Martin Shkreli Explains Finance In 20 Minutes (Everything You Need To Know)

all these things we can actually get an exact answer and that's what Finance is all about this is literally the the

discipline known as Finance let's let's get down to it yeah let's explain this $1,000 or $100 a

year okay so the concept that our guest um who was quite good and quite eloquent eloquent pointed out is that $1

today is worth more than usually worth more than $1 tomorrow not just usually almost always hell has to freeze over

for $1 to be worth less today than tomorrow why why and the answer to the to the

,000 question and the answer to the $1 question all lies in this concept it all lies in this kind of concept why one someone said inflation okay I

guess that's true I guess that's true we could talk more about inflation the better answer is the heals it's opportunity

cost opport or just just say opportunity or investment potential same way molecules have potential energy if you had a dollar

today let's say that's let's say it's Monday uh let's say it's Monday January 1st

2016 and you had $11,000 versus Monday January 1st

2019 and you have $1,000 which which is the better place to be if you're an investor well you'd much rather be in 2016 because you can invest that $1,000

let's say you make a 10% return per year Well in 2017 you would have $1,100 in 2018 how much would you have

$1,210 right and in 2019 how much would you have gosh my math is1 41 yeah something like that I think

that's right um so um you would actually have

$1,331 in 2019 versus $1,000 in 2019 so the ability to invest the money and earn a return is why a dollar today is worth

more than a dollar tomorrow but how much more and and why is why would we pick 10% here here why not 20% or 3% or 1% I mean it depends on the kind of

returns you can get and what about negative percentages there's such there's a such thing as possibility there's a such thing as deflation right so we have to think about all of

those things and and this is what Finance is all about we toss and turn about this we toss and turn about all this stuff what about risk what a

fantastic Point Danny aretta you are a special person that is the most important thing in fact is risk and we'll talk about that

soon risk so we got inflation opportunity which is risk it's not a third thing opportunity and risk are the same

thing we'll talk about that in a in a minute as well so this is really a theoretical it's kind of a very theoretical part of finance and I love it because it very it's almost

philosophical even it's almost philosophical and what's so philosophical and theoretical about it well we know that a dollar today is worth more than a dollar tomorrow when

Apple Apple has that exact issue in fact every stock we're ever going to look at the concept is a dollar today and a dollar tomorrow are something to think

about so if Apple makes $18 billion a quarter that means they make what 7 $7 billion a year if they make 7$7 billion a year we can actually discount that and

add it up and we'll talk about that in a second but keep the Apple example in mind all right so now we have the question of how much is a dollar how

much less or more is a dollar worth today than tomorrow okay so like I said if I told you I was going to give you $5 today or this year know he's going to

give you $5 next year and and every year there thereafter we obviously if we summed all these things up I don't know if you guys know the sigma means sum capital Sigma in

Greek if we summed all of these all of these from from beginning of 2016 to Infinity what would the answer be it would be Infinity yeah it would

actually be Infinity because we'd have an infinite number of years and obviously the right to buy the right to get $5 a year forever is not worth

Infinity it is not worth Infinity it is worth less than infinity for sure so why why well let's go year by year so if I told you I was going to give you $5

right now you'd say okay that sounds like it's worth $5 I trust you Martin I think you have $5 what about $5 next year well who knows about next year you know I don't you may not know you may

not be able to collect next year God only knows and then again the idea that $5 will be worth $5 next year it won't be we know at least there might be some inflation we know that I'd rather have

the $5 today than a year from now because I can invest uh I can invest that $5 and maybe make a few percentage return so $5 is

Pro in 2017 is probably worth less than $5 in 2016 it's probably worth less the $5 in 2018 is worth even less than that

of 2017 so let's say it was worth let's say 3% less what would that annuity be worth so let's let's let's do this out in Excel and Excel is great because you can you

can just simply do it the way uh you see me doing it here so $5 and we're going to take uh $5 time

9797 which is 3% less than before and we're going to copy and paste all the way down and you can see that as we get less and less we approach a value of

what each year the value of that $5 approaches zero it's like an ASM toote in in in calculus right in fact we can

kind of graph can even graph what that that the $5 perom remember the face value is $5 every year it's always going to be

$5 and 22 in year 2250 you will get $5 but the the value is going to be [ __ ] yeah exactly in 20

in year 2300 it's not going to be worth much and so we can actually we can actually graph this and so of see what it looks like it'll be fun to see

that how do we do that let's see insert line graph here we go yeah here you can see the value of $5 it sort of reaches this ASM toote of

zero in math an ASM toote is a line that approaches another number another line but never quite touches it and you can see that by the time it's

like 50 years out it really isn't you know the $5 really isn't worth very much wor maybe a dollar so if we take the sum of this

equals sum and we sum all of these numbers we get

$166 $5 a year forever is about $166 today even though if we sum all the the cash we were going to get it was

$1,660 this is let's see how many years this was for how many years is this contract for 332 years there a 332e bond

where I get $5 every year I'm going to collect by the end of the bond I'm going to collect six $1,660 but today the bond would

trade for $166 why we got to think about this we got to think about it carefully what if we only discount by by and let's let's

add more years to this let's let's go let's go into thousands of years see what happens if we do that hang on

okay great so we're going to call the rate at which we discount the cash flow from one year to the next the discount rate and we're going to change this formula

I encourage you all to make this Excel sheet yourself going to change this formula to the discount rate we're going to see what happens when we change the discount rate to

10% what do you think the value of the bond will will do obviously the amount we're going to collect will be the same

this this contract promises promises us 9,310 $5 a year for for a long time let's see how many

years we we put in this if we increase the discount rate what's the value of this contract it's going to be lower yeah it's going

to be lower why because it approaches zero at an earli it gets closer to zero a much earlier time yeah so we can see that it

goes down to $50 if it's 5% it's $100 if it's if it's 3% it's $16 $6 it's

2% it's $250 you can see that they're inversely proportional in fact as a fascinating thing is as the discount rate approaches

zero the value of the bond approaches what um 9,310 no it approaches Infinity oh okay I guess I was assuming

for the amount of time that we were collecting why do you think it approaches Infinity oh yeah I guess yes correct it does if you have a if you have an end to

it but we could always extend this even further right if it's an annuity an annuity is is infinite well the answer is if if a

dollar today was not worth the same as a dollar tomorrow then it would be it would be a uh it would be worth something uh vastly more but we assume

that that money is worth less over time because of things like Risk and opportunity cost so we have to think very carefully about how to discount a series of cash flow and in businesses and bonds and

stocks we have these yearly cash flows we come to expect in this case this is very boring we expect $5 every year forever businesses obviously aren't like

this the cash flow we get fluctuates we hope it grows right we hope that the the CEO of the company figures out a way to make this go from 5 to 6 from 6 to 7

from 7 to 8 hopefully from 8 to 800 you know uh if you're a CEO like me you want as much profit as possible and and you have to Discount you have to Discount

that cash flow because something might go wrong in the year 2029 you can't predict what the earnings of your business will be in 20129 can you imagine the people who are forecasting

Motorola Motorola's earnings 10 years ago Motorola and Nokia were on the top of the world 10 20 years ago right right mola on that note like how do you put a

number on what you should discount it's that is the secret of Finance that's the you're literally you know touching on the number one question in finance which

is subjective a little bit what is the discount

rate well let's take a look let's take a look what is the the interest rate of a Government Bond does anyone know what the 10year

bombs yield not much I mean like 1% yeah it's about 2% 1.7% 1.55% something like

that 1.74 this guy may be a bond Trader so apparently the government says it's not less than inflation it's

not less than inflation so the US Government Bond is theoretically risk-free right it's theoretically risk-free there's no risk that Obama and

trump our future president uh will not pay the uh the uh obligations right what if the government

fails it's a great question it's a great question um there's no risk that the government won't pay its debts we'll talk about how realistic

that is in a second and theoretically there's there's some risk right and we could actually measure that risk with a Bloomberg machine believe it or not and

something called a strip or a tips security but regardless of a tips a tips security um we can see that the the government bonds have an interest rate

of about 1.74% so the government can borrow money from us for 1.74% that means that we get this interest

rate and in fact the risk of not getting paid is worth 1.7.4 per to us and that's simple if I lent Charlie

$5,000 I would ask him for 10% interest because you know I don't know Charlie he seems like a nice guy and he seems very smart so the fact that I'm willing to lend him any money at all is is already

telling I'll take a 10% rate for yeah what it's worth and uh and I I just size him up and I say you know what there's a good chance he's not going to give me back the 5,000

bucks um will who knows yeah reasonably good chance he will so I'm going to give him I'm going to give him uh a 10% interest rate now if a friend of mine

named Maurice who has a arrest record and uh he's known to traffic uh narcotics in my community Maurice wanted

to uh borrow $55,000 from me I don't know what interest rate should I charge him I think Maurice is

more likely more likely to default more likely to default I'd be taking like quarterly payments

of percentage Yeah I I think I'm gonna you going to charge him a higher interest rate because I just don't think Maurice is going to pay me in fact there's

probably no interest rate that I would I would I would take it's not a black or white thing there's Al you know let's make give him

an Albanian name uh uh what's a good Albanian name let's just make an American Bob Bob yeah Bob the crackhead Bob the

crackhead market up 5,000% so so it's a very difficult loan and I'm worried about that but the government how about Apple how about

Apple I can blend the company's money it doesn't have to be cheap here's another good one Brazil this guy's making a good point Brazil is 6% interest rate right

now the US government is 2% so we can see what the least risky least risky Securities are we can make a list in fact us

1.74% Brazil 6% Apple I think is borrowing money at 2% I can look that up with the boomberg uh which I'll log into in a minute

ah Charlie my loan to Charlie is 10% my loan to Bob is 50% so you can see that the

riskier the riskier loan is or a cash flow is the less we expect to get paid the less we can discount

it the riskier a loan is the more we have to discount it does that make sense good does so if we have a corporation

remember these are bonds these are secured obligations bonds are senior to equity cash flow from

Equity is riskier so when Apple makes $18 million this year this is Apple's income statement we don't know what they're going to make in

2017 it could be 10% more it could be 10% less we don't know we have no idea let's look at an athlete let's take

uh Who's name Name an athlete Everyone likes LeBron James Cur Steph Curry all right would not good example

so what is the value of Steph Curry's contract he's going to make let's say he's going to make 10 million a year for five years I don't even know what team he plays for Golden State Warriors I think yeah so let's say he's going to

make 10 million a year for five years what's the value of his contract it's $50 million on paper on paper it's you're going to get 50 million in payments but what about present

value well it's a guaranteed contract from a major company so it's probably not very risky but even the least risky thing

even the least risky thing a Government Bond a promise from the US government it has never broken its promise in 200 how old is this country 250 years has never

broken its promise is not about to break it soon that's the most Ironclad iron at least at least for Bond it's never broken its promise Wars and

[ __ ] like that breaks it every day but