so we are past the halfway point but the
wild ride of 2020 is not
letting up the news cycle is filled with
horrifying headlines day in
and day out an outside observer could be
forgiven for thinking that we are
genuinely living through the apocalypse
but amongst all of this in complete
defiance
or perhaps complete ignorance to the
goings-on of the world
the s p 500 an index that measures the
stock performance of the largest
companies in the usa
closed out this week at its highest
level
ever this is a collection of stocks and
companies that have been
impacted by the fallout of the
coronavirus as well as
all of the other nasty stuff that's
going on in the world right now so what
is going on here
people could be forgiven for thinking at
this point that an
extinction-level media strike would
qualify as a strong buying sign
and you know what they may not be wrong
the usa releases its worst gdp figures
in history
the stock market rose the next day
research is released that this whole
ordeal may not be over until 2022
1 rally in the markets to a rational
viewer
this is verging on insanity but
is there method to this madness a quick
note is that of course we have actually
explored this issue on the channel
but since that video a full recovery has
taken place
a big takeaway of that video is that
there might not be any better place to
keep money at the moment
and we will actually expand on that
point here so
call this a part two if you will but
this entire issue
definitely deserves further exploration
and there are a few
key points that have surfaced since then
to give some remarkable insights into
how this broken system
might have been right all along to
determine this
we need to decide on a few things
what is the actual role of stock market
investors
does the stock market have any
relationship to the economy
is this potentially a sign that things
are not as bad as we are led to believe
and since the market has now rallied 50
percent
in four months is it fair to say that we
are right back
in another market bubble this episode of
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below it is often taught that markets
are
efficient that since something is only
worth what someone is willing to pay for
it
prices are gospel but humans are dumb
and the machines haven't completely
overtaken wall street just yet
so maybe the best way to understand this
market craziness
is to understand the crazy people that
make it possible
so at its core what is the role
of an investor this might sound like a
simple question with an easy answer
an investor is someone who puts money or
capital towards a promising idea or
business venture to get it off the
ground
or to make it more efficient an investor
might invest
two hundred thousand dollars into a farm
for a fifty percent stake in the
business
the farm can then use that money to go
and buy a combine harvester and an extra
few acres of
fields which will triple the output of
the farm sure
the profits now need to be split 50 50
but with three times the output
everybody is better off the farmer
increases his income by 50 percent
the investor is getting a good return on
his investment and
even the wider economy is winning off
this employees at the john deere factory
get to sell an extra piece of equipment
that they wouldn't have otherwise been
able to
and of course there is more food for
everyone to consume
now this is of course very
oversimplified and
actually quite divorced from reality
if today you go out and buy shares in
apple that money is not going towards
the company
it won't be invested into research and
development or building new factories
instead it will just go to some other
investor who used to own those apple
shares
companies very rarely raise any money
from selling shares
after their initial public offering or
ipo
and the trading volumes of shares that
are part of an ipo
are a tiny tiny fraction of the total
trading volume on exchanges like the
nyse
or the nasdaq in fact once a company
lists its shares after its initial
public offering
that's kind of it for them it's really
unlikely they are ever going to be able
to raise money from investors ever again
if they do need money to put towards
productive ventures then their options
would be to take on debt in the form of
a company loan
or to turn a profit if that's something
that companies still do these days
what this means is that in principle the
stock market amounts to people playing
hot potato with securities that don't
actually ever go towards anything useful
right well actually sort of people with
vast share portfolios
shouldn't really be patting themselves
on the back as the guiding force of
modern industry
but they are more so the holders of
contributions
that have been now full disclosure
i am saying this as a proud holder of
these
has been contributions to society but
perhaps this
isn't entirely fair the role of an
investor into the stock market isn't
completely
useless it's just very let's call it
abstract real genuine investment as we
saw in our lovely little farm example
takes place primarily as funding rounds
into younger businesses well before
an initial public offering these will be
called
investment rounds where the owners of a
company will sell off shares to
qualified investors companies like
wework are not yet publicly traded or
listed anywhere
and depend a lot on investment funding
to make them possible
these investments don't come from
regular households but
rather from large investment funds in
this case
softbank and a collection of venture
capitalists now most
modern venture capitalists are not at
all interested in sharing in the profits
of a company
but rather they want to buy in on the
ground floor
and then work on exiting the business an
exit basically amounts to them selling
off their shares that they got from a
very early and therefore
very risky investment into the company
these exits are normally done
after a company goes public so in
reality
an ipo actually serves two purposes
the first is the standard capital raised
to make money to put towards the growing
business yada yada yada but perhaps the
more
important component is that these gives
these early investors a platform to sell
their once volatile investments
to regular investors with less of a risk
tolerance
these early investors will then get a
nice big pool of cash so they can go out
and do it
all over again the role of a standard
household investor into the stock market
is not to fund
a young business in need but rather it
is to fund
the people that fund the young business
in need or
depending on how many times a particular
share has been traded back and forth
since its listing
it might be to fund the person that
funded the person that funded the person
that funded the young business in need
but you get the idea so this all
actually begs the question
why do people care about the stock
market
obviously investors want their
investments to go up in value or at
least return some nice fat dividends
but outside of people with direct
ownership does this even matter
if companies don't rely on shares to
raise capital and the stock market is
not directly contributing towards making
a happier wealthier world
then why does it dominate headlines for
starters of course
people conflate the economy with the
stock market
it might sound silly to you someone who
would sit down to watch an economics
video
but remember most people don't know and
or don't care
at least until they see headlines with
big alarming figures that make it sound
like the world is coming to an end
and of course a stock market crash can
be a sign of an economy in turmoil
but it's not always the case the stock
market and the economy are
two different entities a strong economy
will almost always lead to a healthy
stock market
but the opposite is not necessarily true
a strong stock market
doesn't necessarily mean a healthy
economy as we can see
right now so a company executive
and especially a politician for that
matter being overly focused on stock
market performance
doesn't sound that logical right well no
there is actually a very good reason for
both
to the corporate executive the stock
price might not have much bearing on the
company's actual financial performance
but shareholders own the company that
means that they can elect a new board of
directors and replace ceos on a whim
if they are not happy the best way to
keep them happy keep that stock price
high this sounds sensible enough but it
is actually one of the big
disadvantages of having a public company
since investors want strong returns and
the investors control the board who in
turn control the executives who run the
whole business
the whole operation can become ultra
focused on stock price
this is made even worse when c-suite
level compensation
is tied to stock options which it almost
always is executives may elect to do
something that is not necessarily
in the best strategic interest of the
company if it will bump the stock price
up a bit
like say taking on massive debt to do
sweeping stock buybacks
these decisions give them a nice fat
bonus and keeps most stockholders in a
happy state of complacence
now to politicians it's all about optics
the media loves to scream and shout
about a stock market crash
in reality and in isolation these
headlines won't
impact most of the people reading them
but if people see
the dow didn't ow and connect that last
time this happened they lost their job
they may be very very angry at whoever
is in charge
what this means is that while the stock
market might not be that important for
business managers politicians or regular
folk
investors have a way of making it
relevant
but this all sounds like it is skirting
around the 27 trillion
dollar question why is the market at an
all-time high
in the midst of armageddon now of course
one of the big reasons that we mentioned
in the last video
is fiscal stimulus leading to inflation
but that is worth exploring in more
detail
of course the money printers have gone
bro and this has introduced
trillions of dollars into the economy
some of this went to regular households
to cover the cost of living for people
that may be out of the job through no
fault of their own but a good majority
of this went to
businesses and their wealthy owners one
side effect of this has been a spike in
lamborghini sales
but for the more prudent millionaire
they might put this money towards the
stock market
this has increased demand for shares and
hey presto this has pushed up the price
but this isn't the whole story the other
side to this
is that when we are assessing the price
of something be it a house or a roll of
toilet paper or
company stock we will look at the price
of alternative goods
if rent doubled overnight the price of
houses would likely shoot up too
because more people would be desperate
to get out of rentals and into a
property that they
owned if the government gave a free b
day to
every household in the nation the price
of toilet paper
would fall and if interest rates were
lowered to zero percent on treasury
bonds or large bank holdings
then the stock market is the next best
alternative
howard marks a billionaire investor has
noted that he
and his company are just happy to accept
a significantly lower price to earnings
ratio in this crazy crazy world
a price to earnings ratio basically
notes how much an investment returns as
a multiple of how much it costs
so a price to earnings ratio of 16
would mean that the price of an asset is
16 times
what it returns per year which is
coincidentally what investors normally
expect out of a relatively safe
investment like a
s p 500 index nowadays
that expectation is more like 24 times
and it is only getting worse as
investors continue to lower their
expectations around their expected
returns
in the short term these lowered standard
means that investors can bag some quick
wins
like a 50 rally in stock prices which
kind of sounds like a great success
but think of it like this the stock
market is a market like any other
it has things that offer value to the
buyers and those things trade for what
people think is a fair price
if the price of groceries went up by 50
in the space of three to four months
that would be seen as an
absolute disaster verging on
hyperinflation and it's not necessarily
different to the stock market
the actual value of the market is lower
than it was this time last year
it is a rotten banana it's just that
people are starving
and they will pay whatever it takes to
get something to chew on
so with what could amount to a
multi-trillion dollar market failure
is this a bubble the last consideration
in the trillion dollar bubble dilemma
is where this recovery has come from the
so-called
fang companies that is facebook apple
amazon netflix microsoft and google
all have very sore backs at the moment
that's because
they have been carrying the entire
market
these companies are collectively worth
over five
trillion dollars which is 25 of the
capital valuation
of the s p 500 to give you an idea of
their weighted influence
amazon and apple alone have a larger
market capitalization
than every publicly listed company in
australia
combined and australia is not a small
economy
what this means is that these companies
dictate the market
every other industry be it oil
pharmaceuticals
retail minerals the automotive industry
hospitality
they are all suffering as you would
expect it's just that the success of the
massive tech industry has made this
stagnation
completely invisible in the context of
the broader market
which leads to one big final scary
consideration
we have spent this entire video looking
at the s p
500 which is an index and index
basically means a collection
in this case it's a collection of the
505
biggest companies in the usa but indexes
are actually
really popular as investment classes
where instead of buying
one share or a group of shares people
will invest into an index that has a
pool of
hundreds of shares this gives an average
investor
in-built diversification and exposure to
lots of companies without having to
spend
millions of dollars to buy all of these
and weigh them individually
this is great for easy investing but it
means a lot of misguided capital
is being issued directly towards these
companies that are listed in these
indexes
these companies are already very very
large
and very established and potentially
very overvalued
dr michael bury yes that michael bury
the one that predicted the 2008 subprime
mortgage crisis
has made similar predictions about
exchange traded funds
just because you bundle something up
call it diversified
and then feed it into huge pools of
capital does not necessarily mean
that it's a good investment what is a
good investment
is in yourself and i can't think of a
better place to start building out that
portfolio than with trends
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video description below as always
thanks guys bye