting oil from Iraq being oil from America, getting oil from Russia. Oil is oil, and so the only way you can compete is lower your price and get more sales that drives prices down. You don't want your products of your commodity and Bitcoin has not been a commodity because it was the very first, most well knowing known coin. And a lot of people say What's gonna keep going up because it has scarce. Basically, Bitcoin is going to be limited to 21 million units and what's all those units are mind there will never be Mawr and so it will. It will have a scarcity. You can't print more money like a central bank can just print more U S. Dollars and dilute the currency. You can't do that with Bitcoin. However you have thousands, you're gonna have 1000 thousands of other currencies that are actually better than Bitcoin . Bitcoin mining is actually really slow compared to the other Cryptocurrencies there much faster so you can get more units much faster. And so victory is not the best one. It's the 1st 1 Is that a first mover advantage? And now that all the other ones were becoming more well known and famous, it is right now, as a speaking is crashing in price. So that's a problem with Bitcoin itself. Now the other cryptocurrencies even analyzed one each one at a time. But with thousands of them out there it's not gonna be an easy thing to do. So, as already mentioned in the introduction, advocates say that the Blockchain cannot be hacked. But dozens of couple currency wallets have been happened. Billions of dollars have been lost. And so I'm gonna go through five of the most famous right now. So Mountain Cox was hacked twice in 2011 with losses of 750,000 Bitcoin. If we can use current prices, that would be over $11 billion worth of Bitcoin. If those coins were held in there until now, that would be $11 billion that were stolen. Think about that. That is an enormous amount of money. And even though the Blockchain may not be able to be hacked, the wallets can be hacked half a story of Bitcoins and wallet. So imagine that you said, you know what? I'm gonna just throw $5000 in Bitcoin When it was young and your investment went up to hundreds of $1000 which it did for a lot of people, I got on the bandwagon early and then you're so happy. But you're going to hold it longer. I'm gonna hope that it goes up some more, and then all your Bitcoins got stolen because you kept it in this particular wallet and it's all gone. Bye bye that cannot happen to your stocks. Cannot happen to your real estate. That could only happen to you. Cryptocurrencies. So people tout the encrypted nature of the technology as being safe. But it's actually much, much less safe in a regular investment because the wallets can be happen. There are ways to get around that you can actually keep your Cryptocurrency in physical form. You can go and actually get Bitcoins. But then it was like holding gold around your house or money in your mattress. I mean, that's risky, too, for obvious reasons. So that was the first, most famous hack. And it's one of many other very large hacks that have happened since that another one is called Bit Floor. That was back in 2000 and 12 with losses of 24,000 Bitcoins, so that would have a current value at today's prices of over $350 million. So there's $350 million just stolen gone No recourse because, of course, since the coins are encrypted, is It's the only way to know where the are is that when they're in a wallet, when you have your codes for him, that that attack and they get taken, they just vanished. There's no recourse that's gone. Okay, so that's because 11,012 and I'm to stop this lesson here. Gonna look at the rest of the big hacks, which there are several, even larger, more recent ones in the next. 5. Lesson 4 The Hacking Problem: Okay, so we've already looked at two big ones. Mountain Cox is the most famous one. That was 2011. That was six, almost 77 years ago now that that happened and then bit floor six years ago. And as we'll see almost every single year, there's been a huge hack of a wall. And there was There was one that just happened a few days ago that made headlines as Bickle has reaching peak prices. Highest prices ever gotten too big Wallets are being hacked all around the world. So another really big one was Polonia X. It was hacking pills. And 14 it lost 12 13% of all the Bitcoins it helps. That was another, more recent one to have 14 the next year to 15 is one cold bitch stamp was hacked. They lost 19,000 Bitcoins. That was almost $300 million worth of Bitcoins at the current valuations. Okay, so again, another huge hack, another really popular Bitcoin wallet. Another one called Phoenix was hacking within 16 so it's much more recent. They lost 120,000 Bitcoins. There's 1.8 $1,000,000,000 of Bitcoins at current valuations That's a lot of money. That would be like losing a Fortune 500 business. An entire market cap is evaporating. Everyone that owned Bitcoins in that wallet 120,000 Bitcoins up and smoke. Just think about that. When you think about investing money into the coin or any cryptocurrencies, these wallets can be hacked, obviously. So don't drink the Kool Aid of thinking that this stuff s state is not safe technologies not saved the Blockchain technology. That ledger, the core technology, seems to be encrypted in a way that cannot be hat due to the nature of the mining and how the blocks are connected in an encrypted leisure, it cannot be hacked. At least it hasn't been yet. But these walls are obviously very hackable. Okay, so I want I'm gonna leave it there. That's five of the biggest examples of hacks, but actually smaller wall to be packed every single day. So it's a very common occurrence, actually. And you know, one of them called coin base, which is the biggest, most popular one right now. It hasn't been hacked yet, as far as I know, but the I. R s. The government is now demanding that coin based hand over their users information because they want to be able to tax gains. So when the biggest reasons people were investing and complete currencies was also because they're untraceable by governments and they can't be taxable, that's already changing governments and now demanding information coin makes is going to be forced to give over all the information of all their customers, and the IRS will have it. So you made a $1,000,000 on your big point that's gonna be taxed. If you thought you made a quick $50,000 in your Bitcoin that's gonna be tasked. So a lot of these, um, things that proponents are saying our advantages of these Cryptocurrencies are now going the way of the dinosaur. It's already gone, so it's already too late. Basically, if you were lucky enough to speculate in 2011 or 12 and you bought some Bitcoin and you made a whole bunch of money, good for you. But especially now, so many eyes on these things. Regulations coming. It's yet another thing that increases the risk. And in the next lesson, we're going to look at more detail in more detail. Excuse me as to why they cannot B values like a regular asset 6. Lesson 5 It Can't Be Valued: Okay, I'm going to just continue to hammer away this statement because it's so important to get in you guys. Heads of Cryptocurrencies are not value producing asset. You do not produce anything of value, like a business does business, trade, goods and services sells goods and services and they get money in exchange that money is currency like us dollar that has real value that is backed by central governments is backed by central banks. And while a lot of people who aren't that well versed economics say, well, the U. S. Dollars Fiat currencies, Fiat currencies not backed by anything is not backed by Golden More technically, that may be true, but 90% of all the world's currencies and now Fiat currencies. They're backed by the economy that there in the U. S. Government and essential bank and the world's economy back the U. S dollar because it is circulating throughout the world. So it's not at risk of hyperinflation or losing its value despite the fact that, yes, it's a Fiat currency and the central bank prints more money. The U. S government guarantees it becomes debt. The money is printed. But in the U. S. government owns. It's backed by the government, so it's not the same thing. The Cryptocurrency does not produce any being value. No. Does it produce any cash? Businesses are cash producing assets that can be valued based on their actual profits. This is really important thing to understand. This is why cryptocurrencies cannot be value. You do not produce anything. You can value some release that you can value a farm, A farm produces A's and meat and other things that can be consumed has utility. Apple produces smartphones, technology, things that people pay a lot of money for, has utility and has money that money could be reinvested and therefore you get growth and then the company could be dividends company and you stop buybacks. Any successful business as products that they produce in the cell, it can be valued. It has an actual intrinsic value. Rest. Cryptocurrency do not have that. They lack this fundamental basic thing that you need to have in order to be an asset that can appreciate in value. Yes, but the currencies are appreciating in value right now is a huge bubble, but is based entirely on the fact that more money is being dumped into them. More people buy them forever. They will go up forever. But of course that's impossible. Eventually, money will run out, and also people lose confidence. Basically, it's like a Ponzi scheme. In a Ponzi scheme, some con man sells investment to people who collects the money, and he tell it gives them fake statements. This is looking you got made 20% paper profits. People see sweet. I think I'm Richard. And then he continues to take all the money from all those people. And he invest themselves to get rich. And then he takes money from the new people, and he actually he pays it out. Um, excuse me, takes money for the new people, and he pays it out to the old people. And eventually it all comes crashing down because it's a house of cards. Nothing is being produced. It just moving money around. Well, that's exactly what the couple currency markets are doing. Hey there. Based on Lee on the fact that people are putting money into them, that's it. That's it. Um, profits from a business could be projected with accuracy. Did you look OK? How much money did you make last year. How much money of the management, you know, telling me they are going to make this year and you get a pretty accurate forecast. Therefore, stocks can be forecasted accuracy because of the business, and the sales to be forecasted than the value of the stock can also be forecast. Because stocks are ownership of the business, they're not some ephemeral thing there a real thing. When you own a share of a business, you own a part of that actual business, just as if you manage it yourself in your store. You own part of it, and it's really profits produced by businesses or rial. Products and services are really and are used by people to make lives better. So when you're investing in a business, you actually helping the economy, you're helping people because you're helping that business to continue to produce the goods and services that it produces and to sell them to people. Everything you moan, your closed, all the food you consume your home. Everything in your home was produced by a business is like capitalism and free markets work so well and some will say, well, there's a lot of winners and there's a lot of losers. I'm not gonna get into the moral aspects of capitalism. But in terms of investments, this is why investments have real value and you engage the actual value and why. It's good to be investing in companies that produce things that are good for people. You can choose what companies you can invest if you believe some companies are immoral, a battle that don't invest in those companies. But when you're investing in crypto currencies, you're actually helping criminals and roll regimes because as the values go up, because our money inflows pumped them up, who's making a lot of that money? Criminals are getting richer because of it, and it may be something that you don't care about. But it's a reality. It is a reality. And cryptocurrencies, they don't make people's lives better. I mean, if there a way to make transactions well, we already have lots of other ways to make transactions. Not only do we have PayPal and Venmo now, we have more and more ways to pay for the apple pay, and there's all kinds of ways to pay. And so if the main argument is that they had utility because you can pay for things. Who wants anonymous payments? Criminals? Why else do you need your payments to be anonymous? It doesn't really matter, does it? And, plus, most places don't even accept. Cryptocurrencies anyway may be more and more of them are now. But even still, that doesn't give this asset some huge utility and make it special. It's actually a way to pay for things that is less effective than a credit card, so it doesn't have any intrinsic value like a business does. They're not. Even while they accepted the mining, to increase more of them is slow, as I already mentioned and is a limit to how many could be produced. So if you're trying to trade Bitcoins for things, but they're worth $20,000 each, that's not very fungible. So it's actually not a very useful form of currency. Currency has certain attributes. It has to be durable, has to be exchanged, last in fungible and has all these attributes. Will Cryptocurrency doesn't have all his attributes, and it's not even durable because it could be happy could lose it. So the very things that people say are the Ashby's that make valuable those things aren't even really in many cases. Okay, so for all those reasons, it's very risky and you can't value an asset. How can you put your money into it? You have to have so much faith that's going to be there. I don't need to have faith when I buy a share of Berkshire Hathaway's stop, Warren Buffett manages that company. He owned railroads. He owns riel, businesses that are going to be there, producing profits for a very long time. I can own that and sleep very well at night. And maybe I will make 10,000% on my investment get rich overnight. But I could be certain that we could be getting Richard slowly over time, almost no matter what, Even if we do have another crash in the economy that we had way back in 2000 and eight and nine eventually, pretty much all of the good companies recover, and now the stock market is doing great again. All you have to do is have patients when you invest, invest in good companies that produce growing profits and then wait. And the hardest part, of course, is the fact that we don't want to wait. People have a fear of missing out. That's why so much money is going into cryptocurrencies. But it's also why it's, uh it's like fools gold. It's, um it's a false promise. And I hope that you guys listen to this. Don't get Hoodwinked by it and lose your money. Okay? In addition to the fact that it can't be valued, we're gonna go into the next lecture. The fact that it violates pretty much all fundamental investing principle. 7. Lesson 6 Violation of Fundamental Investing Principles: So a core concept in investing is that there's investing and there's speculating and speculating is basically gambling. It's saying, I think this assets going to go up in the future. Therefore I'm going to buy and I hope that it goes up. But there's no fundamental analysis going on. You're not looking at the business, you know, analyzing the management, the profits, debt levels, how expensive the price of the stock is trading at. You're not doing it deep analysis. Just basically saying something like, Okay, Apples, A really big, great company. I'm reading articles saying that this is a good stock to own. I'm gonna buy us, speculate. But investing is different. Investing is when you look at all aspects of a business, not the stock. We're looking at a business because the stock of Justin ownership of a business and it's based on rigorous analysis of business was virtual certainty of. Here's our motto here, safety of principal, an adequate return, and we're gonna go into a later lecture. Why it's so important that you have safety of principal because if you lose money and you try to compound it backed away. Originally had that could take a really long time. That's another reason why trying to make quick profits and investments, especially cryptocurrencies. It's so dangerous because if you do lose money and you invested a bad time and it goes down by 20% of 3% or whatever, and then you have to wait that to go back up, I mean take a really long time and take 10 or 20 years to go back up, if at all. Residue investment really conservative business and you're only making, let's say, 89 10% or whatever on your stock on average per year, you may think, well, it's not fast enough already making more money, but it's slowly but surely making you wealthier. And because of the nature of compound interest, it's exponential, you know, 10% of $100,000.10,000 dollars, but 10% of a $1,000,000,000 is $100,000. As your money grows, the increase of your capital a salaries, you make more money faster as your capital gets larger. So you know, 10% return is nothing to sneeze at a czar, money gets bigger. It may seem slow at first. It just means you need to increase your savings rate. But in any case, when you're buying on asset like Cryptocurrency, you are just gambling. It's not even investing by the very definition of investing, there's no guarantee of safety of principal inadequate return. Speculating is just hoping that the asset will continue to appreciate after it's been purchased. It is actually what most people do because most people haven't actually been trained to invest. They haven't studied. They think that they know what they're doing is everyone can understand a little bit about business everyone thinks, understand little about released a little about stocks. They read the newspaper, they wash the news. That doesn't mean you know how to analyze the business. You need to actually learn how to do this stuff and you think deeply about it. Which is why weren't Love recommends that 90% of the investing public simply invest in index funds like S and P 500 because on average will get about 10% and you actually outperform most hedge funds according to the statistics, which is pretty hard to believe for most people. But lots of reasons for that, maybe we'll discuss later in this course But thing is, when you want to get is going safety of principal, an adequate return over time. And it's actually really easy to do. If you are happy, which is only a mutual fund or index play. The statistics bear this out over time, so again go back. Teoh Investing Principles Investing is based on cash, little from an asset that can be measured and it can be forecasted. So the business produces a profit of, let's, say, $100,000 per year for five years in a row. That is very, very stable earnings. We have a very good idea how much cash this business will continue to produce for the next several years, right, and so when we're valuing a business like this and they not been growing rapidly, but it's very stable, we can apply in reasonable multiple to the earnings and come up with an accurate I'll be in perfect evaluation, so we always want to be conservative. When we make valuations, we're gonna learn. This is called the margin of safety principal investing similar to an engineer killing bridge that can hold a lot more weight and is ever going to be put on it. We want to invest and buy at prices that are conservatives, so that even if something does go wrong, we're still going to be protected. That's why this is called value investing. You want to get as much value out of your asset as you can. And, of course, when you're investigating configuration, you can't even do that because you have no idea what it's worth. So this is this very simple example. You guys, how we value businesses. A private business that's conservatively priced, will usually sell at a multiple somewhere around five times. So that means we're making about $100,000 a year in net income. That's profit. After all expenses have been taken out. That business is worth probably somewhere around half a $1,000,000 that's a concrete number based on concrete results that have been produced over time on average. So depending on the industry and other variables, a private business like this is probably worth about $500,000 even though you know it might very, you know 20% 30% East direction. If it's growing rapidly, you apply a higher multiple, maybe that businesses with a $1,000,000 because it's growing it 10% per year if it's shrinking. Maybe that business is only worth, you know, two or three times earnings because the range of going down So you're gonna pay when you think the business is worth based on how fast profits are increasing or how fast they're decreasing. But for a private business, we usually apply a multiple of around five times earnings. The stock market earnings. Right now, the average S and P's around 20 times earnings and a lot of reasons for the multiple being much higher for what you pay for stocks. One of the reasons and because the markets so liquid when you on a private visit somebody could be really hard to take a long time to find a buyer for that. And so it makes the value go down and the stock market even instantly. Sell your shares any time you want to see a certain premium, you pay for the liquidity of the market and then also you to list on the stock market are the best companies in the world. The reason that they were listen, the first place is because people were confident enough in them Teoh support an initial public offering and put a lot of money into them. So the businesses of the stock market are the strongest companies on the planet, so you get a higher multiple on average, for that as well. But if you're going to sell your mom and pop store that makes $200,000 a year on Main Street, it's probably worth around $500,000. So the point is, that's a concrete amount of money based on concrete results. Okay? And in the next lesson, we're going to look at just simple supply and a man and why this tells us that the Cryptocurrency prices cannot stay high and continue to increase forever in the current environment. 8. Lesson 7 The Supply and Demand Factor: So for those of you are burst in supply and a man and basic economics, this will be reviewed for you, but we're going to apply it to Cryptocurrencies. For those of you who haven't studied, economics is might be something is new. Basically, any increase in supply of some good usually leads to a decrease in demand and lower prices . Approve example of this in the oil market. This is why OPEC and the leaders of those countries that produce most of the oil in the world over the in the Middle East. If they cut their output, they cut the supply, increases prices. It increases the man because there's less oil was more competition among buyers the oil that is being produced and being put into the market if they increase their supply, which would have been happening for the last seven years because of shale gas from America and basically the world's awash in oil that drives prices down. Because there's so much supply of oil, there's competition among sellers to get people to buy. It drives the prices down. Now over 1000 cryptocurrencies. Downward price pressure is inevitable, and indeed we're already seeing it with Bitcoin. Why do you want to pay $20,000 for a Bitcoin when you can buy either or any of the other cryptocurrencies like coin, etcetera for less and how to do the same thing? I u $20,000 or reason You would pay that much because you hope that it keeps going up, but that's just pure. It's pure hope. That's all it is. And it is a basic business principle that increased competition leads to lower prices, especially as I already mentioned if the good in question is a commodity now, there are some differences among the different cryptocurrencies in terms of what they could do. But in terms of just being a crypto currency that the exact same thing, you can trade them for goods and services. So Bitcoin is nothing but a currency, whereas something like Ethereum Ethereum like is an entire platform has don't Cryptocurrency within the platform called either. So Ethereum is basically a decentralized application. It's like software that, uh, is based on the Blockchain. The Blockchain is the core technology at the root of all these cryptocurrencies, so there are different platforms now they're being produced. They can do all kinds of things in terms of making software that decentralized encrypted. But they Cryptocurrency piece of Ethereum and others in the theory of this case is called either and the exact same thing is a Bitcoin is just currency. It can't do anything else. And so these are commodities now, every Cryptocurrency, all they can do what you can trade it, you can trade it, you could buy things with it. And so they're becoming commoditized, and over time they become even more commoditized. That's going to drive prices down. Bitcoin, up until now, has gone up dramatically, mostly because it's a well known Cryptocurrency. So I had a first mover advantage. It's the most widely accepted as a form of payment, so that makes it more valuable than the others, because you can't buy something with it. Then what's the point of having Cryptocurrency? And just because it was the very first, it's had a pretty long first mover Advantage has been several years that people thought of cryptocurrencies and all they think about Bitcoin. Even now, Bitcoin is the one that um comes up in most people's minds. Most lay people really are the one that should be staying away from these markets. Maybe some of you listening to this right now. And so because first mover advantages being eroded by competition. Cryptocurrencies They're being commoditized and by definition, their goods that are substantive eliminator commodities. When you can substitute one product for another product and get the same, think right, a good example of that would be so you could buy one soaking another something. There's always gonna be maybe a premium brand of soap that's got really good branding. It's not a commodity, but in most cases, people just by Sophie, one of Washington, of its commodity. Coffee is a commodity. Yes, there are differences, but it's a commodity or just is a commodity. Gas, oil. It's a commodity. Cryptocurrencies are becoming commoditized. It is not good for their valuations, is not good for their price, especially if the only thing they can do is make payments. And the only thing that gives them value is the fact that people are hoping they're gonna go up. Commoditization is terrible. I mean, if you're investing in Bitcoin, you want it to be special. You want it to be unique. You wanted to be doing something that other things can't do, but that's not the case. So it's a value is going to go down, and we're seeing that it's already starting to come down. Okay, so in the next lesson, we're going to look at of the safety of principal, an adequate return, the fundamental core concept in investing that we really need to understand that we're gonna be investing our hard earned money on Rome. 9. Lesson 8 Safety of Principal and an Adequate Return: So the father of value investing his name was Benjamin Graham. He wrote a book called The Intelligent Investor, and he was also Warren Buffett's first investment mentor. And he shaped the way that Warren above reviewed investing and more of us still consider this book the intelligent investor to be the best book by far ever written on investing and one of the things he said. Not. But would you said that investment is most intelligent when it's most business like that goes back to what I was saying earlier about business analysis. You want to analyze a business as deeply if you can come up with a price that you think it's worth in terms of its intrinsic value, and then you look at the stock market price for it, and you see, is there any discrepancy? If you see the stock trading at a high evaluation than you think it's working, you shouldn't buy it, even if it's a greatest company in the world world. Like Amazon, for example, Amazon is obviously a powerhouse. Taking the world by storm continues to grow at amazing rates, but it trains at, like 400 times earnings or something, so you're making a really risky bet when you buy Amazon. You're hoping that has continued to grow at that rate for a long time, and there's no way to guarantee that it will, or the value investor will say, OK, here's a good business and you put a value on it and you say You want to find a stock that's trading at a lower price. What, you estimate it's actually work. It's what one, but it has been doing his entire career. So if he looks at a business that I think this should be trading for $10 a share and stock markets offering you $7 a share, it looks like you're getting a discount of about 30% for that investment. So you get that opportunity, you want to buy a lot of it, and it's had a margin of safety because you are giving yourself margin for error that human . If some things don't go right like you expect them to do, you're still getting so much of value for your investment that you're not gonna lose money , doesn't make any sense happen. You lose money if you're getting such a huge discount to the intrinsic value of an asset. Okay, that's the first thing you want to think about. Vestment is most intelligent. Was most business like it is not speculation it's having to understand economics. And if you don't know, analyze businesses. And as Warren Buffett said, you should invest in a low cost index funds mutual fund and, like S and P 500 or the Dow Jones Industrial or the Wilshire 5000. A whole bunch of Vanguard is now the most popular place to do that. And you pay almost no fees and you just get the average performance of the stock market, which historically has been around 10%. And you're gonna do fine, you're gonna compound your money and you're gonna seek well, at night, you're not gonna have to worry about your stuff dropping by 40% overnight. If it does go down, you know, that is probably gonna go back up again with the economic cycle returns to normal, even if you would've been invested at the absolute worst time in 1929 right before the Great Depression, even though 20 years seems like a really long time, this is an extreme example. 20 years later, you would have turned a profit in your investments. And then the fifties and sixties work some of the best years of the stock market in history , so you do have to be patient, he said. The first rule of investing is don't lose money in the second rule is don't forget Rule number one. The reason, he says that is what I already alluded to before is that when you lose money, you risk having a permanent impairment of your capital, and it takes a long time for your money to come pound back to what it was before. So you lose 1% of your investment. It takes a 2% gain to get that money back because your capital base is smaller. It's an important thing to understand. So if you're speculating and you put $100,000 into a stock and it goes down 20% you lost $20,000. Now you only have $80,000 of the capital, and you've got to get that to compound back up to where you started with. That takes a long time. I make take several years, but if you're conservative and you approach investing from. I wanted you. Okay, First of all, I don't want to lose money. It's kind of like a hip. Gotta go over. There's a doctor, right? You say first, do no harm. First, do no harm to your capital. Actually that the Hippocratic oath of investing and then you can you look forward to 5% return. 10% return, 50% return. Whatever the adequate return is that we hope to achieve from our investments, it's going to compound the compound. Interest is going to grow and grow and grow, and it's gonna do it in a way that is not risk. The stock market is not risky if you know what you're doing. Investing is not risky. You know what you doing. But buying cryptocurrencies is the definition of risk. It's just gambling. And these are some of the reasons why understanding these basic investment principles understanding basic economics should really highlight to you why it's so risky and really just a bad idea to put any of your money into crypto currencies. Charlie Munger, Warren Buffett's billionaire business partner and amazing investor himself, he just says simply being conservative and not expecting miracles is the way to go now. The thing about this is, though, is that paradoxically, you're likely to get a much, much better result over time in the Wood and trying to make money quickly. Charlie Munger. He got started in investing kind of late in his forties, and he had a really, really good record. He ran a hedge fund for a while, whose trained as a lawyer, but he's now a billionaire. He's worth at this point in 2018 almost $2 billion all he ever did was save money from his business or from his job as a lawyer and investment stock market. He didn't conservatively. When you do it conservatively, don't lose money. It compounds and compounds at once. The number start to get big, as they already mentioned. The acceleration is rapid. You reach what we call sometimes at escape velocity, where your money compounds on itself. Cook enough so that you don't ever need Teoh work again, and you don't ever need to add to your capital base again. Once you get a certain amount of capital, five or 10% per year on average is going. Teoh continue to make you wealthier. Okay, so if you understand the basic fundamental principles, then you don't need to do anything fancy 10. Lesson 9 Mr: Mr Market is a concept that was introduced by Benjamin Grand that I've already mentioned in the course, and he uses as an analogy to characterize the way the market behaves. Excuse me, Mr. Market is a manic depressive who offers very high prices one day and very low prices the next. And so we take advantage of these mood swings of Mr Market by buying when prices are low and selling or continuing the whole when prices are high. Mr. Market offers price quotes every day in real time, nothing more. So basically, we can ignore Mr Market. Most of the time. Most people do you with you watch our stocks and our prices, everything with them to go. We hope we are. Stocks are going up all the time, right? But that's not the way we should think about it. We should have more equanimity if we realize that Mr Market is asthmatic, oppressive, that overreacts to good news and bad news, then we shouldn't panic our stocks going down. We should consider buying more for getting better prices ever. Stocks are going up for a long time. We shouldn't be too exuberant because you know that they may be overpricing getting inflated and also means that will be paying higher prices if we want toe reinvest fresh capital. And so this is a way to think about the market, and this is where the value investors think about the market. You need to be the markets master. Don't let it be your master in 2000 and eight, when the market was crashing because of the real estate debacle and the mortgages and everything, what did Warren Buffet and Charlie Munger do? Almost all the capital they had, and they bottom companies and the bottom stocks at discounts now most well, don't have a lot of cash lying around to be able to do that during a market crash. But that's what this lesson is all about. Always hold some dry powder, and so then, if the market does correct, you can put fresh capital toe work when the prices are lower. But the main lesson here is to understand that you can ignore the price boats of the market most of time and just take advantage of them when they're good. Just think about it. You have a house, right? You buy your house, you don't have a quote. You don't have a real estate agent or someone quoting you develop your house every day. Every once a while, you might do an appraisal if you considering buying a house or if you're going to refinance your house or whatever, have a razor come you an estimate on the house. But you own that asset. You don't worry that your house isn't going up in value. You know that over time probably will go up in value. It's the same thing when you own a stock stopped Justin ownership, sharing a business. But we freak out if it's going down because we're getting these daily quotations on our stock. We own a business. We don't own a stop. The stock is an actual real ownership. That business, so warm up says, Don't own a stock. If you wouldn't be comfortable holding it for 10 years, the market closed. Okay, we don't own stock. It's not just a piece of paper. It's something riel at the market called down continues. You still own the business that still making profits, and so we have to have faith that if you made a good decision when you bought it, at a good price. It's going to go up over time, and we shouldn't be freaking out about the daily fluctuations of the stock market. Okay, so it's the same thing as what I just said about your house. You would ignore any daily price Quotations would drive you crazy if you were getting our expectations every single day. And so you know, the value of the business is not changed minutes minute, just like the value of your property does not change minute to minute. So should we shouldn't be freaking out. And we shouldn't be stressed out about what our stocks are doing even if they do have a big correction, which is defined by a 10% move. Negative moves of your stocks. But on 10% you own a lot of stocks. You're gonna meet the feel 10% poor. And this is what people start to freak out sort of stealth because they're afraid of losing more. But if you're a true investor and you understand, Mr Market, what you need to be doing that stocks were down is the adding to your positions. If you hold good companies and you know they're gonna be doing fine 10 or 20 use from now. Then you should be celebrating when the prices of stocks go down because it allows you to add to your holdings. This is a Warren Buffett does his entire career. He's done this. It's very, very emotionally difficult to do that. You feel like you're losing money, but in fact you're not losing money unless yourself. But that's all those people do. And so this is how panic start and the Mr Market over corrects it gets more and more pessimistic until prices get better and better and better. And this is a fundamental thing to understand. If you're going to be investing in stocks or we don't have to worry about any of this, do it. Mr Buffett recommends, and buy mutual funds or index funds so you can basically ignore Mr Market. Most of the time, you could ignore the planets on TV. You can ignore all this stuff. I do read like articles online on a daily basis, as I think about my holdings that think about my companies, I mostly ignore what they say. I mean, those guys got getting paid to write articles they need to produce something. I mean, you might write a read. Excuse me. 10 articles one day, half of them being negative about your company have been deposited by your companies. Of course, that's very confusing. So don't listen harder. When you need to do is be a now, uh, analyst of businesses. And so you own a company. You should be following its financial statements. You should be following its earnings calls, and you should be following what is doing on your own and make your own judgments. You don't know how to do that. You don't want to do that. There's simply dollar cost average, which means by the same amount of stock every month into an index fund like the S and P 500 or the Dow or whatever. And just do that for many, many years, and you will get a really good performance to probably get nine or 10% performance. If you stretch it out over a long time Now we'll get you where you want to go that we get to retirement. That can build a lot of wealth. Um, and as we know now, the hedge funds where the wealthiest people the world invest they actually underperform those index funds was a great way to go. For someone like me who loves finance of those business finds it very, very interesting and enjoys doing it and believes that, you know, if we can outperform the market, we're going Teoh extraordinarily larger amount of money because of the nature of compounding because, exponential, then you need to understand this stuff. You understand, Mr Market, understand margin of safety principle and had it analyzed businesses really well. And the thing about it is when you seek Alfa, which is what it's called when you're trying to up from the market, you get 1% Alfa. That means you got 1% higher returns in the market. You got a 1% higher performance from the market over a 20 year period. You're talking about hundreds of thousands or millions of dollars in additional capital because of the way that money compounds. As it gets larger, that small percentage gets larger. Just like I said earlier, 1% of a $1,000,000 is only $10,000 but 1% um, $10 million is a $1,000,000 so if you need $100,000 so the factors go up, the amount of money goes up and so is your capital gets bigger. It accelerates. So if you get a little bit outperforms, the market makes a huge, huge difference. But I digress. Just remember that only pay attention when the market is in a bad mood, offering extraordinarily pessimistic evaluations of his businesses. Otherwise, pretty much ignore what is going on and you will sleep well at night while the stock market fluctuates and hold on your good and bad times. It's a really simple concept is really important. One to understand emotionally, money is a very emotional thing. Our investments are very emotional, and the reason that most people are not very good investors is because of this. They get afraid of the market down their cell, and they get excited when the market goes up and they buy more when the markets going up. So you're actually in the opposite what we should be doing. We learn in basic finance, fastest in college that you should buy low and sell high. But because of psychology, we actually end up doing the opposite most of the time by within going up. It seems you're gonna keep going up and we sell them. They're going down. Do you think they're gonna keep going down? So the real trick to become a really good investor, This is true with any asset that's your real estate. Should gold are when prices are depressed, that's when you bought. But it's the hardest time to do it because it feels like they're gonna be low for a long time. Hence the need for patients. So if you want to be a really good investor, wait for those little prices you buy, and then you have to wait. Right now, the Cryptocurrency markets, the big plane market, we have irrational exuberance, extraordinarily high prices. And so even if it were a decent asset class, which I believe it's not, it would still be a really bad time to be buying it. That is going up and up and up. When you're an investor, you want to get low prices, just like when you go to the grocery store. You want to get low prices, what you're buying when you buy stocks, you're buying shares of a business. You want to buy those shares at a discount you want, you don't pay a lot for those shares, no matter how good the company is that you're buying. So this is a really important concept to learn about. And so we get think about this lesson than maybe even watch it a couple more times, so it really sinks in. 11. Lesson 10 Holistic Investment Analysis: analysis of our investment. That means we don't just look at a few stats like the price to earnings ratio and read a couple articles and think, OK, this is probably a pretty good company. No, there's no single metric like the PD or the price to book or anything else that will tell us whether or not this is a good invested. When you look at all the different stats of a business, when you look at all of the fundamentals of the business, we need to read the financial statements. And then we need to also think about the value of the brand. Think about industry that they're in you to think about what's going on the competition. When you think about the management, you need to have a holistic picture in your mind about whether or not this is a good investment. And whether or not the price that is being often the stock market right now is a good price . This is why investing is much more of an art than a science. Nobody can say this is definitely a good investment because of this. It's an art because there's so many factors that go into there so many variables. So I have such a hard thing to explain for most people. A lot of people don't like to hear this. They want in here step by step system and see what you're investing system. But investing systems don't work because there is no single system where you say, OK, stocks, trading it API of 10. It's a good stock is trading oftentimes in a little P because the bad company, it's not making very much money and its industries in decline to just because the stock is cheap does not mean that it's a good investment. And the converse is also true. Just because the stock is expensive already mentioned Netflix and Amazon, it does not mean that those are bad investment. Those make very well continue to be good investment because even though the trading in a very, very high price there also growing rapidly. But the thing about value investing use, the more you pay for a stock you invest in the Amazon. Netflix is eccentric, taking a higher risk because you're paying for the future, paying for future earnings. That's why you're paying for such a higher multiple For that growth, you're assuming that growth is going to continue for many, many years and it may very well do. And if it does, and you're gonna get excellent results, But if it doesn't and this is the thing, the future is very, very difficult to predict. If it doesn't, then you're going to actually lose a lot of money. But when you invest in a good company like, for example, the apple example from earlier when you get a good company like Apple and you buy it for such a cheap, cheap little price, like 11 12 times earnings, you still can't predict the future. But you're buying with such a low price that the odds of your investment going up a lot of very good, the odds of it going down a very look. So no matter what happens in the future, you have a margin of safety, which we're gonna talk about later. That's a really key concept. I'm gonna keep bringing up because a lot of people don't understand that I never heard about it, and it helps you to lower your risk and you're making investments. So if you're not, you know, sufficiently interested in investing in finance to train yourself to learn everything there is to know about business and about economics. Then you have no business managing your own portfolio. You may dislike to buy and sell stocks and trade, but just know that you're doing that. Then you are gambling. That exact same thing is sitting in a casino and pushing buttons on rolling the dice. That's all you're doing. And if you enjoy that, maybe take a small amount of your capital and do that for fun. Try to hit a hit a home run, try to find the next Microsoft you know it is nascent stages. Maybe you'll become a millionaire. I just know that the likelihood of you making money that way is it low and the likelihood of you loosing money that way is high. That's just the latest what history tells us. So in order to succeed investing, we need to understand how the value of business and this takes a deep understanding of micro economics, and it includes both qualitative and quantitative factors. So I just wanna make a list of some of the qualitative factors that we need to think about when were trying to analyze the business we need to think about the brand. Does this company have a franchise? That's the word that Warren Buffett Charlie Munger use. They look at the brand because the brand is. They say it owns a piece of the consumer's mind. I always drink coke. I'm not going to switch away from Coke. If I always love to watch Disney movies, I'm gonna watch all the Disney movies that come out. So people have brand loyalty, and so the company has a really valuable brand. That's something it's hard to value, knowing exactly what is the value of Disney's brand. Well, people do try to put a value on it will say, Well, it's worth $10 billion or whatever, but it's very, very ephemeral. It's the thing that's really hard to put your finger on, but it's a factor that's really important. So just because it's hard to measure doesn't mean that we don't try to measure it, can't ignore it. Do you think about the branding to think with staying power of that brand as one? But it says, you know he could take $100 billion he wouldn't be able to start a new soda company that would dethrone Coca Cola because it's brand that's been building in people's minds part of the culture for over 100 years, no closer to 150 years now I think so. That brand is something that is going to be strong for a very long time. That's why Warren Buffett made a huge bet a local in the 19 eighties and continued to hold that stuff because the brand has such staying power and no amount of money and no amount of competition is gonna dethrone that company. It doesn't mean that's a good company to buy any time, depending on the price of the stock and the recent business performance. But it tells you the power of a brand in hell before that is that's quality of factor. You need to think about it. You're buying a company that's like a commodity, which is basically what explain Cryptocurrencies are becoming. Don't they don't have ah brand, and you're taking a big risk. Smartphones have actually become commoditized in many ways the interchange of what you could buy stamps and you could buy an iPhone. You can buy any of the other brand you're getting really similar thing. But see Apple is different because Apple is a very strong brand and has very, very high customer loyalty. So even though smartphones are being commoditized, Apple isn't compete on price because Apple has a franchise. And as customer Loti was, other companies don't have that in as larger supply. That's really important to understand when you're looking at investing in a business that you want to have staying power for 10 years or 20 years. The brand is one of the things that will give it that staying power. And you think about brands? Were you thinking about investing? Okay. And so that brand also plays into the strength of the company's moat. That company that you're investigating has to have some competitive advantage, and competitive advantages must be durable. It must be something that will last for a very, very long time. And so Warren Buffett he looks at competitive advantages that are durable. So he likes to buy really simple businesses like Gillette, for example, he Mont Gillette a few decades ago. His company owns the entire company of Gillette. Now, because everybody needs raisers, you know every man in the world that doesn't have a beard right needs to shave, and so that's very consistent. And you can increase the price of razors as new technology comes out of and new research development is done by the company, and he knows, 20 years from now people will still be lying razors and Gillette is the Brandon Sticks. In people's months, it's an old brands just like Coca Cola. So when you buy a company got especially, you can buy it. When it's being offered by Mr Market at a discount. You know that that investment will compound for many, many decades, and that's what it's all about. You want to find a moat that is durable, and it has a way to keep the competition of banks going really hard for any company you compete with Gillette because brand recognition and one recently actually dio last 10 years there was $1 Shave Club was a his you go for about a month service and the send you knew razors, and that was a very interesting idea. And so they did start to eventually cut into fillets market share. But finally that company just bought out on now Gillette old, so it shows you that if you get big, big companies, they have a huge competitive advantages. And usually when you invest, you want to buy a company of a certain size. They could just ability. It also lowers your risk taken whether a lot of economic storms that things like that, another qualitative factor is the quality of the company's management. You you may have amazing business, but the managers are terrible. Dishonest, as we saw with Enron and a whole bunch of those accounting scandals that happened, I guess it was 15 or 20 years ago. Now seems that time went by faster those managements destroyed. Those businesses may have been good businesses, but that is always looking Who was the CEO and who was on the board of directors? You've got a look at that because you didn't think that this company's greatest ever. But there's ethical issues there. You don't know what they're hiding. You don't know what they're doing now. We know because of some of accounting scandals, you just can't trust the management of companies without being skeptical. Looking at who they are, they're doing. So you want to look at how predictable the company's profits are because We're looking at these investments gonna hold them for at least five years. Most people only hold their investments for a few months or for a year to Andi, actually getting shorter over time, which is really interesting. Decades ago, people held their investors for much longer and actually had better performance on average . You want to be holding our investments for a lot of crazy time so we can get compound growth that is not taxable has no feet because when you sell, we have a taxable event. We made a profit. We think he's every time we trade. So if you could buy and hold, this has been proven to be not only the superior investing strategy in terms of results. It's also the easiest because all they have to do is wait. Most people can't wait, don't have the patients, they want to be active. You want to buy and sell, buy itself. So psychologically, buying and bowling is the most difficult. But I get you the best results and it's the most intellectually easy way to invest. And then, of course, we everything, those qualitative factors, we need to be thinking of the quantitative factors I've given you some examples of some of the quantitative factors. Obviously, it is not an exhaustive list, but you want to look at the price to earnings to see how expensive is that stock in terms of how much money is making to the profits. Usually the historical average of the P E is around 15. That's gonna very a lot of industry is going very well, but Company 15 is historical after the stock market for a P. So right now it's trading the S and P trading at around 20. Everyone says that stocks might be overpriced or get a little bit up there. But we're in any situation because interest rates are really low and, you know, without going into a long conversation about macroeconomic policy and interest rates. When interest rates are lower, stocks are more attractive because there are many alternative investments. Youling returns as it just rates go up. Then the relative attractiveness of stocks usually goes down, and so you will see the P you go down. So you have like during the Great Depression p east like 567 times, earning very, very, very low. People were very scared of stocks because they crashed, but that would have been one of the best times to accumulate stock. If you're planning on holding that for tenants one years, then you would have gotten very rich. You would've bought a bunch of stock in the 19 thirties, for example. But of course, people were scared. A lot of people weren't buying stock, and that's why the prices were so low. But the main factor that people look at is the price earnings. Would you want to look at the price of the stock You also the price to book about? You know, that just means that how expensive is a company based on how much of its assets are valued at that includes things like real estate planning, property in cash and these air tangible things that the company owns. So one of the reasons again that Warren Buffett likes Apple is Apple has 250 $1,000,000,000 in cash right now, a lot of cash, and they do a lot of things of that cash. And so they could buy back shares, which is always a boost to stock price. They can return the money dividends they can acquire, other companies that make huge acquisitions that they want to, and so what? Companies have a lot of cash lying around on, long as they're finding good ways to use it. That's a really good thing, but we want to look at a price toe book value that isn't too high because the price of the stock is trading at way higher than book by Oh say, like 10 times book value, 20 times book value, which companies like Amazon are, then it means that the asset base of the company is very small compared to the company's market cap. And so that could be risky. So we're looking at a stock that its book value is equal to its market cap. That means that it's a very, very reasonably priced asset, and it's a very conservatively priced asset, and so it's probably a lot safer. OK, so this is another fact that we look at both of these things, look at debt levels. We want to buy companies that don't have too much debt because that means you've got to pay interest on that. That might be a big expense, and so a really good example of the company I like is Google because they have almost no data. We have $100 billion in cash, Nelly having three or $4 billion in debt, and so they have a very, very low level of debt. And so they just there's a washing cash. You could do a lot of things with that cash. So that's something that you want to look for in a company. You want to see you out of stability. Some companies, they have really good results. All the stats are really good, but they have tons and tons of debt, and a lot of companies that acquire other companies and mergers and acquisitions that you get to make the acquisition and it ends up hurting that business's finances. So you want to look at that levels. You weren't looking the price Teoh Arnie's divided by growth. That's called a P e G. So if you have a company that's trading it with a PG of around one, that's very attractive. That means that the company is growing its profit rapidly when you look at the stock price and so a lot of companies seem to be doing pretty well with the RPG is like five or 10. That means a growing very slowly relative to their price. And so that's just another factor that you can look at. How fast is the company growing? And you want to kind of just combine all these things together? You want to think about all that's why it's an art, not a science. People will look at these staffs, and they have a different opinion about what the company's future holds. A different evaluation. So you really have to learn, um, a lot about finances. Learn a lot about business. A Warren Buffett says that they're they're not even stock analysts or security. How's that Think of themselves as business analysts because of a stock and just ownership stake in the business. And really, what matters is the business not really what's going on in the economy, although that my matter a lot in the short term, which is yet again a reason when we look long term, you wanna be able to analyze all these things and you want to see is the company Pinkett diffident. How much of a dividend paying one of the margins of the business? We wanna have companies producing really good Martin 30 40 50% margins. Apple has really high margins on its bones, and so even though it's got relatively little work a share worldwide, the smartphone market it actually earns 90% of the profits because it has such high margins , whereas the other companies have low margin on their phones and lots of reasons why their margins are higher. One of them is the power of the brand customer loyalty, but that makes their finances much, much stronger is the apple kind of takes up all of these boxes. So even though it now, it's not a huge company that people say, Well, as companies get bigger, they can't grow was fast. Well, that's definitely true. In most cases, there have so much strength, so many areas. That's just a very very statement. Best. That's a very low risk investment. Now you may not get 20 and 30% a year on Apple over a long time, but you're very, very, very unlikely to lose your money. And so that's where you talk about safety of principal in the adequate return your goals that build wealth with certainty and sleep well at night that an investment is stopped like that is what you're looking for. You're not looking for high growth and high risk and most of time, if you're gonna do it that way, you just gotta know. What you're doing is gambling. It's speculating and you just not really investing. Investment is best. Most intelligent was most business like That's something that should really keep in your mind. And of course, we want to look at revenue and sales growth rates of profit growth rates and see how fast are those things growing and how long are they likely to grow? So these are kind of the most important statistics we want to look at first. And then if everything is looking good to us from this point of view, then we want to dig deeper. We want to read the financial statements and see use anything in there that might be scary to us that we didn't know about. It might make us want to stay away from company. And this is why another reason why you want to have a concentrated portfolio, If you're gonna be doing this much analysis on each business, you should we can't track 50 businesses, 100 businesses of any intelligence. And so you want to be very, very carefully selecting your investments and then making sure you follow them closely. I personally right now have only five holdings. I'm very, very, very concentrated companies are extremely confident about. And unless I can find some other better cos at better prices, I'm gonna keep investing new capital in those businesses because they are super solid and getting really good results. Why would I want to change about doing? That's something that you guys should think about. All this stuff seems a bit much for you. If you want to just go buy some big clean or you want to buy some Amazon, you hope that it goes up. You wanna make money fast? Well, good luck to you. Just know that you're likely to lose money with that strategy. 12. Lesson 11 The Blockchain: so mostly have been talking about investments. That's what this course is really about and comparing what a good investment is. Teoh, uh, Cryptocurrency or two Bitcoins. You can understand why it's so hard to value Bitcoin and why it's such a terrible investment. In my view, however, the blocking buck chain technology, that restaurant can't really be ignored. It's pretty cool stuff means a new technology of extraordinary potential. This is one reason why people are so excited about and what people are buying it. It's a decentralized, anonymous application ecosystem. For example, Ethereum is not just a Cryptocurrency. It has a currency within it called ether. But it's basically decentralize platform that allows people to make APS. I'm using the Blockchain that that are encrypted and that don't need to have any centralized database from a company or from a government or from any platform. It's all just out there on the Internet, encoded in the block, change what's really cool, and people like it for this reason, as I already mentioned, it also is favored by criminals and bad regimes and things like that. So it's a double edge sword. It's a digital ledger of encrypted transaction that's what it is, and it's basically just money because you're gonna even buy it. And then you can trade over things on the Internet, and increasingly, you can trade it for things in the real world. But horse, a lot of Cryptocurrencies are very not very well known and so being able to buy things with it, you know, Bitcoin is still the leader because the most popular right now, how how long that's going to be for we have no idea. It's still just the Wild West. It's totally unpredictable. There's another reason why I would never want to invest money in this. The unpredictable nature of it makes. It's still risky. I want to make sure that my money is going to be compounding. And if I buy a share of ah, solid blue chip stock, especially if I can get a good price for because the market is going down a bit, then I don't worry about the fluctuations of the market. All I know that in 10 years my stock is worth a lot more than it is now, and I try Teoh, ignore Mr Market for the most part and take advantage of it when it offers me better prices , so it's unreachable. Nature makes it very, very speculative, and a difficulty in valuing this asset makes it impossible to know. But it's actually worked as opposed to stocks posted real estate. Real estate can also be valued very easily by looking at cops. That's one thing you can take your house. You can look at all the houses out of the same your neighborhood, and you get a really good idea of what it's worth. And you can also look at the rates of rents, and you get a really good idea about how much cash your house could produce if it was a rental, and then you can value it like a business. If you can see that you could rent out your house for $1000 a month, that's $12,000 profit per year. You can put a multiple on that and say, Well, this was a business could be worth 60 or $70,000 just for the cash production value alone. But then, of course, you own the land and then that adds, you know, probably several $100,000 to it, depending on your house, so a real estate is very easy to value. Stocks are very easy to value now. I just give you a really long lecture on how complicated it is. Devalue stocks. But you're basing evaluation on riel, concrete things, profits, assets, things like that. And once you learn what you're doing, it's not that difficult. It's the matter of opinion. How much is this company worth? How much money is going to make it a future? People differ on that, which is why it's more art than science, like I said. But the values or concrete statistics are concrete. Where their Cryptocurrency you have nothing. You have nothing to base your evaluation on at all, except for the hope that is gonna be more cash going into it out, and therefore the price will rise. You may very well be right when you make those predictions, but there's just no way to know, even on blackjack, either playing blackjack, gambling, you have some information to deal with. You see the dealers card and you see your car and say, hit or stay and you know some probabilities about what card is gonna come. Whether or not you're going to bust are you going to beat the dealer? So you even have some more information even though the house has an advantage playing blackjack from the Cryptocurrency, since there's so many of them and this is unregulated and there's no way to value it. I mean, it's actually the worst form of gambling. Like think of because at least when you're gambling in the casino, you have some statistics and probabilities you could deal with to play the game where the Cryptocurrency you're really just throwing a dart in the dark, and so far it's gone up a lot. And so because people have a fear of missing out, they want to buy. They want to get out on the actually want to make money. But it's just the utter definition of gambling. And so again, the proliferation of hundreds of different cryptocurrencies and Blockchain APS. It puts downward pressure on valuations because they're being commoditized because of supplying a man. This is inevitable. It's a law of economics that can't be changed, okay, and so they're only valuable because of the rampant mass. Speculation is happening right now. The extreme volatility makes it very stressful. Hold these. I mean, we're all human. We don't want to lose money, so you buy a Bitcoin and it fluctuates 10 or 20% and given day or any week. That's very stressful. And, you know, I don't need that. I don't need a lot of stress in my life already have enough, right? So we want to be buying assets that are solid that are going to perform for us over time. If you're looking to get rich quick and you want to make a $1,000,000 in the stock market, well, good luck to you. But the odds do you doing it, especially by buying Cryptocurrencies at this point in time, are extremely low, and he also be losing money, are extremely high. Also, the threat of government intervention and the hacks that we've already discussed and other sudden craft is that make these this asset class really no different than any other form of risky gambling because at any point, the government and say we're going to regulate this animal crash. It will absolutely crash because the value of it right now is that unregulated, decentralized and it's anonymous. And as I already mentioned, the government is now demanding from coin base the largest wall in the world. The information of people that have Bitcoins with them of their customers. They want tax them. So that's the beginning of regulation. Once the iris gets her hands on all that, then it's going to make a value of this asset go down because one of the main factors that people like about it is the anonymity is that it's not a currency that's from a government . So that's going to change. If you were looking up to buy Bitcoin in 2010 or 11 you made a $1,000,000 off it or more. Well, then, good job. But now have you looking to invest in this thing is just so, so risky that I can't emphasize that, you know, although the technology is really cool. And so now I'm just gonna drive the point home with some economic history lessons, we could learn a lot about that could not expect seeing what markets have done in the past and look 13. Lesson 12 Economic History Lessons: one thing we know setting history is that all asset bubbles eventually pop. Thing we don't know is that win is going to happen. The great to the bubble in Holland in the 17th century was one of the most extraordinary examples of this, where something like a flower because it was important because as unique traits, because it was trendy, it became so valuable. People were trading one too cool for like entire, like hundreds of acres of property is really crazy the 19 nineties because Internet was so new. It's so cool, just like the block chain technology company, since they're so new and so cool, we see this amazing potential. And so it's driving irrational exuberance, in the words of Alan Greenspan. And this is what creates a boat. The bubble we had in the Middle State market that caused the 2008 crash that was based on bad mortgages that were being resold or felt. Subprime mortgages. There are beings. They're being sold to people that couldn't afford them, and then they're being repackaged and sold off the other third party banks. And so the initial bank that offered the mortgage was taking no risk they were making a profit and was making a profit. And that one single mortgage with being leveraged multiple times it caused a crash. In this case, you just have pure, irrational exuberance. People hope this asset will go up forever. And the thing about it is, you know, that could continue to go up for the next several years. Nobody knows, but if you're holding it and you're making money off it, it's really, really tricky because it's hard to sell. You say, Oh, man, I've done with my money. I should sell it, take profits. Most people end up not doing that. Even like you think that you wouldn't be one of those people who think that Hold us for one of us on this bird a little bit longer. It'll keep conviction. Richard, Let's hope you end up with a gambling like behavior. You let it ride, and then you end up losing it all, being very depressed, losing your money or you end up maybe having to sell after it goes down 6% in the top, because fear and so you've got a lot of commotion going on a lot of a lot of hope fears. And that's not what we want to be is very, very stressful in it. Yes, having a cost. People jump on buildings, they lose too much money investment. So a bubble is something that you want to avoid and azi old master showed us in the 19 nineties. Warren Buffet famously avoided the dot com bubble, kept investing solid businesses knowing that bubble is gonna burst. And he was gonna just continue to slowly get Richard over time. And because of the nature of compounding that slow and steady approach, it actually isn't that slow. It seems like a slow sometimes if you watch your money slowly, go up once your capital gets to a larger point. You know, once you got a couple $1,000,000 do you have a 20% year? $2 million.400 dollars, our do nothing and what the numbers. It's still a big warm ups got billions of dollars, So here's a 10% your He makes billions of dollars doing nothing, And so you've gotta keep in mind the nature of compound interest. And so, you know, companion my intended said what seems slow. Sometimes while you're waiting, it's actually very very fast. Once you get to the tipping point where it's just really accelerate on, the longer the bubble expands for the more risky an investment is s. So right now we're at a point work of the currencies are reaching very, very high crazy valuations, and people just continue to put even more money into them. So people are putting money into them at the riskiest point possible. There's also what happened late nineties in the dot com bubble. Everyone saw the neighbors making money of all these companies they wanted on the action. They started putting their money into. They didn't want to miss out. So the spear missing out is a really big problem in investing. You need to ignore what anyone else is doing, Charlie Munger says. You know somebody else make getting Richard and use. This is not a tragedy, so it's a crazy thing to worry about. Who cares if someone else gets Richard, you will we be worried about Is, are we hitting our economic goals or not? That's the important thing. So I've already mentioned the great to the bubble briefly the dot com bubble, the housing bubble. These are all based on it inflated valuations and hope in some future. That hasn't come to pass that, hoping the asset will continue to go up forever. And it's based on money being poured into the market. More money that goes into a market, the higher the price is going to be. It's a simple as that. Then, when money starts to flow out, prices go down. And so in these bubbles, what really happened is that his panic selling and they get popped and they crash very, very equipment. Sometimes there's not even time and your money, as we've seen in some of the flash crashes that have happened like in 1987 for example, in the stock market it lost like 30% in one day is the largest one day drop in the history of the stock market. And 2000 or in 1929. We know that the horrible stock market that started the Great Depression to crash in 29. The market loss like happens value over the course of like one or two weeks, and so when you're in a bubble, prices can fall. And so if you see a bubble happening, see asset prices going way up thing to do is tow. Stop buying and you see a good opportunity. Stop investing. Let your cash accumulate and then wait for better prices. It's the opposite of what most people do. It takes a lot of patients, so I'm a bubble is like the absolute worst time to be investing any of your money. There's nothing wrong holding cash for a while waiting for a good opportunity. Okay, so this whole thing is fueled by the masses. Fear missing out. Continue to drive the valuations higher until capital inflows are exhausted. At some point there will be no more money to invest. Everyone have their money in the market, and then, if it crashes, is nothing to prop it up. There's no money to come from anywhere, and we're reaching that point right now where money is running out and asset values are very, very high. Possible work. I know asset lives of buying real estate and stocks and in the Cryptocurrency. Because interest rates are so low, US interest rates go up. Asset values start to decline because things like bonds and fixed income assets we more attractive. You can get a guaranteed five or 6% on your money, And do you really want to risk losing it all to try to get a higher return for a lot of people? That's gonna be good enough for you. So, um, history tells us a lot about what's gonna happen in markets. We never ever know when it's gonna happen, and that's the tricky part. So the best thing to do if you are looking at some sort of a bubble or something that looks probably like a bubble, just stay out of it. There's no reason to be greedy on the best way to invest Charlie, Munger said, is Teoh. Be conservative and don't expect miracles. And paradoxically, that's how you're going to build well. Evaluations air high. Just hold the cash or invest in different asset class, maybe even a different market. If assets are really, really high in America, maybe you could buy some stocks in China or Europe or whatever. Look for lower priced market when the market crashes occur or you have a correction, as they put it, but your cash to use by buying these valuable assets that discounted prices, taking advantage of Mr Markets, boost swings, okay, you have to have, as Charlie Munger puts it, extreme patients followed by extreme decisiveness. This is how those guys have gotten very, very wealthy. They hold lots of cash on the markets, crash it, put it all the work. And then they get tonnes into the tens of assets at very low prices. What the famous Rothchild family did during the French Revolution after Waterloo, they were gambling on the results of war. And when wars happen, markets kind of go haywire because no one knows what's gonna happen. They usually crash immediately because of pessimism. And then because of all the economic activity that happens to produce weapons and things usually end up going up a lot. Well, the Rothschilds had all this capital, and they bought assets at bargain basement prices when the French Revolution was going on. And then everything stabilized at those assets went up through the roof and they became wealthier, still everywhere. Before they understood Mr Market. They understood economics, and because of that, I mean a lot of money in their investments about taking much risk. And that's the thing. Investment always want lower our risk. So we think about lowering your risk of being a gold investing and buying cryptocurrencies is pretty much insane. So what? That will move on, Teoh, What should we go? Where do we go from here, Which we can now? 14. Lesson 13 What Now: so big picture here, be patient. There's no rushing your investments, okay? Warren Buffett says it's pretty easy to become well to do slowly. It's very difficult to get rich quick. And the reason is that investments take time. They take time because assets go up in value when they produced catch and the production of cash from the sales of goods and services that takes time. So every quarter the company will report their earnings. Every year the company will report their yearly earnings, and these things can't be rushed if earnings are going up, the economy is good that the company is strong when stocks are going to go up. And on average, they're gonna go up, uh, 10% over time, and 10% will build a lot of well for you if you're investigating holding your assets. If you're an excellent investor and you get up from the market, you can get, you know, 12 13 14% on your invested. Over time, it's gonna make a difference of hundreds of thousands of millions of dollars. People like Warren Buffett, Charlie Munger, they have produced returns over 20% over a long time was why they are extraordinarily wealthy because they're so good investing, and one thing that Charlie Munger once said, he said. You know, people are expecting things that really complicated. All we're trying to do is not stupid, but it's harder than you think. They say they take a simple idea and they take it seriously and things in this left. And it's these lectures and I'm giving it out. It's a simple idea by though so high, you know, I understand, Mr Market, ignore the bubbles. Just simple ideas. Nothing super sophisticated. But most people don't do it. Being patient is a simple idea, but it's really hard, so it takes discipline. It's very challenging, but it's not really complex. Okay, so if you want to build well for sure, slow and steady approach is the way to go. If you want to try to get rich quickly and take more risk and it's possible that you will be able to, the odds are very low. If you understand that it's really simple, sleep well at night by good assets of big companies and wait for them to go up because of the business results. That will happen just because someone lottery it doesn't mean that you can. The odds are 175 million toe one. Okay, A lot of people tell you what someone's gonna win the lottery. People think we'll look at it. I saw some people getting super rich from Bitcoin. Now I want it to. This is another version of fear of missing out. It's the keeping up with the Joneses. Never compare your financial results to those of other people. It will only hurt you. Warren Buffett says You have to have an inner scorecard, right? But I think about it is as long as I'm getting wealthy over time, as long as my investments are bearing fruit according to my expectations and longtime learning and getting better investing time, I'm happy. There's a lot of people that are making more money than he does a lot of people that are Richard and me, but long as I'm richer than I was yesterday or last year or five years ago, that I'm satisfied and we're building well and we're doing away that say that is really the goal and so the same issue when you see people in TV or you heard about something, got rich quickly in the stock market or through real estate. It makes us want to take more risks because we want what we saw have happened. We heard that this person got rich flipping houses or whatever you need to ignore that stuff. You need to understand that the lessons of business and lessons of history and economics tell us that there is a sure way to get rich, and that is by consistently investing in stocks or real estate, which everyone you prefer. All those stocks have outperformed real estate by a huge margin over time. His business is make a lot of money and real estate. You know, it doesn't make as much, um, you know that will build wealth for you. It's a simple Is that so? You simply invested a long time. You hold on to the market fluctuations and you wait until you reach your financial goals. That's the thing to do when we say that time in the market is your friend. But trying to time the market is your enemy. So it's another basic argument for buy and hold. Most of the gains in the stock market happen in short spurts, so for example, there might be one month or one week where stocks go up 20%. And if you're trying to time the market, you didn't have your money in the market during that period, you would have missed out on big gains. The stock market fluctuates a lot, and so you just need to have your money in it. I need to go along for the ride. You take in and out, in and out. You're in curing fees, your and taxes on your profits, and you're risking missing those big surgeons. So time in the market is your friend. Timing. The market is your enemy. You don't want to take your mark money in and out of the market. It's inherently unpredictable, as we have seen, even the experts that run those hedge funds that have 1000 finance degrees and are consider the superheroes a finance. They can't even outperform the average returns of the market. Warren Buffet just won a $1,000,000 bet. He challenged any hedge front to a 10 year bet to see if they get out before the market, when you include fees of the charges of customers and they lost and they lost badly they underperform the market significantly, as that should tell you a lot. If the richest people in the world they're hiring the best fund manager in the world on average cannot even match the average the bones of the market. That's pretty amazing. So index funds be professional hedge fund investors 90% of the time. Okay, so that's a good thing to know. It's a good statistic to know on, then. Next listen, we're gonna go ahead and wrap it up with some final investing lessons. 15. Lesson 14 Conclusion: an interesting study that backs up what I've been saying about buying and holding was done by Charles Schwab, one of the largest investment companies that allows you to buy stocks. It's a brokerage firm. They they looked at a survey. They did a study and they took a survey of their customers. And what they found was that the highest performing accounts were literally of those that for gotten that they owned them and left them alone. So some people met up gifted stocks or Boston stocks 20 years ago, 30 years ago or whatever, and that some people literally forgot they even owned them. You know, a lot of people don't follow investing that much. Maybe it was a small amount of money for them. Whatever the reason may be, it turns out that the people that has left their money alone in their overall the best institution, the market they by far outperformed all the other accounts of people that were buying and selling and worm or active. So it's a really big less, and they did this study a few years ago. Just look back on the performance and just to learn about about markets and this is what they found out. That's another really big vote in favour of buying holding for long periods of times. You have to have a long term. You have to look at the big picture. And to be conservative when you buy and don't be agreed is a very conservative approach that we're talking about. It's looking for safety of principal. An adequate return is looking to avoid rips. And while it's not sexy, it's even boring. When you look at, you know Warren Buffett's biggest stock holdings. A lot of times and things that Coca Cola, Gillette razors, you know insurance is a pretty boring things. They're not sexy, like all these tech stocks and tech companies. But a lot of times those companies are the most predictable. Trading at the lowest evaluations and that conservativism is what makes money over time, things that are flashing sexy. I pose new companies. Those are things that are very, very volatile, risky and well. You may get richer off of those things. It's very less likely and it's very more unpredictable. We want things that are predictable. It's very safe to say that big blue chip companies like Coca Cola apple McDonald's. Whatever the case may be, those companies gonna be making more money in the future than they are now. Doesn't mean you want to buy them, no matter what prices are being offered for their stock. You have prices learn, but it's a conservative way to invest that is virtually guaranteed to get you where you want to go. If you wait cryptocurrencies and Blockchain technology, it may change the world. They're gonna be doing some amazing things. Who knows what people are gonna be able to do with this technology? And they have already created many millionaires and multi millionaires. But they're not investment, great assets, and they're no different. Any form of speculating or gambling just because someone has gotten rich off them does not mean that you should put your money into them. You are very likely to lose money by chasing returns as this bubble continues. That's my main argument here. That's what I want to leave you guys with that If you go ahead and buy some cryptocurrencies, um, you know, just know that you're gambling. Just know that there's no way of knowing whether they're gonna go up or down just because they've gone up a lot. It's not meaning that will continue. And so I just want to warn everyone that is not well versed in investing. Is not, is not an expert in finance to stay away from Cryptocurrencies. If your goal is to build well and good luck to you in your journey, good luck with your investing. 16. Bonus Lecture- Margin of Safety Principle: so the margin of safety principle, which have been for him to throughout the course, is a super important foundational idea in investing that most people don't even know about . Even though it's so fundamental and basic, they don't teach it in business school. It's something that Benjamin Graham talked about extensively in his book The Intelligent Investor and Warren Buffet Lives by. So it's this basic idea that you know, an engineer. They make a bridge to carry a much larger low than necessary, right? You're not gonna make a bridge. It's only supposed to carry one ton and then have one time drive across. You're gonna get bridge, can carry many, many tons so that you can have does and does the cars on it and never, ever get anywhere near its capacity so it won't fall. We need to think the same way about investing. You need to be buying something at a low price. You have a margin of error. So even if your judgment isn't perfect, even if you have bad luck, something bad happens to the company, which could totally happen, or some regulation happens when the government, which could totally happen. You made such a good purchase on the price and of things that you're going to end up making money almost no matter what. This is the fundamental idea of value investing. It's such a simple idea, but most people don't do it. The market is high and prices were high. Then you may be much better off waiting for a correction, waiting for values to go down or looking to a different asset class as lower prices in order to buy. But instead because of human psychology is. I've already mentioned what most people do is. They see prices going up and they're worried about missing out. I think the prices are gonna continue to go up and then they start buying at higher, higher prices. That is a risk is way to invest. And so this is a really important thing to understand and to think about. So we should be investing in the same way that engineer is designing things like bridges and buildings, Warren Buffett says, prices when you pay, but value is what you get. You buy a piece of business, you're getting a certain amount of value, so obviously you want to pay as little as possible for the shares that you are getting. Most people don't do that. They see prices going up, and it's a weird thing. In psychology. We end up buying high and selling low due to our fear and our greed. So the primary investment skill, the trade that we need to cultivate, the habit that we need to have is to be able to have discipline and know that when everyone else is selling, that's actually the best time to buy. And when everyone else is buying is actually the best time to sell. Ideally, were excellent investor, and what we're going to be doing is we're going to be holding are good investments. Even when the market is peak, there may be some exceptions to the having weren't but that will sell stocks. If you want to take a big profit on something that you think that maybe it's not going to stay up very long for various reasons may want to sell, but in general you want to get the maximum return on your investments. You want to be holding for long periods of time, even if the market is high because you want that long term company you look a stock like Amazon, if you would about that stop in the nineties, there have been many, many opportunities for yourself for a very large profit. But if you would have held it through all vice institutes from the UPS and the downs, even through the 2008 crash, you have made 1000 thousands of percentages on your money. The company continues to grow. The stock continues to go up. At some point that will have to stop. We don't know what it will be. It doesn't mean that, you know right now is a good time to buy. Amazon stocks have already mentioned it's kind of a I spent it stop. It may not have a margin of safety, but the point is, when you hold a stock of a company that's gonna be growing for a long period of time, that's when you get outstanding returns. And that's when you could basically get rich in the stock market or in some cases you get extraordinarily rich if you hold the right stop for a long period of time. But initially we won't be buying in a very good price with the margin of safety and even though it seems like common sense, you know it is worth saying this because people don't tend to behave this way. The higher the price you pay for a stop. The riskier that investment is when I see a high price. I didn't mean, like, you know, $1000 per share. The price per share is irrelevant when we say high price. We mean, what is the earnings? Multiple. How many times profits are you paying? If the P E is 10 the next stop is probably a lot cheaper. That P e is 30 again, I already said, depends on the growth rate of the company. If a company like Facebook is growing at 50% per year, and you have reasonably that's gonna continue than paying 30 or 40 times, earnings for that stock is not going to be expensive. So this is what you have to understand business. You have to understand how to value a company, how to analyze it. But the easiest way to investigate outstanding returns his looks for stocks that are trading with low peas with low price to book value, and you are going to be minimizing your risk and increasing the probability that your stock is going to go up. No matter what happens, you're gonna be achieving a safety of principal and adequate return. And, of course, the Cryptocurrencies. You can't do this at all because you can't devalue them any normal way. So the more you pay, the higher the probability of a permanent impairment of capital. That's the way that Benjamin Benjamin Graham put it, he said. We don't want to have permanent impairment of your capital. You have $100,000 invested and you suffer a 20% loss or 30% loss by buying a risky stock, then you are risking having your money be permanently impaired. And then if you put it into some other stock, it's gonna take a long time for that smaller amount of capital to compound back up to what you originally had. You only have $70,000 you invest that it's gonna be a long time for you get $200 dollars. You're gonna have to get about 50 percent, 40 to 50% gang to get to when you originally had and so it's a pretty basic concept was really important understanding of the way to invest intelligently is conservatively because if you protect your capital and you invest in things that look like they're pretty sure bets, then you know a 10% return from counted over time is going to make you very wealthy. But if you're looking to get a 2030% return and you're looking to take big risks and you believe in the idea that you have to take large risk in order to get large profits than you put yourself at risk of permanent impairment of capital trying to push your money, Teoh get returns that may not be reasonable in the short term, you want to be conservative and don't expect miracles as Charlie, Munger said. So this is why the price of book and the price earnings ratios are so important because when you buy a lower prices, you lower your risk. And Benjamin Graham? He wrote his book at a time when the Great Depression was on, and he had lost almost everything in the crash of 2000 in 1929 and he was looking at a riskless way, too invested so at the time, because stocks trading at such tiny uh, multiples. They were trading oftentimes below book value. So he was looking at stocks that were literally the market cap of the company was trading at a lower price than its tangible assets. So that means that it's cash and it's real estate and things like that directly worth more than all of its stuff. Which is pretty crazy because that means that even if the company went bankrupt or whatever , um, and they hunted, divvy up and sell their assets to pay for everything, they would have more assets than stock. So there's no risk it all, no matter what, You were gonna lose money. And so that's what he have. A case. It is but fine companies that are below book value now modern day times. It's very, very rare to have companies that are trading below book value. Sometimes you do, and if you do, it might be a very risky company just because there must be a reason that it's trading at such a low price. But we could still take the same philosophy that Benjamin Graham hat and look toe by companies with low P values, mo PB values and basically what you're doing is you're putting yourself situation with almost no downside, and it's almost certain upside. We don't know how much the upside is going to be, but we know that we're going to get adequate return on our investment and we're going to build well. But that being said, price is not the only thing that provides a margin of safety. And this is why we need to do a rigorous ballistic analysis of a company. I've been talking about how companies like Netflix or Amazon might be risky because they are trying in a very high price. However, if there their business is strong enough, if the brand is strong enough and if they're Valentim is very likely to continue for a long time into the future. You may have a margin of safety do to those other strengths, not just price. But the thing is, when you get a margin of safety from the low price, it's much simpler to see. It's much easier to analyze. So if you buy a company like Apple in 2015 or 16 when it was trading at only 11 or 12 times earnings due to fear that the iPhone was not gonna continue to grows. It's very easy to see that margin of safety. You're getting an excellent company with powerful brand tons of cash and all of these things going for it for a very low price. It's very easy to see now. A company like Amazon is very, very popular because it continues to grow a very rapid rates. And if you buy that stock, you may get multiple years of fantastic returns. But it's much more risky and complicated because you're basing your investment on the future. You're basing on the fact that you're gonna be getting value out of the continued growth the company. But future is very unpredictable, whereas in the Apple example, you're getting a lot of value right, bagging all their cash, getting the brandy, getting their sales and getting the dividend, getting it forward and low earnings multiple 11 12 times At the time that I'm making this course, the earnings multiple for Apple's not up. It's around 19 now, so it's much more expensive than it was. But it's still trading at a discount to the average of the overall market, which is around 20 so you could argue the apple still in really good value right now. So the margin of safety and idea is something that could be translated to various aspects of the business. But the simplest and easiest way to use it to your advantage is to pay a low price for a stuff. And that's what a lot of the disciples of Benjamin Graham and what Warren Buffett, especially early his career is looking to do. And obviously it's worked out very, very well for them. So some companies that are really large size and very famous they may have a margin of safety simply due to their size. So a company like McDonald's or Apple or Google They're so big, so much cash and so powerful that even if they're only short term struggles, maybe that the price of the stock will go down. But you're gonna have a margin of safety as long you don't pay too much for those stocks simply because of their sheer size. They have so much capital will work with. They could turn the company around. They could hire new managers, they can reinvent themselves a lot of time. Buying blue chip stocks and big companies is gonna provide you with a margin of safety all on its own. It's very easy thing to do. And as already mentioned, it could come from very rapid growth, like Amazon and Netflix. That's just still a little bit riskier. You're gonna have to really understand those companies and be really confident that your forecast for their future sales of profits are accurate, and it's a very difficult thing to do. Where I was staying in little price for a company is a very easy thing to recognize was just simpler. It's simpler and it's easier, and that lowers your risk. So growth stocks might get you better returns. But they're riskier because we can't predict the future of cases. Margin of safety principle is, ah, super important, and it's a basic idea. It's one the always will make thinking about when you are looking to make an investment in my paying too much for this pass it. If you would have bought real estate in 2006 to 2007 in the United States and you held that real estate through the crash, you would have lost a lot of money to get a high pressure asked. Of course, everyone had a fear of missing out because real estate prices going higher and higher. And it's really hard to hold up your worried that you're never gonna be able to get into the market and buy a house because prices keep going up. But if there's a rational exuberance going on and it seems like prices were way higher than it should be, then you should be patient. If you were smart enough and discipline enough. Teoh, continue renting and wait for prices. Come down. You have experienced a massive crash YouTube in one. Sitting there revolves, money ready but in the market, and you would have gotten real estate pains in the dollar. So anyone who bought real estate in 2000 and 2009 after the crash you could have paid cash and about multiple properties for the same amount of money that you would have just a year or two earlier, spent a lot more on just for one property so that you would have a margin of safety because you would have been buying these assets and accused discount so what? Their actual value would bay in the very, very near future. So it's a simple idea. And so when it's really important across all asset classes, gold, real estate, stocks, bonds, Any time you get a discount to the intrinsic value of something, you're getting a really good deal with Cryptocurrencies. There's no way to gauge that, cause there's just no way to know what their works. You can't even look at a margin of safety with the Cryptocurrency. No matter what you're paying. It's based on faith, and it's based on open future that has no bearing any kind of reality. So think about that and use it to your advantage.