So as you see, we were just talking about what are the essentials of value in an
idea or a project. So, I want to take the next step and talk
about why this class is fundamentally relevant to you.
So, so here's the good news. We do not need to be a corporation of work
for one. By that I mean, a corporation is a
collection of people that has a common purpose and takes on what we call new
ideas, projects, and hopefully take some one that are good, rather then ones that
value destroying. So, the point I'm trying to make now is
shifting gears a little bit. I want to spend some time talking about
how everything we have done, with a minor twist is applicable to anything you would
like to do regardless of whether you're corporation or not.
Of course, if you work for a corporation and I have to evaluate project, we'll set
you up to do so. We can use the fundamental principles, the
frameworks, the tools, techniques to value anything.
So for example, if you have a saving decision to make, to think about, for the
future obviously, we did that right up front.
In fact, we spent the first two weeks focusing entirely on decisions that you
would have to make about saving. And saving for the future obviously
involves borrowing and lending. And the reason is that if you are saving
for the future, you won't put it under your mattress, you'll lend the money to
someone, and someone will borrow it from you.
And therefore it'll be, it'll be returned hopefully to you in the future, right?
I'm smiling because a lot of this didn't happen recently, right.
People, people lost a lot of money. And, I'm not smiling because they lost a
lot of money, is that the presumption is that when you say for the future you'll
hopefully get more right, so we assume that the return is positive you get your
principle back plus you get a lot of money back, okay?
The point I'm trying to make here is the same cash-flows and the same discount rate
that we talked about in the context of evaluating projects, my, my.
I mean not every body gets to do projects and great value, most of us don't.
But we do participate in the economy, right?
So if you have resources you, and do not have good ideas what do you do?
You give your money to people with the resources that's why a marketplace is so
important. As the flow of resources goes to the
ideas, you are making, saving, borrowing or lending decisions.
And the key to recognizes that everything we taught in this course is applicable.
There's just one minor twist that you need to do and that will make you understand
that all principles are the same. I'll come to that minor twist in a second.
Both time value and risk components that I did in this class were always motivated by
financial decision making at the individual level.
Why am I emphasizing that? Because I do not want you to think that
this class was only but corporations or decision making that corporations do.
Corporations are a bunch of individuals. The key emphasis I want to distinguish
however, is that most individual decisions are financial in nature.
In other words, if you see the bullet point up there, the financial is in
quotes. What do I mean by that?
I mean by that is what I emphasized earlier, is we may not have great projects
to undertake. And we, most of us in this world therefore
tend to make financial decisions of borrowing and lending and value creation
hopefully happens with the best ideas, right?
So take, so take, for an example, take the following scenario.
You are in the IT business. You are in the technology business.
It is unlikely that everybody in the technology business will be able to be
like Steve Jobs, right? And the reason is, Steve Jobs has created
a track record. Even though he's not with us anymore,
Apple still benefits from his stock of track records of coming up with great new
ideas that a, actually available, or perceived to be available by the
customers, right? So, not everybody can be like him.
But what we can do is give our associates financial associates, those who have
resources to Steve Jobs and benefits from his ability to create positive NPV
projects. And, that's why I think markets are the
best social thing created by us. By word social, I mean is, all of us can
participate in the value creation process rather than put our mattress under, our
money under the mattress and lose value. This is something most people don't
recognize, that markets are the same as democracy and lift all of us up.They don't
do a very good job sometimes because only few can participate but that's not the
intent by which democracy or markets will created.
So, what is the key distinction in the end between a person whose ideas are, has the
ability to invest in positive NPV projects.
And that person does, is not a static person.
Right? So, Steve Jobs cannot do, even he couldn't
create positive NPV projects all the time. And suddenly, from nowhere two young
people created Google. Right?
So it's not anybody's birthright to create positive NPV projects.
However, there's a big difference between investing in a "real asset" and in a
"financial asset". I'm going to pause here and let you think
about it and please do this. I will keep going, but I would ask you to
press the pause button before answering the next question.
And the next question is this. What is the key difference between real
and financial assets? And, as I said, I'm raising this because
it's extremely important you understand this.
The context of well functioning market place.
Okay? That's very important.
So, the key difference is the following. Financial assets are zero NPV
transactions. So think about it.
If I invest in equity or in a loan, which is debt, my NPV or my decision has to be
zero in a well functioning market. Otherwise, what would happen?
You and I would just keep selling stocks and bonds to each other, split up the
gains and go home and sleep. The idea here is that to create real
value, you have to have a better idea than somebody else.
And that better idea I call real, not financial.
Of course, financial innovation also involves better ideas than in the past,
right? And you can get some, make some money on
that idea, right? But the, the essence of this point is the
following. When I go in a marketplace, and take a
loan, what is the present value of the future gas flows I pay?
So I get $50,000. Remember this is a while ago, seem like,
ten years ago. But $50,0000 I borrow and I pay PMT five
times. Right?
Or 60 times, if it's monthly for five years.
What is the present value of all of that? It has to be the money I borrowed.
Which means it's a zero NPV transaction. Similarly, buying a stock.
It's value today has to be it's present value, right?
Otherwise somebody's being cheated here, or somebody's made fool of.
That doesn't mean in the future your expectations will be realized.
But in a well functioning market you cannot make money.
Except for the risk return that you get over time.
Just by investing it in a stock or a bond. You can.
And this is such an important ratio that I would, I would encourage you to think like
that. When could financial asset investments,
when could financial investments make money, there are questions created and
there loop holes in the laws and stuff like that.
That's a very different issue. It's not nature thats dictating law, okay.
Let me move on and spend the next ten to fifteen minutes on issues related to all
of, this. So what have I done till now.
Shown you how to make real decisions. Shown you how to make financial decisions.
And said that the risk/return issue and the cash flow issue is identical.
The only difference is when you make real decisions.
Start a factory. You better be creating a value, otherwise
why do it. Whereas when you're just transacting
resources, financial resources, you can't create value from nothing.
You're just being compensated for the time value of money and, of course, for the