{"version":"1.0.0","segments":[{"startTime":0.29,"endTime":1.56,"body":"- Good evening everybody."},{"startTime":1.56,"endTime":5.37,"body":"This is a chart of the stock"},{"startTime":1.56,"endTime":5.37,"body":"prices of the largest companies"},{"startTime":5.37,"endTime":7.91,"body":"on the UK stock market yesterday."},{"startTime":7.91,"endTime":10.18,"body":"But what causes some prices to go up"},{"startTime":10.18,"endTime":11.671,"body":"and some prices to go down?"},{"startTime":11.671,"endTime":14.55,"body":"And how do we know whether"},{"startTime":11.671,"endTime":14.55,"body":"the prices fail or not?"},{"startTime":14.55,"endTime":17.84,"body":"Whether we should buy shares or sell them?"},{"startTime":17.84,"endTime":20.23,"body":"Well, we're going to look at"},{"startTime":17.84,"endTime":20.23,"body":"these questions this evening"},{"startTime":20.23,"endTime":23.32,"body":"in today's lecture on"},{"startTime":20.23,"endTime":23.32,"body":"how to value a stock."},{"startTime":23.32,"endTime":26.75,"body":"It's the fifth in my Gresham"},{"startTime":23.32,"endTime":26.75,"body":"College public lecture series"},{"startTime":26.75,"endTime":28.76,"body":"on basic financial literacy"},{"startTime":28.76,"endTime":31.54,"body":"called the principles of finance."},{"startTime":31.54,"endTime":35.24,"body":"And while today is explicitly"},{"startTime":31.54,"endTime":35.24,"body":"about how to value shares,"},{"startTime":35.24,"endTime":37.9,"body":"what we're going to look at"},{"startTime":35.24,"endTime":37.9,"body":"will hopefully be applicable"},{"startTime":37.9,"endTime":42.44,"body":"to anything that you want to"},{"startTime":37.9,"endTime":42.44,"body":"value any financial decision."},{"startTime":42.44,"endTime":44.2,"body":"So what is an investment?"},{"startTime":44.2,"endTime":46.8,"body":"An investment is spending some money now"},{"startTime":46.8,"endTime":48.89,"body":"to get some benefit in the future."},{"startTime":48.89,"endTime":50.18,"body":"Now, we are going to look at shares."},{"startTime":50.18,"endTime":52.55,"body":"We will buy the shares"},{"startTime":50.18,"endTime":52.55,"body":"now and get some dividends"},{"startTime":52.55,"endTime":53.61,"body":"in the future."},{"startTime":53.61,"endTime":55.99,"body":"But there's many other"},{"startTime":53.61,"endTime":55.99,"body":"investments that you might make"},{"startTime":55.99,"endTime":60.07,"body":"buying a house, renovating a"},{"startTime":55.99,"endTime":60.07,"body":"house, going to university."},{"startTime":60.07,"endTime":62.35,"body":"All of those things have immediate costs"},{"startTime":62.35,"endTime":63.85,"body":"and long-term benefits."},{"startTime":63.85,"endTime":65.79,"body":"And hopefully what we're"},{"startTime":63.85,"endTime":65.79,"body":"going to look at today"},{"startTime":65.79,"endTime":68.483,"body":"will be applicable for"},{"startTime":65.79,"endTime":68.483,"body":"all of those situations."},{"startTime":69.33,"endTime":72.02,"body":"But we might think haven't"},{"startTime":69.33,"endTime":72.02,"body":"we heard this a bit before?"},{"startTime":72.02,"endTime":74.52,"body":"Because those of you who"},{"startTime":72.02,"endTime":74.52,"body":"came to my lecture three"},{"startTime":74.52,"endTime":77.09,"body":"on how to make financial decisions,"},{"startTime":77.09,"endTime":80.97,"body":"we did look at how to value"},{"startTime":77.09,"endTime":80.97,"body":"lots of these investments,"},{"startTime":80.97,"endTime":83.36,"body":"but we're going to go beyond lecture three"},{"startTime":83.36,"endTime":85.09,"body":"in two important ways."},{"startTime":85.09,"endTime":88.872,"body":"First we're going to"},{"startTime":85.09,"endTime":88.872,"body":"take risk into account."},{"startTime":88.872,"endTime":92.46,"body":"So when you buy a share,"},{"startTime":88.872,"endTime":92.46,"body":"the dividends are risky."},{"startTime":92.46,"endTime":95.24,"body":"And indeed, when you buy"},{"startTime":92.46,"endTime":95.24,"body":"a house, you are not sure"},{"startTime":95.24,"endTime":97.97,"body":"how much you can solve that"},{"startTime":95.24,"endTime":97.97,"body":"house for in the future."},{"startTime":97.97,"endTime":100.31,"body":"So risk is something we absolutely need"},{"startTime":100.31,"endTime":101.65,"body":"to take into account."},{"startTime":101.65,"endTime":105.51,"body":"We looked at how to look at"},{"startTime":101.65,"endTime":105.51,"body":"risk last time in lecture four,"},{"startTime":105.51,"endTime":107.8,"body":"but we're going to going"},{"startTime":105.51,"endTime":107.8,"body":"to do is now combine that"},{"startTime":107.8,"endTime":110.21,"body":"with the prior lecture"},{"startTime":107.8,"endTime":110.21,"body":"to value an investment"},{"startTime":110.21,"endTime":111.669,"body":"when there is risk."},{"startTime":111.669,"endTime":115.74,"body":"And also we're going to look"},{"startTime":111.669,"endTime":115.74,"body":"at more realistic cash flows."},{"startTime":115.74,"endTime":118.274,"body":"So what we looked at in"},{"startTime":115.74,"endTime":118.274,"body":"lecture three was investments"},{"startTime":118.274,"endTime":121.2,"body":"that gave the same cash flow every year."},{"startTime":121.2,"endTime":123.44,"body":"But we know with stocks, dividends go up"},{"startTime":123.44,"endTime":126.46,"body":"then they go down in a pandemic,"},{"startTime":123.44,"endTime":126.46,"body":"they bounce around a lot."},{"startTime":126.46,"endTime":128.71,"body":"So we're going to look at"},{"startTime":126.46,"endTime":128.71,"body":"a lot of the uncertainty,"},{"startTime":128.71,"endTime":131.063,"body":"which drives changes in the stock market."},{"startTime":132.35,"endTime":133.88,"body":"So let's go back to basics."},{"startTime":133.88,"endTime":135.44,"body":"How do you value a stock?"},{"startTime":135.44,"endTime":137.22,"body":"How do you value anything?"},{"startTime":137.22,"endTime":140.48,"body":"Well, what we've established"},{"startTime":137.22,"endTime":140.48,"body":"is the value of any investment"},{"startTime":140.48,"endTime":143.6,"body":"is the future cash flows"},{"startTime":140.48,"endTime":143.6,"body":"from that investment."},{"startTime":143.6,"endTime":146.88,"body":"If we're buying a house, it's"},{"startTime":143.6,"endTime":146.88,"body":"the future rental income."},{"startTime":146.88,"endTime":151.54,"body":"So we're buying a stock, what"},{"startTime":146.88,"endTime":151.54,"body":"are the cash flows that we get"},{"startTime":151.54,"endTime":152.943,"body":"from owning a stock?"},{"startTime":154.06,"endTime":156.7,"body":"It's actually not that obvious."},{"startTime":156.7,"endTime":159.106,"body":"So let me look at the"},{"startTime":156.7,"endTime":159.106,"body":"profit and loss statement"},{"startTime":159.106,"endTime":160.71,"body":"of a company."},{"startTime":160.71,"endTime":163.7,"body":"A stock, a share is a share in a company"},{"startTime":163.7,"endTime":167.24,"body":"and you own the company,"},{"startTime":163.7,"endTime":167.24,"body":"but how much do you receive"},{"startTime":167.24,"endTime":168.69,"body":"from owning a company?"},{"startTime":168.69,"endTime":171.47,"body":"Well, let's take a clothes company,"},{"startTime":171.47,"endTime":176.312,"body":"say it makes 1000 pounds a"},{"startTime":171.47,"endTime":176.312,"body":"year from selling clothes."},{"startTime":176.312,"endTime":179.92,"body":"It has to pay 300 pounds"},{"startTime":176.312,"endTime":179.92,"body":"in terms of raw materials"},{"startTime":179.92,"endTime":181.537,"body":"and in terms of the staff."},{"startTime":181.537,"endTime":183.913,"body":"So after netting that off, it's got 700,"},{"startTime":184.77,"endTime":186.657,"body":"but then it has to pay tax."},{"startTime":186.657,"endTime":189.57,"body":"And let's say the tax rate is 20%."},{"startTime":189.57,"endTime":190.6,"body":"That's 140."},{"startTime":190.6,"endTime":195.6,"body":"And so the profit after tax,"},{"startTime":190.6,"endTime":195.6,"body":"the bottom line net income,"},{"startTime":195.74,"endTime":197.93,"body":"that is 560."},{"startTime":197.93,"endTime":200.449,"body":"And so let's say there's"},{"startTime":197.93,"endTime":200.449,"body":"100 different shareholders."},{"startTime":200.449,"endTime":203.83,"body":"That 560 is split 100 ways."},{"startTime":203.83,"endTime":206.37,"body":"So we each are better off by 5.6."},{"startTime":208.32,"endTime":212.55,"body":"But we actually don't receive"},{"startTime":208.32,"endTime":212.55,"body":"five pounds and 60, why?"},{"startTime":212.55,"endTime":215.36,"body":"Yes, the company has"},{"startTime":212.55,"endTime":215.36,"body":"made five pounds and 60"},{"startTime":215.36,"endTime":218.87,"body":"per shareholder, but it's not"},{"startTime":215.36,"endTime":218.87,"body":"necessarily going to pay that out"},{"startTime":218.87,"endTime":220.17,"body":"to everybody."},{"startTime":220.17,"endTime":221.04,"body":"Why?"},{"startTime":221.04,"endTime":224.436,"body":"Because it might reinvest"},{"startTime":221.04,"endTime":224.436,"body":"a lot of that money."},{"startTime":224.436,"endTime":227.18,"body":"So when a company's chosen to make money,"},{"startTime":227.18,"endTime":229.12,"body":"does it choose to reinvest it"},{"startTime":229.12,"endTime":231.12,"body":"and build another clothes factory"},{"startTime":231.12,"endTime":234.94,"body":"or spend it on training its"},{"startTime":231.12,"endTime":234.94,"body":"employees or does it pay it out"},{"startTime":234.94,"endTime":236.69,"body":"and so that's the important difference."},{"startTime":236.69,"endTime":240.7,"body":"So out of that 5.6, I'm"},{"startTime":236.69,"endTime":240.7,"body":"going to assume that 3.6"},{"startTime":240.7,"endTime":244.72,"body":"is reinvested and used"},{"startTime":240.7,"endTime":244.72,"body":"to build another factory."},{"startTime":244.72,"endTime":247.35,"body":"And only two is paid out to shareholders."},{"startTime":247.35,"endTime":250.915,"body":"And what that two is"},{"startTime":247.35,"endTime":250.915,"body":"known as is a dividend."},{"startTime":250.915,"endTime":254.09,"body":"We often hear the term"},{"startTime":250.915,"endTime":254.09,"body":"dividends, but what does it mean?"},{"startTime":254.09,"endTime":257.22,"body":"That means that is what is"},{"startTime":254.09,"endTime":257.22,"body":"paid out to shareholders"},{"startTime":257.22,"endTime":258.673,"body":"at the end of the year."},{"startTime":258.673,"endTime":262.52,"body":"But notice dividends are"},{"startTime":258.673,"endTime":262.52,"body":"quite different from earnings."},{"startTime":262.52,"endTime":265.64,"body":"Earnings are the profits"},{"startTime":262.52,"endTime":265.64,"body":"that a company makes,"},{"startTime":265.64,"endTime":268.06,"body":"but we could choose to pay some of it out"},{"startTime":268.06,"endTime":270.77,"body":"and choose to retain"},{"startTime":268.06,"endTime":270.77,"body":"it within the company."},{"startTime":270.77,"endTime":273.06,"body":"Just like you achieve a salary every year."},{"startTime":273.06,"endTime":276.41,"body":"Your salary is every month,"},{"startTime":273.06,"endTime":276.41,"body":"your salary is deposited"},{"startTime":276.41,"endTime":280.21,"body":"into your bank, but you might"},{"startTime":276.41,"endTime":280.21,"body":"only withdraw a partial amount"},{"startTime":280.21,"endTime":282.953,"body":"of that salary and that"},{"startTime":280.21,"endTime":282.953,"body":"is known as dividends."},{"startTime":284.28,"endTime":287.76,"body":"And so the actual cash"},{"startTime":284.28,"endTime":287.76,"body":"received by a shareholders"},{"startTime":287.76,"endTime":289.14,"body":"is only the dividends."},{"startTime":289.14,"endTime":292.92,"body":"It's only the two, it's"},{"startTime":289.14,"endTime":292.92,"body":"not the overall profit"},{"startTime":292.92,"endTime":294.85,"body":"that a company makes."},{"startTime":294.85,"endTime":296.9,"body":"So the first important point for today"},{"startTime":296.9,"endTime":300.017,"body":"is that when we look at valuing a company"},{"startTime":300.017,"endTime":302.391,"body":"or valuing a stock, it's only dividends"},{"startTime":302.391,"endTime":305.64,"body":"that we need to take into account."},{"startTime":305.64,"endTime":308.32,"body":"Go back to the formula we"},{"startTime":305.64,"endTime":308.32,"body":"looked at in lecture three,"},{"startTime":308.32,"endTime":311.63,"body":"the value of any investment"},{"startTime":308.32,"endTime":311.63,"body":"is the present value"},{"startTime":311.63,"endTime":314.01,"body":"of all of those future cash flows"},{"startTime":314.01,"endTime":316.47,"body":"from now until the end of time."},{"startTime":316.47,"endTime":318.87,"body":"For a house, again, that's rental income."},{"startTime":318.87,"endTime":321.86,"body":"For a stock it's only its dividends."},{"startTime":321.86,"endTime":325.782,"body":"And so what we'd need to do to"},{"startTime":321.86,"endTime":325.782,"body":"forecast the price of a stock"},{"startTime":325.782,"endTime":329.42,"body":"is to estimate all of the future dividends"},{"startTime":329.42,"endTime":333.34,"body":"that the stock will pay from"},{"startTime":329.42,"endTime":333.34,"body":"now until the end of time."},{"startTime":333.34,"endTime":337.187,"body":"If I buy a share now I'm"},{"startTime":333.34,"endTime":337.187,"body":"entitled to dividends next year"},{"startTime":337.187,"endTime":339.94,"body":"and the year after and"},{"startTime":337.187,"endTime":339.94,"body":"the year after that,"},{"startTime":339.94,"endTime":343.57,"body":"and I should forecast all"},{"startTime":339.94,"endTime":343.57,"body":"of those future dividends."},{"startTime":343.57,"endTime":346.07,"body":"And that will tell me how"},{"startTime":343.57,"endTime":346.07,"body":"much the stock is worth."},{"startTime":347.36,"endTime":350.18,"body":"But you might think"},{"startTime":347.36,"endTime":350.18,"body":"well doesn't that assume"},{"startTime":350.18,"endTime":353.46,"body":"that I'm going to sort of"},{"startTime":350.18,"endTime":353.46,"body":"live forever and stay around"},{"startTime":353.46,"endTime":356.834,"body":"until the end of time and"},{"startTime":353.46,"endTime":356.834,"body":"collect all of those dividends."},{"startTime":356.834,"endTime":360.58,"body":"Oasis sang in 1994, you and"},{"startTime":356.834,"endTime":360.58,"body":"I going to live forever,"},{"startTime":360.58,"endTime":363.36,"body":"but nobody's actually figured"},{"startTime":360.58,"endTime":363.36,"body":"out a way of how to do that."},{"startTime":363.36,"endTime":365.45,"body":"So is this sort of unrealistic"},{"startTime":365.45,"endTime":367.1,"body":"that we are not going to stick around"},{"startTime":367.1,"endTime":368.993,"body":"to receive every single dividend."},{"startTime":370.133,"endTime":371.63,"body":"And even if you could live forever,"},{"startTime":371.63,"endTime":373.71,"body":"it might be that you"},{"startTime":371.63,"endTime":373.71,"body":"would not want to keep"},{"startTime":373.71,"endTime":374.95,"body":"the stock forever."},{"startTime":374.95,"endTime":377.38,"body":"It might be that I'm buying shares now"},{"startTime":377.38,"endTime":380.32,"body":"to finance my children going to university"},{"startTime":380.32,"endTime":382.033,"body":"in five years time."},{"startTime":382.033,"endTime":384.8,"body":"So you might think,"},{"startTime":382.033,"endTime":384.8,"body":"well, do we really care"},{"startTime":384.8,"endTime":388.593,"body":"about what the dividend"},{"startTime":384.8,"endTime":388.593,"body":"will be in 15 years time"},{"startTime":388.593,"endTime":390.743,"body":"if I only intend to"},{"startTime":388.593,"endTime":390.743,"body":"hold it for five years."},{"startTime":392.049,"endTime":396.3,"body":"And in fact, surprisingly,"},{"startTime":392.049,"endTime":396.3,"body":"the answer is yes."},{"startTime":396.3,"endTime":397.53,"body":"Why is that?"},{"startTime":397.53,"endTime":399.03,"body":"Okay, so let's look at this example"},{"startTime":399.03,"endTime":401.35,"body":"where I'm going to buy a stock now."},{"startTime":401.35,"endTime":404.29,"body":"And I know that I'm going"},{"startTime":401.35,"endTime":404.29,"body":"to sell it within two years,"},{"startTime":404.29,"endTime":407.943,"body":"because I want to use the"},{"startTime":404.29,"endTime":407.943,"body":"money to deposit a house."},{"startTime":408.78,"endTime":413.014,"body":"So what am I going to"},{"startTime":408.78,"endTime":413.014,"body":"receive when I buy the stock?"},{"startTime":413.014,"endTime":416.09,"body":"I'm going to collect the"},{"startTime":413.014,"endTime":416.09,"body":"dividend after the first year,"},{"startTime":416.09,"endTime":419.68,"body":"and I'm going to collect the"},{"startTime":416.09,"endTime":419.68,"body":"dividend after the second year."},{"startTime":419.68,"endTime":422.77,"body":"I'm just going to assume"},{"startTime":419.68,"endTime":422.77,"body":"dividends paid once a year"},{"startTime":422.77,"endTime":424.07,"body":"to make things simple."},{"startTime":424.07,"endTime":426.82,"body":"So I've looked at the first dividend"},{"startTime":426.82,"endTime":428.46,"body":"and the second dividend."},{"startTime":428.46,"endTime":431.44,"body":"And after the second year"},{"startTime":428.46,"endTime":431.44,"body":"I'm going to sell my shares"},{"startTime":431.44,"endTime":433.81,"body":"because I need to use the"},{"startTime":431.44,"endTime":433.81,"body":"money to put a deposit"},{"startTime":433.81,"endTime":434.643,"body":"on my house."},{"startTime":435.95,"endTime":438.97,"body":"But when I sell my shares,"},{"startTime":435.95,"endTime":438.97,"body":"let's say I sell them to Simon."},{"startTime":438.97,"endTime":443.233,"body":"When Simon comes along and"},{"startTime":438.97,"endTime":443.233,"body":"offers me money for my shares,"},{"startTime":443.233,"endTime":445.874,"body":"what is a fair price that"},{"startTime":443.233,"endTime":445.874,"body":"Simon is going to offer?"},{"startTime":445.874,"endTime":447.177,"body":"Well, he's going to say,"},{"startTime":447.177,"endTime":449.17,"body":"well, if he buys the dividend the share"},{"startTime":450.091,"endTime":453.2,"body":"at the end of year two, the"},{"startTime":450.091,"endTime":453.2,"body":"future dividends he will get"},{"startTime":453.2,"endTime":456.92,"body":"are going to be dividends from"},{"startTime":453.2,"endTime":456.92,"body":"year three, year four, year five"},{"startTime":456.92,"endTime":458.54,"body":"and so on."},{"startTime":458.54,"endTime":462.22,"body":"So even though I don't"},{"startTime":458.54,"endTime":462.22,"body":"care about the dividends"},{"startTime":462.22,"endTime":465.09,"body":"in year three onwards, because"},{"startTime":462.22,"endTime":465.09,"body":"I'm not receiving them,"},{"startTime":465.09,"endTime":469.909,"body":"I do care because this affects"},{"startTime":465.09,"endTime":469.909,"body":"what Simon is willing to pay."},{"startTime":469.909,"endTime":473.6,"body":"Okay so when Simon comes"},{"startTime":469.909,"endTime":473.6,"body":"along at the end of year two,"},{"startTime":473.6,"endTime":477.03,"body":"he's going to forecast the"},{"startTime":473.6,"endTime":477.03,"body":"company's future profits"},{"startTime":477.03,"endTime":478.593,"body":"from year three onwards."},{"startTime":478.593,"endTime":481.01,"body":"And he says, well, if I'm"},{"startTime":478.593,"endTime":481.01,"body":"going to have the share"},{"startTime":481.01,"endTime":484.24,"body":"at the end of year two, I'm"},{"startTime":481.01,"endTime":484.24,"body":"going to receive dividends"},{"startTime":484.24,"endTime":487.875,"body":"from year three and"},{"startTime":484.24,"endTime":487.875,"body":"four and five and so on."},{"startTime":487.875,"endTime":489.59,"body":"And so if you work through the math,"},{"startTime":489.59,"endTime":490.97,"body":"which I'm not going to bore you with,"},{"startTime":490.97,"endTime":495.529,"body":"what this means is that I care"},{"startTime":490.97,"endTime":495.529,"body":"about every single dividend."},{"startTime":495.529,"endTime":499.131,"body":"So even if I'm only going to"},{"startTime":495.529,"endTime":499.131,"body":"hold the shares for two years,"},{"startTime":499.131,"endTime":502.3,"body":"I will only receive two dividends,"},{"startTime":502.3,"endTime":506.05,"body":"but because Simon will receive"},{"startTime":502.3,"endTime":506.05,"body":"dividends three, four, five"},{"startTime":506.05,"endTime":510.31,"body":"and so on, what he pays"},{"startTime":506.05,"endTime":510.31,"body":"me at the end of year two"},{"startTime":510.31,"endTime":512.616,"body":"will reflect all of the future projects"},{"startTime":512.616,"endTime":515.323,"body":"and the future dividends of that company."},{"startTime":516.3,"endTime":519.03,"body":"And so let's just strip back"},{"startTime":516.3,"endTime":519.03,"body":"from all of these equations"},{"startTime":519.03,"endTime":523.18,"body":"and think about what this means"},{"startTime":519.03,"endTime":523.18,"body":"in terms of the real world."},{"startTime":523.18,"endTime":527.27,"body":"So why is Tesla such a valuable company?"},{"startTime":527.27,"endTime":530.26,"body":"Tesla makes electric cars"},{"startTime":527.27,"endTime":530.26,"body":"and those electric cars"},{"startTime":530.26,"endTime":532.14,"body":"will be really profitable in the future."},{"startTime":532.14,"endTime":534.629,"body":"Yes I know that Tesla is"},{"startTime":532.14,"endTime":534.629,"body":"already profitable now,"},{"startTime":534.629,"endTime":537.235,"body":"but why it's worth so much is that people"},{"startTime":537.235,"endTime":541.04,"body":"are thinking about the"},{"startTime":537.235,"endTime":541.04,"body":"future in 15 years time,"},{"startTime":541.04,"endTime":543.65,"body":"this is going to be massively profitable."},{"startTime":543.65,"endTime":547.177,"body":"Now, many people who hold"},{"startTime":543.65,"endTime":547.177,"body":"Tesla shares have no idea"},{"startTime":547.177,"endTime":549.06,"body":"whether they're going"},{"startTime":547.177,"endTime":549.06,"body":"to be still holding them"},{"startTime":549.06,"endTime":550.199,"body":"in 15 years time."},{"startTime":550.199,"endTime":553.85,"body":"Life changes, you might"},{"startTime":550.199,"endTime":553.85,"body":"want to buy a house."},{"startTime":553.85,"endTime":556.602,"body":"You might have children and"},{"startTime":553.85,"endTime":556.602,"body":"send them to university,"},{"startTime":556.602,"endTime":560.07,"body":"but why it's worth so much"},{"startTime":556.602,"endTime":560.07,"body":"is even though the world"},{"startTime":560.07,"endTime":562.52,"body":"is so uncertain and we have no idea"},{"startTime":562.52,"endTime":564.42,"body":"when we're going to sell the shares."},{"startTime":564.42,"endTime":568.42,"body":"As long as we have confidence"},{"startTime":564.42,"endTime":568.42,"body":"that when we sell the shares"},{"startTime":569.28,"endTime":573.66,"body":"that people we'll sell them"},{"startTime":569.28,"endTime":573.66,"body":"to, we'll look in the future"},{"startTime":573.66,"endTime":577.33,"body":"and see Tesla as a stream of"},{"startTime":573.66,"endTime":577.33,"body":"all of these future profits"},{"startTime":577.33,"endTime":580.11,"body":"from electric cars, we"},{"startTime":577.33,"endTime":580.11,"body":"are willing to invest"},{"startTime":580.11,"endTime":581.563,"body":"in electric cars today."},{"startTime":582.89,"endTime":586.01,"body":"And I can't stress enough the"},{"startTime":582.89,"endTime":586.01,"body":"importance of this insight."},{"startTime":586.01,"endTime":587.832,"body":"By anybody who wants to criticize finance"},{"startTime":587.832,"endTime":591.18,"body":"and the stock market will"},{"startTime":587.832,"endTime":591.18,"body":"say, the stock market"},{"startTime":591.18,"endTime":592.57,"body":"is short termist."},{"startTime":592.57,"endTime":595.56,"body":"People only hold their"},{"startTime":592.57,"endTime":595.56,"body":"shares for one or two years."},{"startTime":595.56,"endTime":598.91,"body":"And that's true, people"},{"startTime":595.56,"endTime":598.91,"body":"don't hold their shares"},{"startTime":598.91,"endTime":602.59,"body":"for a long time, but"},{"startTime":598.91,"endTime":602.59,"body":"why is it that companies"},{"startTime":602.59,"endTime":605.87,"body":"with quite low earnings"},{"startTime":602.59,"endTime":605.87,"body":"are worth so much money?"},{"startTime":605.87,"endTime":608.22,"body":"It's because they're"},{"startTime":605.87,"endTime":608.22,"body":"worth what their value is"},{"startTime":608.22,"endTime":609.427,"body":"in the future."},{"startTime":609.427,"endTime":612.266,"body":"And even if I'm not sticking"},{"startTime":609.427,"endTime":612.266,"body":"around to explicitly receive"},{"startTime":612.266,"endTime":617.02,"body":"those future profits myself,"},{"startTime":612.266,"endTime":617.02,"body":"I still care about them."},{"startTime":617.02,"endTime":617.853,"body":"Why?"},{"startTime":617.853,"endTime":620.37,"body":"Because anybody who buys"},{"startTime":617.853,"endTime":620.37,"body":"my shares in the future"},{"startTime":620.37,"endTime":622.9,"body":"will be thinking about"},{"startTime":620.37,"endTime":622.9,"body":"the long term prospects"},{"startTime":622.9,"endTime":623.733,"body":"of the company."},{"startTime":624.8,"endTime":628.61,"body":"So this is why it's entirely"},{"startTime":624.8,"endTime":628.61,"body":"fair to value a company"},{"startTime":628.61,"endTime":632.26,"body":"by trying to forecast all"},{"startTime":628.61,"endTime":632.26,"body":"of the dividends right now"},{"startTime":632.26,"endTime":633.732,"body":"until the end of time."},{"startTime":633.732,"endTime":636.21,"body":"So if it is a possibility"},{"startTime":636.21,"endTime":638.62,"body":"that we're going to"},{"startTime":636.21,"endTime":638.62,"body":"have a huge carbon tax,"},{"startTime":638.62,"endTime":641.24,"body":"I don't want to be investing"},{"startTime":638.62,"endTime":641.24,"body":"in fossil fuel companies,"},{"startTime":641.24,"endTime":643.74,"body":"because I know that"},{"startTime":641.24,"endTime":643.74,"body":"maybe 10 years from now,"},{"startTime":643.74,"endTime":645.575,"body":"this business might not be sustainable."},{"startTime":645.575,"endTime":648.74,"body":"If there's a company which"},{"startTime":645.575,"endTime":648.74,"body":"mistreats its workers,"},{"startTime":648.74,"endTime":651.11,"body":"doesn't invest in a diverse workforce,"},{"startTime":651.11,"endTime":653.25,"body":"then I will know that"},{"startTime":651.11,"endTime":653.25,"body":"maybe in 10 years time"},{"startTime":653.25,"endTime":656.76,"body":"that this company will not"},{"startTime":653.25,"endTime":656.76,"body":"have as strong human capital."},{"startTime":656.76,"endTime":659.75,"body":"Therefore I might not"},{"startTime":656.76,"endTime":659.75,"body":"value it highly today."},{"startTime":659.75,"endTime":662.48,"body":"And indeed, when you see"},{"startTime":659.75,"endTime":662.48,"body":"some companies with incidents"},{"startTime":662.48,"endTime":665.14,"body":"like Sports Direct and Boohoo and so on,"},{"startTime":665.14,"endTime":666.77,"body":"this is something that affects"},{"startTime":667.788,"endTime":669.892,"body":"the company's valuation today."},{"startTime":669.892,"endTime":671.912,"body":"So I've just spent a while stressing"},{"startTime":671.912,"endTime":675.437,"body":"how the stock market"},{"startTime":671.912,"endTime":675.437,"body":"does take into account"},{"startTime":675.437,"endTime":678.651,"body":"all of the future dividends of a company."},{"startTime":678.651,"endTime":681.41,"body":"But that seems to be a"},{"startTime":678.651,"endTime":681.41,"body":"bit of a hollow victory,"},{"startTime":681.41,"endTime":684.65,"body":"because it means that in"},{"startTime":681.41,"endTime":684.65,"body":"order to estimate the price"},{"startTime":684.65,"endTime":688.22,"body":"of a stock, we would"},{"startTime":684.65,"endTime":688.22,"body":"literally have to forecast"},{"startTime":688.22,"endTime":691.167,"body":"every single dividend from"},{"startTime":688.22,"endTime":691.167,"body":"now until the end of time."},{"startTime":691.167,"endTime":693.53,"body":"And that's a really arduous task."},{"startTime":693.53,"endTime":696.443,"body":"It's going to be really"},{"startTime":693.53,"endTime":696.443,"body":"difficult to do that."},{"startTime":696.443,"endTime":698.928,"body":"But some of you might remember"},{"startTime":696.443,"endTime":698.928,"body":"if you came to lecture three,"},{"startTime":698.928,"endTime":703.59,"body":"that there was a nice shortcut"},{"startTime":698.928,"endTime":703.59,"body":"formula that we can use"},{"startTime":703.59,"endTime":707.45,"body":"to avoid having to forecast"},{"startTime":703.59,"endTime":707.45,"body":"from now until the end of time."},{"startTime":707.45,"endTime":709.02,"body":"So we have some settings"},{"startTime":709.02,"endTime":712.84,"body":"in which we have a growing perpetuity."},{"startTime":712.84,"endTime":714.58,"body":"What is that for those of who didn't go"},{"startTime":714.58,"endTime":715.5,"body":"to the third lecture,"},{"startTime":715.5,"endTime":718.87,"body":"that is when the dividends of a company"},{"startTime":718.87,"endTime":722.52,"body":"will grow at a constant rate over time."},{"startTime":722.52,"endTime":724.61,"body":"And that is quite realistic."},{"startTime":724.61,"endTime":728.426,"body":"Like once a company is mature,"},{"startTime":724.61,"endTime":728.426,"body":"it might increase dividends"},{"startTime":728.426,"endTime":732.783,"body":"let's say by 2% per year,"},{"startTime":728.426,"endTime":732.783,"body":"pretty much every year."},{"startTime":732.783,"endTime":737.64,"body":"So a rough guess, and also"},{"startTime":732.783,"endTime":737.64,"body":"a pretty reasonable guess"},{"startTime":737.64,"endTime":740.625,"body":"might be for a mature company"},{"startTime":737.64,"endTime":740.625,"body":"that it's going to grow"},{"startTime":740.625,"endTime":743.24,"body":"at the same rate forever."},{"startTime":743.24,"endTime":745.548,"body":"And so how can you value that?"},{"startTime":745.548,"endTime":746.96,"body":"Well, what we can do"},{"startTime":746.96,"endTime":749.82,"body":"is we can just take next year's dividend."},{"startTime":749.82,"endTime":753.61,"body":"We divide it by the discount rate,"},{"startTime":753.61,"endTime":755.25,"body":"which we got from lecture four."},{"startTime":755.25,"endTime":758.643,"body":"So that is the rate of return"},{"startTime":755.25,"endTime":758.643,"body":"on alternative investments"},{"startTime":758.643,"endTime":761.25,"body":"minus that perpetual growth rate."},{"startTime":761.25,"endTime":764.88,"body":"And therefore that will"},{"startTime":761.25,"endTime":764.88,"body":"give us the valuation."},{"startTime":764.88,"endTime":767.31,"body":"And I'm going to look at"},{"startTime":764.88,"endTime":767.31,"body":"example very, very quickly."},{"startTime":767.31,"endTime":768.56,"body":"But before I look at the example,"},{"startTime":768.56,"endTime":770.689,"body":"let's just see, does that make sense?"},{"startTime":770.689,"endTime":771.82,"body":"Yes."},{"startTime":771.82,"endTime":773.813,"body":"So what is the discount rate?"},{"startTime":773.813,"endTime":778.27,"body":"That is the rate of return"},{"startTime":773.813,"endTime":778.27,"body":"available in other investments?"},{"startTime":778.27,"endTime":781.83,"body":"So when the Bank of England"},{"startTime":778.27,"endTime":781.83,"body":"puts up interest rates,"},{"startTime":781.83,"endTime":784.32,"body":"which it did recently, the stock prices"},{"startTime":784.32,"endTime":785.746,"body":"will typically go down."},{"startTime":785.746,"endTime":787.01,"body":"Why?"},{"startTime":787.01,"endTime":789.09,"body":"It's less attractive to hold stocks"},{"startTime":789.09,"endTime":792.2,"body":"because it's more attractive"},{"startTime":789.09,"endTime":792.2,"body":"to put your money in the bank"},{"startTime":792.2,"endTime":793.94,"body":"because the interest rate is higher."},{"startTime":793.94,"endTime":796.97,"body":"So what determines the"},{"startTime":793.94,"endTime":796.97,"body":"rate of return available"},{"startTime":796.97,"endTime":798.31,"body":"on other investments,"},{"startTime":798.31,"endTime":802.52,"body":"the greater the alternative"},{"startTime":798.31,"endTime":802.52,"body":"investment opportunities,"},{"startTime":802.52,"endTime":804.71,"body":"the lower the price of the stock."},{"startTime":804.71,"endTime":806.58,"body":"That's why I'm so grateful"},{"startTime":804.71,"endTime":806.58,"body":"that so many of you"},{"startTime":806.58,"endTime":807.887,"body":"have come up to today's lecture."},{"startTime":807.887,"endTime":810.959,"body":"The alternative opportunity"},{"startTime":807.887,"endTime":810.959,"body":"was the assumption outside"},{"startTime":810.959,"endTime":813.78,"body":"and that's something which"},{"startTime":810.959,"endTime":813.78,"body":"will affect the value"},{"startTime":813.78,"endTime":816.62,"body":"to many people coming to today's lecture."},{"startTime":816.62,"endTime":819.329,"body":"And so the growth rate, the"},{"startTime":816.62,"endTime":819.329,"body":"greater the growth rate,"},{"startTime":819.329,"endTime":821.628,"body":"the smaller the denominator,"},{"startTime":821.628,"endTime":825.09,"body":"the smaller the denominator,"},{"startTime":821.628,"endTime":825.09,"body":"the greater the value."},{"startTime":825.09,"endTime":828.405,"body":"And that's why intuitively"},{"startTime":825.09,"endTime":828.405,"body":"companies that grow faster"},{"startTime":828.405,"endTime":831.223,"body":"like Tesla have higher stock prices."},{"startTime":832.33,"endTime":835.57,"body":"So let's try to look"},{"startTime":832.33,"endTime":835.57,"body":"at this and apply this"},{"startTime":835.57,"endTime":837.34,"body":"with a practical example."},{"startTime":837.34,"endTime":840.55,"body":"Let's take Tesco, a"},{"startTime":837.34,"endTime":840.55,"body":"company that we all know."},{"startTime":840.55,"endTime":843.822,"body":"So these numbers are just"},{"startTime":840.55,"endTime":843.822,"body":"made simple deliberately."},{"startTime":843.822,"endTime":848.53,"body":"Tesco has just paid a dividend"},{"startTime":843.822,"endTime":848.53,"body":"of three pence per share,"},{"startTime":848.53,"endTime":851.003,"body":"and its beta is 0.5."},{"startTime":851.865,"endTime":855.88,"body":"Remember what is beta, that's"},{"startTime":851.865,"endTime":855.88,"body":"just the risk of a company."},{"startTime":855.88,"endTime":857.57,"body":"And it'll become clear why we need it."},{"startTime":857.57,"endTime":859.569,"body":"Even if you didn't come"},{"startTime":857.57,"endTime":859.569,"body":"to the last lecture."},{"startTime":859.569,"endTime":862.09,"body":"Analysts are expecting the dividend"},{"startTime":862.09,"endTime":866.51,"body":"to grow by 2% each year forever."},{"startTime":866.51,"endTime":869.0,"body":"So it's just paid three P per share."},{"startTime":869.0,"endTime":872.62,"body":"And that three pence is"},{"startTime":869.0,"endTime":872.62,"body":"going to grow by 2% forever."},{"startTime":872.62,"endTime":874.09,"body":"The current risk free rate."},{"startTime":874.09,"endTime":877.677,"body":"That's what the Bank"},{"startTime":874.09,"endTime":877.677,"body":"of England sets is 1%."},{"startTime":877.677,"endTime":882.547,"body":"And the expected excess"},{"startTime":877.677,"endTime":882.547,"body":"return on the FTSE is 4%."},{"startTime":883.718,"endTime":886.193,"body":"What should Tesco's share price be?"},{"startTime":887.46,"endTime":889.66,"body":"So let's use those simpler formulas"},{"startTime":889.66,"endTime":892.873,"body":"to see how we can value a"},{"startTime":889.66,"endTime":892.873,"body":"large company like Tesco."},{"startTime":894.09,"endTime":895.76,"body":"So the first thing we really want to do"},{"startTime":895.76,"endTime":899.41,"body":"is you want to estimate the discount rate,"},{"startTime":899.41,"endTime":903.074,"body":"the rate of return that we would"},{"startTime":899.41,"endTime":903.074,"body":"use to discount Tesco stock"},{"startTime":903.074,"endTime":905.68,"body":"because it's something risky."},{"startTime":905.68,"endTime":908.43,"body":"And so you might remember the"},{"startTime":905.68,"endTime":908.43,"body":"capital asset pricing model"},{"startTime":908.43,"endTime":909.9,"body":"from lecture four."},{"startTime":909.9,"endTime":914.22,"body":"So what that says is that the"},{"startTime":909.9,"endTime":914.22,"body":"return that Tesco gives you"},{"startTime":914.22,"endTime":918.64,"body":"above the risk-free rate,"},{"startTime":914.22,"endTime":918.64,"body":"depends on the market's return"},{"startTime":919.82,"endTime":923.89,"body":"above the risk-free rate,"},{"startTime":919.82,"endTime":923.89,"body":"multiplied by the beta of Tesco,"},{"startTime":923.89,"endTime":925.52,"body":"how risky Tesco is."},{"startTime":925.52,"endTime":930.28,"body":"The riskier the stock, the"},{"startTime":925.52,"endTime":930.28,"body":"greater the return you require"},{"startTime":930.28,"endTime":932.062,"body":"to invest in that stock"},{"startTime":932.062,"endTime":935.777,"body":"because it needs to"},{"startTime":932.062,"endTime":935.777,"body":"compensate you for that risk."},{"startTime":935.777,"endTime":937.96,"body":"So let's plug in these numbers."},{"startTime":937.96,"endTime":942.96,"body":"I'm going to plug in the"},{"startTime":937.96,"endTime":942.96,"body":"number of 0.5 for the beta,"},{"startTime":943.08,"endTime":945.675,"body":"1% for the risk free rate"},{"startTime":945.675,"endTime":950.62,"body":"and the return on the market, 4% minus 1%."},{"startTime":952.86,"endTime":954.674,"body":"But in fact, that's wrong."},{"startTime":954.674,"endTime":955.938,"body":"Why is that wrong?"},{"startTime":955.938,"endTime":959.35,"body":"Because the question"},{"startTime":955.938,"endTime":959.35,"body":"says the excess return"},{"startTime":959.35,"endTime":961.69,"body":"on the FTSE is 4%."},{"startTime":961.69,"endTime":964.115,"body":"So the excess return is already,"},{"startTime":964.115,"endTime":967.42,"body":"after subtracting the risk-free rate."},{"startTime":967.42,"endTime":971.07,"body":"So actually 4% is what the"},{"startTime":967.42,"endTime":971.07,"body":"FTSE stock market is giving"},{"startTime":971.07,"endTime":973.8,"body":"above the government risk-free rate."},{"startTime":973.8,"endTime":976.36,"body":"And therefore we don't"},{"startTime":973.8,"endTime":976.36,"body":"need to subtract the 1%"},{"startTime":976.36,"endTime":981.36,"body":"because that 4% is already"},{"startTime":976.36,"endTime":981.36,"body":"after subtracting this 1%"},{"startTime":981.7,"endTime":982.533,"body":"to begin with."},{"startTime":983.73,"endTime":985.73,"body":"So you might think, okay,"},{"startTime":983.73,"endTime":985.73,"body":"let's fix that problem."},{"startTime":985.73,"endTime":990.47,"body":"And so what is the"},{"startTime":985.73,"endTime":990.47,"body":"required return on Tesco?"},{"startTime":990.47,"endTime":993.48,"body":"Well, the market is giving you 4%,"},{"startTime":993.48,"endTime":995.661,"body":"but because Tesco is not that risky,"},{"startTime":995.661,"endTime":1000.12,"body":"Tesco only requires half"},{"startTime":995.661,"endTime":1000.12,"body":"of what the market gives."},{"startTime":1000.12,"endTime":1003.873,"body":"And therefore the required"},{"startTime":1000.12,"endTime":1003.873,"body":"return on Tesco is 3%."},{"startTime":1004.76,"endTime":1006.018,"body":"So that does make sense."},{"startTime":1006.018,"endTime":1009.5,"body":"The interest rate for investing"},{"startTime":1006.018,"endTime":1009.5,"body":"in something very safe,"},{"startTime":1009.5,"endTime":1011.753,"body":"like government bonds is 1%."},{"startTime":1011.753,"endTime":1016.118,"body":"Tesco is risky so you"},{"startTime":1011.753,"endTime":1016.118,"body":"do demand more than 1%,"},{"startTime":1016.118,"endTime":1019.375,"body":"but it's not missed as"},{"startTime":1016.118,"endTime":1019.375,"body":"risky as the market."},{"startTime":1019.375,"endTime":1024.343,"body":"So you only require a 3%"},{"startTime":1019.375,"endTime":1024.343,"body":"return for investing in Tesco."},{"startTime":1025.855,"endTime":1028.58,"body":"So let's now apply that to the dividend."},{"startTime":1028.58,"endTime":1030.81,"body":"So we said Tesco has just paid a dividend"},{"startTime":1030.81,"endTime":1032.12,"body":"of three pence per share."},{"startTime":1032.12,"endTime":1035.936,"body":"And we know that the discount rate is 3%."},{"startTime":1035.936,"endTime":1038.758,"body":"That's what we just calculated."},{"startTime":1038.758,"endTime":1042.56,"body":"And because it's growing by 2% every year,"},{"startTime":1042.56,"endTime":1046.414,"body":"let's take that three, subtract the two,"},{"startTime":1046.414,"endTime":1049.659,"body":"and I'm going to get three over"},{"startTime":1046.414,"endTime":1049.659,"body":"one that gives me three pounds"},{"startTime":1049.659,"endTime":1051.513,"body":"being the stock price of Tesco."},{"startTime":1053.56,"endTime":1054.47,"body":"But that's also wrong."},{"startTime":1054.47,"endTime":1056.07,"body":"I'm not having a good day today."},{"startTime":1056.07,"endTime":1057.08,"body":"Why?"},{"startTime":1057.08,"endTime":1060.76,"body":"Because I've said Tesco"},{"startTime":1057.08,"endTime":1060.76,"body":"has just paid a dividend"},{"startTime":1060.76,"endTime":1062.297,"body":"of three pence."},{"startTime":1062.297,"endTime":1064.5,"body":"But when we look at the"},{"startTime":1062.297,"endTime":1064.5,"body":"valuation of a stock,"},{"startTime":1064.5,"endTime":1066.54,"body":"we don't care what's happened in the past."},{"startTime":1066.54,"endTime":1069.016,"body":"We care about what's"},{"startTime":1066.54,"endTime":1069.016,"body":"happening in the future."},{"startTime":1069.016,"endTime":1072.97,"body":"When I buy that share,"},{"startTime":1069.016,"endTime":1072.97,"body":"I don't get the dividend"},{"startTime":1072.97,"endTime":1076.86,"body":"that was paid last year, I'm"},{"startTime":1072.97,"endTime":1076.86,"body":"going to get all future dividends."},{"startTime":1076.86,"endTime":1078.3,"body":"And this is something which is common"},{"startTime":1078.3,"endTime":1080.65,"body":"to all aspects of finance."},{"startTime":1080.65,"endTime":1083.85,"body":"Finance is always"},{"startTime":1080.65,"endTime":1083.85,"body":"concerned about the future."},{"startTime":1083.85,"endTime":1086.03,"body":"And that's true not just to finance,"},{"startTime":1086.03,"endTime":1087.496,"body":"but any type of investment."},{"startTime":1087.496,"endTime":1090.41,"body":"Let's say you are the"},{"startTime":1087.496,"endTime":1090.41,"body":"manager of a football team"},{"startTime":1090.41,"endTime":1092.297,"body":"and you want to buy a striker."},{"startTime":1092.297,"endTime":1094.277,"body":"You don't really care about the goals"},{"startTime":1094.277,"endTime":1096.95,"body":"that the striker scored"},{"startTime":1094.277,"endTime":1096.95,"body":"for his current team."},{"startTime":1096.95,"endTime":1099.66,"body":"When you buy that striker,"},{"startTime":1096.95,"endTime":1099.66,"body":"all you care about"},{"startTime":1099.66,"endTime":1101.3,"body":"is how many goals he will score"},{"startTime":1101.3,"endTime":1103.67,"body":"for your team going forwards."},{"startTime":1103.67,"endTime":1107.117,"body":"Yes, you might still care"},{"startTime":1103.67,"endTime":1107.117,"body":"about his track record"},{"startTime":1107.117,"endTime":1111.424,"body":"to the extent of which the track"},{"startTime":1107.117,"endTime":1111.424,"body":"record predicts the future."},{"startTime":1111.424,"endTime":1114.627,"body":"But remember, we only"},{"startTime":1111.424,"endTime":1114.627,"body":"care about the future"},{"startTime":1114.627,"endTime":1116.79,"body":"and the track record is only a guide."},{"startTime":1116.79,"endTime":1120.94,"body":"Similarly here, yes, we"},{"startTime":1116.79,"endTime":1120.94,"body":"do care about the dividend"},{"startTime":1120.94,"endTime":1123.098,"body":"that Tesco just paid."},{"startTime":1123.098,"endTime":1126.22,"body":"Not because we actually"},{"startTime":1123.098,"endTime":1126.22,"body":"receive that dividend,"},{"startTime":1126.22,"endTime":1128.32,"body":"but because it affects what Tesco"},{"startTime":1128.32,"endTime":1129.4,"body":"is going to get in the future."},{"startTime":1129.4,"endTime":1133.234,"body":"And so we said Tesco"},{"startTime":1129.4,"endTime":1133.234,"body":"just paid three pence."},{"startTime":1133.234,"endTime":1137.68,"body":"But because that three pence is"},{"startTime":1133.234,"endTime":1137.68,"body":"going to grow by 2% every year,"},{"startTime":1137.68,"endTime":1140.25,"body":"what this means is that what I need to put"},{"startTime":1140.25,"endTime":1145.25,"body":"in the top of this equation"},{"startTime":1140.25,"endTime":1145.25,"body":"is three compounded by 2%,"},{"startTime":1145.953,"endTime":1149.25,"body":"because of the last"},{"startTime":1145.953,"endTime":1149.25,"body":"year dividend was three."},{"startTime":1149.25,"endTime":1152.591,"body":"The next year's dividend will be 3.06,"},{"startTime":1152.591,"endTime":1155.503,"body":"because that will have grown by 2%."},{"startTime":1156.494,"endTime":1158.393,"body":"So this calculation is really simple."},{"startTime":1158.393,"endTime":1160.871,"body":"It's just plus times minus divide."},{"startTime":1160.871,"endTime":1164.8,"body":"So this is why finance is"},{"startTime":1160.871,"endTime":1164.8,"body":"very easy in terms of maths,"},{"startTime":1164.8,"endTime":1168.17,"body":"but in terms of the actual"},{"startTime":1164.8,"endTime":1168.17,"body":"thought process behind it,"},{"startTime":1168.17,"endTime":1169.71,"body":"that can be complicated,"},{"startTime":1169.71,"endTime":1171.49,"body":"which is why I'm spending most of the time"},{"startTime":1171.49,"endTime":1173.17,"body":"on the underlying economics"},{"startTime":1173.17,"endTime":1175.233,"body":"and the intuition and the common sense."},{"startTime":1175.233,"endTime":1177.65,"body":"And then what would you"},{"startTime":1175.233,"endTime":1177.65,"body":"do with this number?"},{"startTime":1177.65,"endTime":1180.55,"body":"If that's what you thought"},{"startTime":1177.65,"endTime":1180.55,"body":"the valuation of Tesco was,"},{"startTime":1180.55,"endTime":1183.11,"body":"you can look up Tesco stock price."},{"startTime":1183.11,"endTime":1185.595,"body":"And I did that, and this"},{"startTime":1183.11,"endTime":1185.595,"body":"is what it was last night."},{"startTime":1185.595,"endTime":1188.77,"body":"It was 286.70."},{"startTime":1188.77,"endTime":1193.45,"body":"So if you think that"},{"startTime":1188.77,"endTime":1193.45,"body":"Tesco stock is worth 306,"},{"startTime":1193.45,"endTime":1195.423,"body":"then you would want to buy it."},{"startTime":1195.423,"endTime":1198.7,"body":"And this is indeed what stock"},{"startTime":1195.423,"endTime":1198.7,"body":"analysts do in real life."},{"startTime":1198.7,"endTime":1201.33,"body":"The calculation won't"},{"startTime":1198.7,"endTime":1201.33,"body":"be as simple as this,"},{"startTime":1201.33,"endTime":1203.683,"body":"but their general methodology is this."},{"startTime":1203.683,"endTime":1206.922,"body":"They will try to find what"},{"startTime":1203.683,"endTime":1206.922,"body":"they think the company's worth."},{"startTime":1206.922,"endTime":1209.48,"body":"They will compare it to the current price."},{"startTime":1209.48,"endTime":1212.01,"body":"And they will say, we"},{"startTime":1209.48,"endTime":1212.01,"body":"think the stock is a buy,"},{"startTime":1212.01,"endTime":1213.953,"body":"or we think the stock is a sell."},{"startTime":1216.042,"endTime":1219.37,"body":"So what causes stock"},{"startTime":1216.042,"endTime":1219.37,"body":"prices to change so much"},{"startTime":1219.37,"endTime":1221.237,"body":"from day to day?"},{"startTime":1221.237,"endTime":1223.58,"body":"Well, let's say we suddenly think,"},{"startTime":1223.58,"endTime":1225.22,"body":"well, the world is now different."},{"startTime":1225.22,"endTime":1228.71,"body":"Maybe we think there's going to"},{"startTime":1225.22,"endTime":1228.71,"body":"be another wave of the virus."},{"startTime":1228.71,"endTime":1230.6,"body":"Hopefully not, but let's say that happens."},{"startTime":1230.6,"endTime":1232.35,"body":"And we think that"},{"startTime":1230.6,"endTime":1232.35,"body":"actually now the dividend"},{"startTime":1232.35,"endTime":1233.957,"body":"will only grow by 1% per year"},{"startTime":1233.957,"endTime":1237.445,"body":"because there's a change in"},{"startTime":1233.957,"endTime":1237.445,"body":"the economic environment."},{"startTime":1237.445,"endTime":1239.74,"body":"So what is that going to do?"},{"startTime":1239.74,"endTime":1243.28,"body":"It's going to change the"},{"startTime":1239.74,"endTime":1243.28,"body":"1% both here and here,"},{"startTime":1243.28,"endTime":1246.54,"body":"and it's going to really"},{"startTime":1243.28,"endTime":1246.54,"body":"reduce the stock price of Tesco"},{"startTime":1246.54,"endTime":1248.833,"body":"down to 151.5."},{"startTime":1250.68,"endTime":1254.697,"body":"Okay so just one small"},{"startTime":1250.68,"endTime":1254.697,"body":"change in the growth rate"},{"startTime":1254.697,"endTime":1258.12,"body":"can change the value of Tesco, can half it"},{"startTime":1258.12,"endTime":1261.298,"body":"from 300 down to 150."},{"startTime":1261.298,"endTime":1265.43,"body":"And so this is why stop prices"},{"startTime":1261.298,"endTime":1265.43,"body":"can go up and down so much"},{"startTime":1265.43,"endTime":1267.587,"body":"because if there's a"},{"startTime":1265.43,"endTime":1267.587,"body":"change to a growth rate"},{"startTime":1267.587,"endTime":1271.13,"body":"and it applies every year"},{"startTime":1267.587,"endTime":1271.13,"body":"until the end of time,"},{"startTime":1271.13,"endTime":1274.51,"body":"this can have a massive"},{"startTime":1271.13,"endTime":1274.51,"body":"effect on the long term value"},{"startTime":1274.51,"endTime":1275.343,"body":"of a company."},{"startTime":1277.41,"endTime":1279.734,"body":"So, so far what we looked at,"},{"startTime":1279.734,"endTime":1282.07,"body":"we've found two different formulas"},{"startTime":1282.07,"endTime":1283.838,"body":"to try to value a company."},{"startTime":1283.838,"endTime":1287.09,"body":"One of them is the exact academic formula"},{"startTime":1287.09,"endTime":1290.06,"body":"where you value every single dividend"},{"startTime":1290.06,"endTime":1291.89,"body":"right until the end of time."},{"startTime":1291.89,"endTime":1294.1,"body":"It's correct, but it's impractical"},{"startTime":1294.1,"endTime":1296.95,"body":"because we can't forecast"},{"startTime":1294.1,"endTime":1296.95,"body":"so far in the future."},{"startTime":1296.95,"endTime":1299.73,"body":"Then we just had a quick and dirty formula"},{"startTime":1299.73,"endTime":1302.95,"body":"is that if you can assume"},{"startTime":1299.73,"endTime":1302.95,"body":"that a company's dividends"},{"startTime":1302.95,"endTime":1305.71,"body":"grow by the same rate every single year,"},{"startTime":1305.71,"endTime":1307.163,"body":"then we can use the shortcut."},{"startTime":1308.5,"endTime":1311.42,"body":"But in reality, we can't"},{"startTime":1308.5,"endTime":1311.42,"body":"make that assumption."},{"startTime":1311.42,"endTime":1314.73,"body":"Some companies don't yet"},{"startTime":1311.42,"endTime":1314.73,"body":"pay dividends like Tesla,"},{"startTime":1314.73,"endTime":1316.294,"body":"or even if you do pay dividends,"},{"startTime":1316.294,"endTime":1319.458,"body":"maybe that might be grown"},{"startTime":1316.294,"endTime":1319.458,"body":"really fast for two years,"},{"startTime":1319.458,"endTime":1322.753,"body":"and then it's going to"},{"startTime":1319.458,"endTime":1322.753,"body":"settle into a steady state."},{"startTime":1323.84,"endTime":1326.64,"body":"So in reality, what would you do?"},{"startTime":1326.64,"endTime":1329.4,"body":"Well, you'd have to use a bit of both."},{"startTime":1329.4,"endTime":1331.86,"body":"So let's say I can't forecast my dividends"},{"startTime":1331.86,"endTime":1334.93,"body":"until the end of time,"},{"startTime":1331.86,"endTime":1334.93,"body":"but I can forecast them"},{"startTime":1334.93,"endTime":1336.932,"body":"for the next five years or so."},{"startTime":1336.932,"endTime":1341.46,"body":"So what I do is I would"},{"startTime":1336.932,"endTime":1341.46,"body":"explicitly forecast the dividends"},{"startTime":1341.46,"endTime":1343.44,"body":"for the next five years."},{"startTime":1343.44,"endTime":1347.06,"body":"And then after those five"},{"startTime":1343.44,"endTime":1347.06,"body":"years, I will ask myself,"},{"startTime":1347.06,"endTime":1351.16,"body":"what is the company worth at"},{"startTime":1347.06,"endTime":1351.16,"body":"the end of that fifth year?"},{"startTime":1351.16,"endTime":1354.47,"body":"And that is something"},{"startTime":1351.16,"endTime":1354.47,"body":"known as terminal value,"},{"startTime":1354.47,"endTime":1356.058,"body":"which is the value of the company"},{"startTime":1356.058,"endTime":1358.62,"body":"at the end of the fifth year."},{"startTime":1358.62,"endTime":1360.636,"body":"So what is the stock worth for me today?"},{"startTime":1360.636,"endTime":1363.72,"body":"It's worth the dividends"},{"startTime":1360.636,"endTime":1363.72,"body":"over the next five years"},{"startTime":1363.72,"endTime":1366.173,"body":"and the terminal value."},{"startTime":1366.173,"endTime":1367.65,"body":"What is the company worth"},{"startTime":1367.65,"endTime":1369.533,"body":"at the end of that five year period?"},{"startTime":1370.617,"endTime":1372.81,"body":"Okay that sounds well and good."},{"startTime":1372.81,"endTime":1375.11,"body":"So how do we estimate terminal value?"},{"startTime":1375.11,"endTime":1377.39,"body":"How do we know what the company's worth"},{"startTime":1377.39,"endTime":1378.623,"body":"after those five years?"},{"startTime":1379.569,"endTime":1382.337,"body":"Well, how do we estimate terminal value?"},{"startTime":1382.337,"endTime":1385.21,"body":"Let's think about, well,"},{"startTime":1382.337,"endTime":1385.21,"body":"how do we estimate value?"},{"startTime":1385.21,"endTime":1387.44,"body":"How do we estimate the value of anything?"},{"startTime":1387.44,"endTime":1389.14,"body":"And what is perhaps something"},{"startTime":1389.14,"endTime":1391.707,"body":"that you will all have"},{"startTime":1389.14,"endTime":1391.707,"body":"practiced in trying to value?"},{"startTime":1391.707,"endTime":1394.53,"body":"Perhaps the most important"},{"startTime":1391.707,"endTime":1394.53,"body":"investment you'll ever make"},{"startTime":1394.53,"endTime":1396.634,"body":"is the value of a house."},{"startTime":1396.634,"endTime":1400.771,"body":"So how do we think about"},{"startTime":1396.634,"endTime":1400.771,"body":"how much a house is worth?"},{"startTime":1400.771,"endTime":1403.812,"body":"Well, there's two ways we can think"},{"startTime":1403.812,"endTime":1404.7,"body":"about the value of a house."},{"startTime":1404.7,"endTime":1406.91,"body":"The first is the fundamentals."},{"startTime":1406.91,"endTime":1410.71,"body":"What does a house actually"},{"startTime":1406.91,"endTime":1410.71,"body":"get you if you buy it?"},{"startTime":1410.71,"endTime":1413.1,"body":"The house gets you somewhere you can live."},{"startTime":1413.1,"endTime":1414.34,"body":"What is that worth?"},{"startTime":1414.34,"endTime":1416.534,"body":"That's worth the rent of the house."},{"startTime":1416.534,"endTime":1420.49,"body":"Because by buying the house that saves you"},{"startTime":1420.49,"endTime":1422.39,"body":"having to pay out rent."},{"startTime":1422.39,"endTime":1424.238,"body":"So what a house is fundamentally worth"},{"startTime":1424.238,"endTime":1427.57,"body":"is what you could rent it for."},{"startTime":1427.57,"endTime":1430.17,"body":"This is regardless of whether"},{"startTime":1427.57,"endTime":1430.17,"body":"you're going to live in it,"},{"startTime":1430.17,"endTime":1432.88,"body":"that saves your own rent, or if"},{"startTime":1430.17,"endTime":1432.88,"body":"you're going to be a landlord"},{"startTime":1432.88,"endTime":1435.32,"body":"and rent it out and you're"},{"startTime":1432.88,"endTime":1435.32,"body":"going to be receiving the rent."},{"startTime":1435.32,"endTime":1439.15,"body":"What you care about is the"},{"startTime":1435.32,"endTime":1439.15,"body":"rental income from the house."},{"startTime":1439.15,"endTime":1441.44,"body":"And so what a house is"},{"startTime":1439.15,"endTime":1441.44,"body":"fundamentally worth,"},{"startTime":1441.44,"endTime":1444.12,"body":"and this is what estate"},{"startTime":1441.44,"endTime":1444.12,"body":"agents might partly look at"},{"startTime":1444.12,"endTime":1447.15,"body":"is indeed how much it rents for"},{"startTime":1447.15,"endTime":1449.6,"body":"and how much those rents"},{"startTime":1447.15,"endTime":1449.6,"body":"will grow in the future."},{"startTime":1450.71,"endTime":1454.88,"body":"But I said, that's what"},{"startTime":1450.71,"endTime":1454.88,"body":"partly estate agents look at,"},{"startTime":1454.88,"endTime":1457.219,"body":"because the main thing that"},{"startTime":1454.88,"endTime":1457.219,"body":"estate agents might look at"},{"startTime":1457.219,"endTime":1460.88,"body":"is comparables, what they will look at"},{"startTime":1460.88,"endTime":1463.58,"body":"is other similar houses."},{"startTime":1463.58,"endTime":1466.17,"body":"So if other similar houses of similar size"},{"startTime":1466.17,"endTime":1469.54,"body":"in the same neighborhood are"},{"startTime":1466.17,"endTime":1469.54,"body":"trading in a certain amount,"},{"startTime":1469.54,"endTime":1472.28,"body":"then that will guide us"},{"startTime":1469.54,"endTime":1472.28,"body":"on how much our house"},{"startTime":1472.28,"endTime":1473.737,"body":"should be costing."},{"startTime":1473.737,"endTime":1477.08,"body":"And so these two principles"},{"startTime":1473.737,"endTime":1477.08,"body":"for valuing a house,"},{"startTime":1477.08,"endTime":1479.478,"body":"fundamentals, how much"},{"startTime":1477.08,"endTime":1479.478,"body":"we can rent it out for"},{"startTime":1479.478,"endTime":1483.86,"body":"and comparables, what"},{"startTime":1479.478,"endTime":1483.86,"body":"other houses are worth."},{"startTime":1483.86,"endTime":1487.86,"body":"Those are the two same"},{"startTime":1483.86,"endTime":1487.86,"body":"principles for stock valuation."},{"startTime":1487.86,"endTime":1489.44,"body":"And so why I like to look at analogies"},{"startTime":1489.44,"endTime":1492.0,"body":"is people think, oh, stocks"},{"startTime":1489.44,"endTime":1492.0,"body":"they're really complicated,"},{"startTime":1492.0,"endTime":1494.87,"body":"the stock market is really cumbersome,"},{"startTime":1494.87,"endTime":1497.98,"body":"but the principles of valuation"},{"startTime":1494.87,"endTime":1497.98,"body":"that we can understand"},{"startTime":1497.98,"endTime":1501.31,"body":"with more simple things,"},{"startTime":1497.98,"endTime":1501.31,"body":"every day, things like houses,"},{"startTime":1501.31,"endTime":1502.543,"body":"they will also apply."},{"startTime":1503.6,"endTime":1505.743,"body":"So let's look at these two things in turn."},{"startTime":1507.01,"endTime":1508.37,"body":"So the first thing we might do"},{"startTime":1508.37,"endTime":1510.16,"body":"is go back to the fundamentals."},{"startTime":1510.16,"endTime":1512.25,"body":"We are valuing the house by looking"},{"startTime":1512.25,"endTime":1514.069,"body":"at the rental income we can get,"},{"startTime":1514.069,"endTime":1515.991,"body":"translate that to the company."},{"startTime":1515.991,"endTime":1519.015,"body":"We are trying to look at"},{"startTime":1515.991,"endTime":1519.015,"body":"the terminal value act"},{"startTime":1519.015,"endTime":1523.26,"body":"at the end of year five and"},{"startTime":1519.015,"endTime":1523.26,"body":"the house that company's worth"},{"startTime":1523.26,"endTime":1527.73,"body":"what the future dividends"},{"startTime":1523.26,"endTime":1527.73,"body":"will be from year six onwards."},{"startTime":1527.73,"endTime":1529.83,"body":"So why is that so powerful?"},{"startTime":1529.83,"endTime":1533.02,"body":"Because it might be that"},{"startTime":1529.83,"endTime":1533.02,"body":"the company's immature"},{"startTime":1533.02,"endTime":1534.66,"body":"for the first five years,"},{"startTime":1534.66,"endTime":1537.09,"body":"dividends are bouncing"},{"startTime":1534.66,"endTime":1537.09,"body":"around all the time."},{"startTime":1537.09,"endTime":1540.8,"body":"So we cannot assume a"},{"startTime":1537.09,"endTime":1540.8,"body":"constant growth rate,"},{"startTime":1540.8,"endTime":1544.75,"body":"but maybe after five years,"},{"startTime":1540.8,"endTime":1544.75,"body":"the company has matured."},{"startTime":1544.75,"endTime":1547.85,"body":"And then we can use that shortcut formula"},{"startTime":1547.85,"endTime":1549.893,"body":"that assumes a constant growth rate."},{"startTime":1550.92,"endTime":1552.32,"body":"Let me repeat myself,"},{"startTime":1552.32,"endTime":1554.763,"body":"the shortcut formula that we use for Tesco"},{"startTime":1554.763,"endTime":1556.63,"body":"that is really attractive"},{"startTime":1556.63,"endTime":1559.511,"body":"if you can assume a constant growth rate,"},{"startTime":1559.511,"endTime":1562.39,"body":"but you might not be able to"},{"startTime":1559.511,"endTime":1562.39,"body":"assume a constant growth rate"},{"startTime":1562.39,"endTime":1563.853,"body":"from the start."},{"startTime":1563.853,"endTime":1567.2,"body":"Maybe you can only assume"},{"startTime":1563.853,"endTime":1567.2,"body":"it from year five onwards."},{"startTime":1567.2,"endTime":1570.04,"body":"So if so, we will explicitly forecast"},{"startTime":1570.04,"endTime":1574.23,"body":"the first five dividends and"},{"startTime":1570.04,"endTime":1574.23,"body":"then use the shortcut formula"},{"startTime":1574.23,"endTime":1577.35,"body":"from year five onwards"},{"startTime":1574.23,"endTime":1577.35,"body":"when Tesco is mature."},{"startTime":1577.35,"endTime":1580.0,"body":"And then we can make that"},{"startTime":1577.35,"endTime":1580.0,"body":"simple shortcut assumption."},{"startTime":1581.05,"endTime":1584.54,"body":"So what we have is the value"},{"startTime":1581.05,"endTime":1584.54,"body":"of Tesco or any company,"},{"startTime":1584.54,"endTime":1586.753,"body":"it's the first five years of dividends."},{"startTime":1587.63,"endTime":1591.11,"body":"And then the terminal value"},{"startTime":1587.63,"endTime":1591.11,"body":"is the future dividends"},{"startTime":1591.11,"endTime":1593.057,"body":"from then on which we're going to assume"},{"startTime":1593.057,"endTime":1595.223,"body":"are growing at a constant rate."},{"startTime":1596.86,"endTime":1601.614,"body":"So again, let's just try to"},{"startTime":1596.86,"endTime":1601.614,"body":"apply this with an example."},{"startTime":1601.614,"endTime":1603.5,"body":"So let's go back to"},{"startTime":1601.614,"endTime":1603.5,"body":"Tesco, I'm going to try"},{"startTime":1603.5,"endTime":1605.76,"body":"and keep the numbers"},{"startTime":1603.5,"endTime":1605.76,"body":"exactly the same as possible"},{"startTime":1605.76,"endTime":1607.414,"body":"to the extent that I can."},{"startTime":1607.414,"endTime":1610.7,"body":"Dividend of three last"},{"startTime":1607.414,"endTime":1610.7,"body":"year, beta is the same."},{"startTime":1610.7,"endTime":1612.876,"body":"The dividend grows by 2%,"},{"startTime":1612.876,"endTime":1616.39,"body":"but we're now going to say"},{"startTime":1612.876,"endTime":1616.39,"body":"the dividend only grows by 2%"},{"startTime":1616.39,"endTime":1618.31,"body":"for the first two years."},{"startTime":1618.31,"endTime":1620.06,"body":"Why is it growing so quickly?"},{"startTime":1620.06,"endTime":1622.153,"body":"Because of the recovery from the pandemic,"},{"startTime":1622.153,"endTime":1625.57,"body":"but then we're going to say"},{"startTime":1622.153,"endTime":1625.57,"body":"actually after two years,"},{"startTime":1625.57,"endTime":1630.12,"body":"it's going to level off and"},{"startTime":1625.57,"endTime":1630.12,"body":"only grow at 1.5% from then on."},{"startTime":1631.12,"endTime":1632.27,"body":"So how do things change?"},{"startTime":1632.27,"endTime":1634.83,"body":"What we can't use that"},{"startTime":1632.27,"endTime":1634.83,"body":"constant growth formula"},{"startTime":1634.83,"endTime":1637.298,"body":"from the start because"},{"startTime":1634.83,"endTime":1637.298,"body":"dividends were by 2%"},{"startTime":1637.298,"endTime":1639.317,"body":"and then by 1.5."},{"startTime":1639.317,"endTime":1642.84,"body":"So what we're going to do is"},{"startTime":1639.317,"endTime":1642.84,"body":"we're going to explicitly forecast"},{"startTime":1642.84,"endTime":1644.612,"body":"the first two dividends"},{"startTime":1644.612,"endTime":1646.883,"body":"and then use the shortcut afterwards."},{"startTime":1647.81,"endTime":1649.34,"body":"So let's do that."},{"startTime":1649.34,"endTime":1652.55,"body":"So what we could do is we"},{"startTime":1649.34,"endTime":1652.55,"body":"could just make a table"},{"startTime":1652.55,"endTime":1655.734,"body":"projecting the dividends of Tesco."},{"startTime":1655.734,"endTime":1658.974,"body":"It was three just received me."},{"startTime":1658.974,"endTime":1662.21,"body":"It grows by 2% for the first year."},{"startTime":1662.21,"endTime":1665.25,"body":"Grows by 2% for the second year."},{"startTime":1665.25,"endTime":1666.69,"body":"And then from year three onwards,"},{"startTime":1666.69,"endTime":1670.263,"body":"it's grown by 1.5% until the end of time."},{"startTime":1671.193,"endTime":1673.49,"body":"So how do we do the calculation?"},{"startTime":1673.49,"endTime":1676.853,"body":"What we're doing is"},{"startTime":1673.49,"endTime":1676.853,"body":"we're going to first look"},{"startTime":1676.853,"endTime":1680.95,"body":"at what is the stock price comprised of."},{"startTime":1680.95,"endTime":1685.62,"body":"The first dividend 3.06,"},{"startTime":1680.95,"endTime":1685.62,"body":"the second dividend,"},{"startTime":1685.62,"endTime":1690.62,"body":"that's also grown by 2%, 3.1212,"},{"startTime":1685.62,"endTime":1690.62,"body":"the third dividend of 3.16."},{"startTime":1692.915,"endTime":1697.915,"body":"And that is then growing by 1.5% per year."},{"startTime":1698.12,"endTime":1699.32,"body":"So if you look at the numbers,"},{"startTime":1699.32,"endTime":1702.69,"body":"we're going to value the first"},{"startTime":1699.32,"endTime":1702.69,"body":"dividend, the second dividend,"},{"startTime":1702.69,"endTime":1704.27,"body":"and then the third dividend,"},{"startTime":1704.27,"endTime":1707.811,"body":"which then grows at 1.5%,"},{"startTime":1704.27,"endTime":1707.811,"body":"and because that is constant,"},{"startTime":1707.811,"endTime":1711.834,"body":"we can now use that"},{"startTime":1707.811,"endTime":1711.834,"body":"simple shortcut formula."},{"startTime":1711.834,"endTime":1714.24,"body":"And at the end of the day,"},{"startTime":1711.834,"endTime":1714.24,"body":"this leads to the price"},{"startTime":1714.24,"endTime":1715.107,"body":"being 205."},{"startTime":1716.053,"endTime":1718.28,"body":"And if you remember, what was it"},{"startTime":1718.28,"endTime":1721.063,"body":"when the growth rate was"},{"startTime":1718.28,"endTime":1721.063,"body":"2% forever, it was 306."},{"startTime":1722.37,"endTime":1725.011,"body":"It's now gone down a huge amount to 205."},{"startTime":1725.011,"endTime":1729.114,"body":"Why again small changes"},{"startTime":1725.011,"endTime":1729.114,"body":"in the growth rates"},{"startTime":1729.114,"endTime":1733.0,"body":"can have huge changes in the stock price."},{"startTime":1733.0,"endTime":1735.34,"body":"And again, this is why"},{"startTime":1733.0,"endTime":1735.34,"body":"people will disagree so much"},{"startTime":1735.34,"endTime":1736.37,"body":"in the value of a stock."},{"startTime":1736.37,"endTime":1739.573,"body":"This is why so many people"},{"startTime":1736.37,"endTime":1739.573,"body":"will trade stock every day."},{"startTime":1739.573,"endTime":1743.82,"body":"I might think Tesco can sustain"},{"startTime":1739.573,"endTime":1743.82,"body":"its growth of 2% forever."},{"startTime":1743.82,"endTime":1745.34,"body":"Simon might think I'm a fool."},{"startTime":1745.34,"endTime":1747.2,"body":"They could only sustain it for two years"},{"startTime":1747.2,"endTime":1750.53,"body":"and then it tails off and"},{"startTime":1747.2,"endTime":1750.53,"body":"therefore Simon will sell"},{"startTime":1750.53,"endTime":1752.883,"body":"and I will buy, we will"},{"startTime":1750.53,"endTime":1752.883,"body":"trade with each other."},{"startTime":1753.798,"endTime":1756.7,"body":"And so if you are then to compare that"},{"startTime":1756.7,"endTime":1761.23,"body":"to Tesco's current price, you"},{"startTime":1756.7,"endTime":1761.23,"body":"might say, no, let's sell it."},{"startTime":1761.23,"endTime":1762.063,"body":"Why?"},{"startTime":1762.063,"endTime":1763.88,"body":"Because we don't think"},{"startTime":1762.063,"endTime":1763.88,"body":"it's actually worth it"},{"startTime":1763.88,"endTime":1765.74,"body":"when we take into account"},{"startTime":1763.88,"endTime":1765.74,"body":"the fact that growth"},{"startTime":1765.74,"endTime":1766.64,"body":"is going to tail off."},{"startTime":1767.898,"endTime":1770.139,"body":"So that was the fundamental method."},{"startTime":1770.139,"endTime":1772.078,"body":"But remember I said that the other way"},{"startTime":1772.078,"endTime":1777.078,"body":"in which you value a house is"},{"startTime":1772.078,"endTime":1777.078,"body":"you look at comparable houses,"},{"startTime":1777.25,"endTime":1779.16,"body":"look at the prices of other houses"},{"startTime":1779.16,"endTime":1782.736,"body":"and then see what our house is worth."},{"startTime":1782.736,"endTime":1785.81,"body":"But the big question is what is it"},{"startTime":1785.81,"endTime":1787.93,"body":"to have a comparable house?"},{"startTime":1787.93,"endTime":1790.857,"body":"What is the important"},{"startTime":1787.93,"endTime":1790.857,"body":"dimension of comparability?"},{"startTime":1790.857,"endTime":1795.298,"body":"Is, my property's address"},{"startTime":1790.857,"endTime":1795.298,"body":"is 15 Peninsula Court."},{"startTime":1795.298,"endTime":1800.217,"body":"Do I compare my house with other"},{"startTime":1795.298,"endTime":1800.217,"body":"houses which are number 15?"},{"startTime":1800.217,"endTime":1801.233,"body":"No."},{"startTime":1801.233,"endTime":1803.477,"body":"Because the number 15 is irrelevant."},{"startTime":1803.477,"endTime":1805.9,"body":"What is the value of a house based on,"},{"startTime":1805.9,"endTime":1809.0,"body":"what is the value driver of a house?"},{"startTime":1809.0,"endTime":1813.356,"body":"The main driver of value of a"},{"startTime":1809.0,"endTime":1813.356,"body":"house is its square footage."},{"startTime":1813.356,"endTime":1818.0,"body":"So what I would do is I"},{"startTime":1813.356,"endTime":1818.0,"body":"would look at other houses"},{"startTime":1818.0,"endTime":1823.0,"body":"in the same region and look at"},{"startTime":1818.0,"endTime":1823.0,"body":"their price per square foot."},{"startTime":1823.65,"endTime":1824.483,"body":"Why?"},{"startTime":1824.483,"endTime":1826.26,"body":"Because the square footage of the house"},{"startTime":1826.26,"endTime":1829.09,"body":"is the main thing that drives"},{"startTime":1826.26,"endTime":1829.09,"body":"the value of the house."},{"startTime":1829.09,"endTime":1830.98,"body":"So let's say you want"},{"startTime":1829.09,"endTime":1830.98,"body":"to take a holiday home"},{"startTime":1830.98,"endTime":1832.357,"body":"in Whimple, Exeter."},{"startTime":1832.357,"endTime":1837.357,"body":"You find this house and this"},{"startTime":1832.357,"endTime":1837.357,"body":"house is worth 295,000 pounds."},{"startTime":1837.68,"endTime":1840.45,"body":"And you see on the estate agent website,"},{"startTime":1840.45,"endTime":1843.373,"body":"this is 847 square foot."},{"startTime":1843.373,"endTime":1844.92,"body":"That is what you care about,"},{"startTime":1844.92,"endTime":1846.57,"body":"you don't care about its number."},{"startTime":1846.57,"endTime":1850.07,"body":"You might not even care"},{"startTime":1846.57,"endTime":1850.07,"body":"about the number of bedrooms"},{"startTime":1850.07,"endTime":1852.83,"body":"so much as the size of the house."},{"startTime":1852.83,"endTime":1854.75,"body":"That is the main thing"},{"startTime":1852.83,"endTime":1854.75,"body":"people are concerned about."},{"startTime":1854.75,"endTime":1859.75,"body":"And so you'll say this costs"},{"startTime":1854.75,"endTime":1859.75,"body":"me 348 pounds per square foot."},{"startTime":1861.82,"endTime":1865.399,"body":"And so that's interesting because"},{"startTime":1861.82,"endTime":1865.399,"body":"if there was another house"},{"startTime":1865.399,"endTime":1869.21,"body":"which was 1,000 square"},{"startTime":1865.399,"endTime":1869.21,"body":"foot, well, you'd say,"},{"startTime":1869.21,"endTime":1873.38,"body":"well, the fair price"},{"startTime":1869.21,"endTime":1873.38,"body":"is then 348,000 pounds."},{"startTime":1873.38,"endTime":1876.12,"body":"So the strength and the"},{"startTime":1873.38,"endTime":1876.12,"body":"beauty of this method"},{"startTime":1876.12,"endTime":1881.07,"body":"is you can actually compare"},{"startTime":1876.12,"endTime":1881.07,"body":"houses of different sizes"},{"startTime":1881.07,"endTime":1882.72,"body":"because when you put them all"},{"startTime":1882.72,"endTime":1884.859,"body":"under the same common denominator,"},{"startTime":1884.859,"endTime":1888.11,"body":"then you have that ratio,"},{"startTime":1884.859,"endTime":1888.11,"body":"which is comparable."},{"startTime":1888.11,"endTime":1890.25,"body":"This is why when you go back to Tesco."},{"startTime":1890.25,"endTime":1892.682,"body":"Now, not to value Tesco,"},{"startTime":1890.25,"endTime":1892.682,"body":"but to buy stuff from Tesco,"},{"startTime":1892.682,"endTime":1896.53,"body":"let's say you want to buy some"},{"startTime":1892.682,"endTime":1896.53,"body":"cereal, like cereal boxes."},{"startTime":1896.53,"endTime":1898.201,"body":"They come in all different sizes,"},{"startTime":1898.201,"endTime":1901.558,"body":"but how do we know what"},{"startTime":1898.201,"endTime":1901.558,"body":"cereal is most affordable?"},{"startTime":1901.558,"endTime":1905.499,"body":"They'll put the price per 100 grams."},{"startTime":1905.499,"endTime":1909.111,"body":"And this whole idea of price"},{"startTime":1905.499,"endTime":1909.111,"body":"per square foot for a house"},{"startTime":1909.111,"endTime":1913.06,"body":"is the equivalent of"},{"startTime":1909.111,"endTime":1913.06,"body":"your price per 100 grams."},{"startTime":1913.06,"endTime":1914.863,"body":"So going back to the prior example,"},{"startTime":1914.863,"endTime":1918.6,"body":"what drives the value of house?"},{"startTime":1918.6,"endTime":1921.25,"body":"It is the square footage,"},{"startTime":1918.6,"endTime":1921.25,"body":"that's what we care about."},{"startTime":1921.25,"endTime":1922.88,"body":"Just like when we buy cereal,"},{"startTime":1922.88,"endTime":1925.119,"body":"we don't care about the size of the box."},{"startTime":1925.119,"endTime":1928.34,"body":"We care about the amount"},{"startTime":1925.119,"endTime":1928.34,"body":"of cereal that it contains."},{"startTime":1928.34,"endTime":1931.02,"body":"It could be there's a massive"},{"startTime":1928.34,"endTime":1931.02,"body":"box with not much cereal."},{"startTime":1931.02,"endTime":1934.595,"body":"So what we're paying for is"},{"startTime":1931.02,"endTime":1934.595,"body":"the actual grams of the cereal."},{"startTime":1934.595,"endTime":1938.06,"body":"And so when we apply this to companies,"},{"startTime":1938.06,"endTime":1942.3,"body":"we then need to think about"},{"startTime":1938.06,"endTime":1942.3,"body":"what is the value driver"},{"startTime":1942.3,"endTime":1943.44,"body":"of a company?"},{"startTime":1943.44,"endTime":1947.03,"body":"What do we care about about a company"},{"startTime":1947.03,"endTime":1948.883,"body":"when we are deciding to buy it?"},{"startTime":1950.37,"endTime":1952.49,"body":"And here it's actually not so obvious."},{"startTime":1952.49,"endTime":1955.15,"body":"With a house, there is one clear dimension"},{"startTime":1955.15,"endTime":1956.95,"body":"that we care about above all else,"},{"startTime":1956.95,"endTime":1958.36,"body":"which is its square footage,"},{"startTime":1958.36,"endTime":1961.36,"body":"but for a company there's"},{"startTime":1958.36,"endTime":1961.36,"body":"many different aspects"},{"startTime":1961.36,"endTime":1963.813,"body":"of a company that we might care about."},{"startTime":1964.66,"endTime":1968.093,"body":"So one thing you might"},{"startTime":1964.66,"endTime":1968.093,"body":"care about is book value."},{"startTime":1969.04,"endTime":1970.433,"body":"So what is book value?"},{"startTime":1970.433,"endTime":1974.201,"body":"That is the value of"},{"startTime":1970.433,"endTime":1974.201,"body":"the assets of a company."},{"startTime":1974.201,"endTime":1977.342,"body":"Companies own things like"},{"startTime":1974.201,"endTime":1977.342,"body":"buildings and factories."},{"startTime":1977.342,"endTime":1980.28,"body":"And you might think that"},{"startTime":1977.342,"endTime":1980.28,"body":"the value of a company"},{"startTime":1980.28,"endTime":1981.96,"body":"depends on its hard assets."},{"startTime":1981.96,"endTime":1984.26,"body":"And that is true for some companies."},{"startTime":1984.26,"endTime":1986.36,"body":"So let's say you are"},{"startTime":1984.26,"endTime":1986.36,"body":"a real estate company."},{"startTime":1986.36,"endTime":1988.25,"body":"You own a lot of property."},{"startTime":1988.25,"endTime":1991.39,"body":"The value of that company"},{"startTime":1988.25,"endTime":1991.39,"body":"really is the value"},{"startTime":1991.39,"endTime":1993.39,"body":"of its property portfolio."},{"startTime":1993.39,"endTime":1996.72,"body":"So what you do is you"},{"startTime":1993.39,"endTime":1996.72,"body":"would calculate the value"},{"startTime":1996.72,"endTime":1999.93,"body":"of its property portfolio and compare that"},{"startTime":1999.93,"endTime":2002.97,"body":"to other companies with"},{"startTime":1999.93,"endTime":2002.97,"body":"similar property portfolios"},{"startTime":2002.97,"endTime":2007.14,"body":"and look at the price"},{"startTime":2002.97,"endTime":2007.14,"body":"per amount of book value"},{"startTime":2007.14,"endTime":2008.79,"body":"per amount of property portfolio."},{"startTime":2010.01,"endTime":2012.32,"body":"So that works for some companies,"},{"startTime":2012.32,"endTime":2015.47,"body":"but there's other companies"},{"startTime":2012.32,"endTime":2015.47,"body":"which really don't have much"},{"startTime":2015.47,"endTime":2017.61,"body":"in terms of hard assets."},{"startTime":2017.61,"endTime":2020.47,"body":"So let's take a tech startup."},{"startTime":2020.47,"endTime":2022.513,"body":"A tech startup, what are the main assets?"},{"startTime":2022.513,"endTime":2026.34,"body":"They're the ideas or"},{"startTime":2022.513,"endTime":2026.34,"body":"the people and people,"},{"startTime":2026.34,"endTime":2028.379,"body":"you can't really have a value on."},{"startTime":2028.379,"endTime":2031.76,"body":"These people are never in"},{"startTime":2028.379,"endTime":2031.76,"body":"the accounting statements"},{"startTime":2031.76,"endTime":2034.867,"body":"of a company, they are never"},{"startTime":2031.76,"endTime":2034.867,"body":"in the books of a company."},{"startTime":2034.867,"endTime":2037.86,"body":"That's why they're not part of book value."},{"startTime":2037.86,"endTime":2040.93,"body":"And so there's other industries"},{"startTime":2037.86,"endTime":2040.93,"body":"where you don't really care"},{"startTime":2040.93,"endTime":2044.4,"body":"about the hard assets a company has,"},{"startTime":2044.4,"endTime":2048.01,"body":"but instead you might care about"},{"startTime":2044.4,"endTime":2048.01,"body":"something like the earnings"},{"startTime":2048.01,"endTime":2051.17,"body":"that the company makes,"},{"startTime":2048.01,"endTime":2051.17,"body":"how much profit they make."},{"startTime":2051.17,"endTime":2052.13,"body":"Why?"},{"startTime":2052.13,"endTime":2054.97,"body":"Because even if the assets are people,"},{"startTime":2054.97,"endTime":2057.42,"body":"they're not hard assets like a machine,"},{"startTime":2057.42,"endTime":2059.59,"body":"those people are still valuable"},{"startTime":2059.59,"endTime":2061.45,"body":"because they generate your earnings."},{"startTime":2061.45,"endTime":2062.66,"body":"And so what you might care about"},{"startTime":2062.66,"endTime":2065.03,"body":"is actually not how much"},{"startTime":2062.66,"endTime":2065.03,"body":"hard assets you have,"},{"startTime":2065.03,"endTime":2067.18,"body":"but how many earnings"},{"startTime":2065.03,"endTime":2067.18,"body":"the company generates,"},{"startTime":2067.18,"endTime":2070.12,"body":"because that takes an account"},{"startTime":2067.18,"endTime":2070.12,"body":"are the earnings generated"},{"startTime":2070.12,"endTime":2073.077,"body":"from smart people or great machines."},{"startTime":2073.077,"endTime":2076.86,"body":"And so indeed what most companies"},{"startTime":2073.077,"endTime":2076.86,"body":"are valued at in reality"},{"startTime":2076.86,"endTime":2080.85,"body":"is a price per earnings ratio."},{"startTime":2080.85,"endTime":2082.38,"body":"So many of you have heard of this."},{"startTime":2082.38,"endTime":2084.134,"body":"It's known as the PE ratio."},{"startTime":2084.134,"endTime":2087.15,"body":"When we're thinking about"},{"startTime":2084.134,"endTime":2087.15,"body":"how to value a company,"},{"startTime":2087.15,"endTime":2089.557,"body":"we value a company by its earnings,"},{"startTime":2089.557,"endTime":2093.296,"body":"just like we value a cereal by the weight"},{"startTime":2093.296,"endTime":2096.59,"body":"and we value a house"},{"startTime":2093.296,"endTime":2096.59,"body":"by the square footage."},{"startTime":2096.59,"endTime":2098.13,"body":"Let's look at this."},{"startTime":2098.13,"endTime":2101.91,"body":"So let's take GlaxoSmithKline,"},{"startTime":2098.13,"endTime":2101.91,"body":"the pharmaceuticals company."},{"startTime":2101.91,"endTime":2106.91,"body":"These are data as of last"},{"startTime":2101.91,"endTime":2106.91,"body":"night, the price was 1755,"},{"startTime":2107.57,"endTime":2109.44,"body":"the earnings per share,"},{"startTime":2109.44,"endTime":2114.27,"body":"so how much profit the company"},{"startTime":2109.44,"endTime":2114.27,"body":"made per share was 113."},{"startTime":2114.27,"endTime":2117.43,"body":"And if you divide one by the other,"},{"startTime":2117.43,"endTime":2120.973,"body":"the price earnings ratio is 15.51."},{"startTime":2121.84,"endTime":2123.493,"body":"And so why is that useful?"},{"startTime":2123.493,"endTime":2126.18,"body":"Well, you could compare GlaxoSmithKline"},{"startTime":2127.294,"endTime":2129.63,"body":"to other types of"},{"startTime":2127.294,"endTime":2129.63,"body":"pharmaceuticals companies."},{"startTime":2129.63,"endTime":2132.038,"body":"So we can look at AstraZeneca"},{"startTime":2132.038,"endTime":2134.27,"body":"and we can look at further"},{"startTime":2132.038,"endTime":2134.27,"body":"pharmaceuticals companies."},{"startTime":2134.27,"endTime":2139.03,"body":"And if indeed they're all"},{"startTime":2134.27,"endTime":2139.03,"body":"trading at 20, we might think,"},{"startTime":2139.03,"endTime":2141.84,"body":"well, actually this is"},{"startTime":2139.03,"endTime":2141.84,"body":"a pretty cheap stock."},{"startTime":2141.84,"endTime":2144.83,"body":"Just like if the price"},{"startTime":2141.84,"endTime":2144.83,"body":"per square foot on a house"},{"startTime":2144.83,"endTime":2147.14,"body":"was less than other comparable houses,"},{"startTime":2147.14,"endTime":2149.12,"body":"we might think it's a buy."},{"startTime":2149.12,"endTime":2152.69,"body":"So this is a really nice way"},{"startTime":2149.12,"endTime":2152.69,"body":"to try to estimate a value"},{"startTime":2152.69,"endTime":2153.56,"body":"of a company."},{"startTime":2153.56,"endTime":2156.6,"body":"You look at the comparable companies."},{"startTime":2156.6,"endTime":2158.42,"body":"But the tricky thing, let"},{"startTime":2156.6,"endTime":2158.42,"body":"me just stress it again"},{"startTime":2158.42,"endTime":2161.272,"body":"is that unlike with a house it's not clear"},{"startTime":2161.272,"endTime":2164.36,"body":"what the value drive is,"},{"startTime":2161.272,"endTime":2164.36,"body":"could it be book value?"},{"startTime":2164.36,"endTime":2165.76,"body":"Could it be earnings?"},{"startTime":2165.76,"endTime":2167.93,"body":"Well, whatever company"},{"startTime":2165.76,"endTime":2167.93,"body":"doesn't really make earnings."},{"startTime":2167.93,"endTime":2170.428,"body":"So often startups, they"},{"startTime":2167.93,"endTime":2170.428,"body":"don't make profits."},{"startTime":2170.428,"endTime":2174.676,"body":"So you might value it"},{"startTime":2170.428,"endTime":2174.676,"body":"according to price per sales."},{"startTime":2174.676,"endTime":2177.99,"body":"Because maybe the main"},{"startTime":2174.676,"endTime":2177.99,"body":"driver of some companies"},{"startTime":2177.99,"endTime":2180.65,"body":"is the sales revenue and"},{"startTime":2177.99,"endTime":2180.65,"body":"there's other companies"},{"startTime":2180.65,"endTime":2182.63,"body":"which might not even be making revenue."},{"startTime":2182.63,"endTime":2185.91,"body":"So let's take WhatsApp"},{"startTime":2182.63,"endTime":2185.91,"body":"when it first started out"},{"startTime":2185.91,"endTime":2188.43,"body":"or Facebook, when it first started out,"},{"startTime":2188.43,"endTime":2191.13,"body":"they didn't really find a"},{"startTime":2188.43,"endTime":2191.13,"body":"way to generate revenue,"},{"startTime":2191.13,"endTime":2193.51,"body":"but all they did was attract"},{"startTime":2191.13,"endTime":2193.51,"body":"something like customers"},{"startTime":2193.51,"endTime":2194.99,"body":"or subscribers."},{"startTime":2194.99,"endTime":2197.4,"body":"So in other tech companies,"},{"startTime":2197.4,"endTime":2200.39,"body":"it might be price per subscriber."},{"startTime":2200.39,"endTime":2204.05,"body":"And so a lot of the skill"},{"startTime":2200.39,"endTime":2204.05,"body":"in investment analysis"},{"startTime":2204.05,"endTime":2207.9,"body":"is not the maths, this was"},{"startTime":2204.05,"endTime":2207.9,"body":"simple, plus times minus divide,"},{"startTime":2207.9,"endTime":2210.7,"body":"but to think about, well,"},{"startTime":2207.9,"endTime":2210.7,"body":"what is the true value"},{"startTime":2210.7,"endTime":2214.48,"body":"of a company, is that its"},{"startTime":2210.7,"endTime":2214.48,"body":"book value, its hard assets,"},{"startTime":2214.48,"endTime":2219.48,"body":"its earnings, its sales, its"},{"startTime":2214.48,"endTime":2219.48,"body":"customers or something else?"},{"startTime":2220.2,"endTime":2222.52,"body":"Some of you in this room"},{"startTime":2220.2,"endTime":2222.52,"body":"might have read \"Moneyball\""},{"startTime":2222.52,"endTime":2226.71,"body":"by Michael Lewis about how"},{"startTime":2222.52,"endTime":2226.71,"body":"to value baseball players."},{"startTime":2226.71,"endTime":2229.68,"body":"And so why Billy Bean"},{"startTime":2226.71,"endTime":2229.68,"body":"of the Oakland Athletic"},{"startTime":2229.68,"endTime":2231.85,"body":"was so successful is you realize"},{"startTime":2231.85,"endTime":2233.61,"body":"that the value of a baseball player"},{"startTime":2233.61,"endTime":2237.13,"body":"is not just how many times"},{"startTime":2233.61,"endTime":2237.13,"body":"they hit the ball successfully,"},{"startTime":2237.13,"endTime":2240.46,"body":"but how many times they"},{"startTime":2237.13,"endTime":2240.46,"body":"get on base successfully."},{"startTime":2240.46,"endTime":2242.0,"body":"And it might be you get on base,"},{"startTime":2242.0,"endTime":2243.63,"body":"not just by hitting successfully,"},{"startTime":2243.63,"endTime":2246.49,"body":"but by walking because"},{"startTime":2243.63,"endTime":2246.49,"body":"you are able to take"},{"startTime":2246.49,"endTime":2248.407,"body":"some bad balls thrown at you."},{"startTime":2250.28,"endTime":2254.32,"body":"So let's now use this"},{"startTime":2250.28,"endTime":2254.32,"body":"practically in an example,"},{"startTime":2254.32,"endTime":2256.95,"body":"now that we've gone through"},{"startTime":2254.32,"endTime":2256.95,"body":"the high level analogies,"},{"startTime":2256.95,"endTime":2260.013,"body":"so we've got Tesco and Tesco's dividends"},{"startTime":2260.013,"endTime":2262.53,"body":"grow by 2% per year."},{"startTime":2262.53,"endTime":2265.53,"body":"But then after year two,"},{"startTime":2262.53,"endTime":2265.53,"body":"we are just going to say,"},{"startTime":2265.53,"endTime":2268.0,"body":"we have no idea what"},{"startTime":2265.53,"endTime":2268.0,"body":"dividends will be afterwards."},{"startTime":2268.0,"endTime":2270.04,"body":"It's really hard to forecast."},{"startTime":2270.04,"endTime":2273.81,"body":"However, we know that the"},{"startTime":2270.04,"endTime":2273.81,"body":"earnings will be 12 pence"},{"startTime":2275.02,"endTime":2278.33,"body":"and we know that other"},{"startTime":2275.02,"endTime":2278.33,"body":"supermarkets are trading"},{"startTime":2278.33,"endTime":2281.38,"body":"at a price earnings ratio of 20."},{"startTime":2281.38,"endTime":2283.41,"body":"That is the going rate for a supermarket."},{"startTime":2283.41,"endTime":2286.25,"body":"You take the earnings,"},{"startTime":2283.41,"endTime":2286.25,"body":"you multiply it by 20,"},{"startTime":2286.25,"endTime":2287.6,"body":"you get the market value."},{"startTime":2287.6,"endTime":2290.71,"body":"That's like looking at comparable houses."},{"startTime":2290.71,"endTime":2293.66,"body":"So how would your calculation change?"},{"startTime":2293.66,"endTime":2295.16,"body":"It's going to be quite simple."},{"startTime":2295.16,"endTime":2297.2,"body":"What we're going to do as before"},{"startTime":2297.2,"endTime":2299.05,"body":"is we're going to estimate the dividends"},{"startTime":2299.05,"endTime":2300.52,"body":"for the first two years."},{"startTime":2300.52,"endTime":2303.53,"body":"And then after the end of the second year,"},{"startTime":2303.53,"endTime":2305.7,"body":"what is the company worth?"},{"startTime":2305.7,"endTime":2307.78,"body":"We're not going to say it's"},{"startTime":2305.7,"endTime":2307.78,"body":"worth the future dividends"},{"startTime":2307.78,"endTime":2309.81,"body":"because we have no idea what they are."},{"startTime":2309.81,"endTime":2311.07,"body":"Instead we're going to say,"},{"startTime":2311.07,"endTime":2313.012,"body":"let's look at comparable supermarkets,"},{"startTime":2313.012,"endTime":2316.13,"body":"they're all trading at 20 times earnings."},{"startTime":2316.13,"endTime":2318.67,"body":"And so it's going to be worth 20"},{"startTime":2318.67,"endTime":2321.86,"body":"times the 12 earnings per share."},{"startTime":2321.86,"endTime":2324.45,"body":"And that's going to give us our 240 here"},{"startTime":2324.45,"endTime":2326.843,"body":"and that will give us"},{"startTime":2324.45,"endTime":2326.843,"body":"our current valuation."},{"startTime":2329.292,"endTime":2332.0,"body":"So to close out before the questions,"},{"startTime":2332.0,"endTime":2334.03,"body":"well, let's look at well, what determines"},{"startTime":2334.03,"endTime":2336.542,"body":"the price earnings ratio to begin with?"},{"startTime":2336.542,"endTime":2338.868,"body":"So I've said, the supermarkets might trade"},{"startTime":2338.868,"endTime":2342.07,"body":"at a price earnings ratio"},{"startTime":2338.868,"endTime":2342.07,"body":"of 20, but why is it 20?"},{"startTime":2342.07,"endTime":2344.021,"body":"Why isn't it 15, why isn't it 100?"},{"startTime":2344.021,"endTime":2348.43,"body":"Just like how you know the"},{"startTime":2344.021,"endTime":2348.43,"body":"price per square foot of a house"},{"startTime":2348.43,"endTime":2351.818,"body":"should be 1000 pounds, it"},{"startTime":2348.43,"endTime":2351.818,"body":"might be that the whole street"},{"startTime":2351.818,"endTime":2353.17,"body":"might be overvalued."},{"startTime":2353.17,"endTime":2355.583,"body":"So what determines that,"},{"startTime":2353.17,"endTime":2355.583,"body":"why does it fluctuate?"},{"startTime":2356.58,"endTime":2359.17,"body":"So the main thing which"},{"startTime":2356.58,"endTime":2359.17,"body":"is going to drive it"},{"startTime":2359.17,"endTime":2361.79,"body":"is the growth of a company."},{"startTime":2361.79,"endTime":2363.83,"body":"So let me get to the punchline first,"},{"startTime":2363.83,"endTime":2366.261,"body":"the faster growing the company is,"},{"startTime":2366.261,"endTime":2369.94,"body":"the greater the price earnings"},{"startTime":2366.261,"endTime":2369.94,"body":"ratio of that company."},{"startTime":2369.94,"endTime":2373.5,"body":"So for houses, why are prices"},{"startTime":2369.94,"endTime":2373.5,"body":"per square foot different?"},{"startTime":2373.5,"endTime":2375.36,"body":"That depends on the neighborhood."},{"startTime":2375.36,"endTime":2376.776,"body":"The better the neighborhood,"},{"startTime":2376.776,"endTime":2381.01,"body":"the higher the price per"},{"startTime":2376.776,"endTime":2381.01,"body":"square foot and for companies,"},{"startTime":2381.01,"endTime":2382.02,"body":"the equivalent of the neighborhood,"},{"startTime":2382.02,"endTime":2384.738,"body":"what people really care"},{"startTime":2382.02,"endTime":2384.738,"body":"about is the growth potential"},{"startTime":2384.738,"endTime":2386.897,"body":"of that company."},{"startTime":2386.897,"endTime":2391.64,"body":"So let's again show this with"},{"startTime":2386.897,"endTime":2391.64,"body":"hopefully simple examples."},{"startTime":2391.64,"endTime":2393.31,"body":"So let's take NatWest"},{"startTime":2393.31,"endTime":2396.68,"body":"and it generates 10"},{"startTime":2393.31,"endTime":2396.68,"body":"pounds per share forever."},{"startTime":2396.68,"endTime":2399.593,"body":"And it pays this out"},{"startTime":2396.68,"endTime":2399.593,"body":"entirely as dividends."},{"startTime":2400.43,"endTime":2402.577,"body":"And its discount rate is 10%."},{"startTime":2402.577,"endTime":2404.835,"body":"What is its share price?"},{"startTime":2404.835,"endTime":2407.32,"body":"Take the similar formula to before"},{"startTime":2407.32,"endTime":2411.24,"body":"we take the dividend in the"},{"startTime":2407.32,"endTime":2411.24,"body":"numerator, 10%, 10 pounds,"},{"startTime":2411.24,"endTime":2414.74,"body":"divide it by the cost of equity of 10%"},{"startTime":2414.74,"endTime":2415.98,"body":"minus the growth rate."},{"startTime":2415.98,"endTime":2419.35,"body":"And the growth rate is"},{"startTime":2415.98,"endTime":2419.35,"body":"zero because NatWest"},{"startTime":2419.35,"endTime":2421.72,"body":"under this situation"},{"startTime":2419.35,"endTime":2421.72,"body":"is not growing at all."},{"startTime":2421.72,"endTime":2424.298,"body":"It's just paying that 10 pounds forever."},{"startTime":2424.298,"endTime":2427.92,"body":"And so it's worth 100 pounds."},{"startTime":2427.92,"endTime":2432.82,"body":"The price earnings ratio is"},{"startTime":2427.92,"endTime":2432.82,"body":"100 over 10, which is 10."},{"startTime":2432.82,"endTime":2435.15,"body":"So if indeed NatWest does not grow at all,"},{"startTime":2435.15,"endTime":2437.47,"body":"it's just paying out"},{"startTime":2435.15,"endTime":2437.47,"body":"its 10 pounds forever."},{"startTime":2437.47,"endTime":2440.933,"body":"It's worth 100 pounds, its"},{"startTime":2437.47,"endTime":2440.933,"body":"price earnings ratio is 10."},{"startTime":2442.67,"endTime":2445.99,"body":"But now let's say NatWest"},{"startTime":2442.67,"endTime":2445.99,"body":"has the opportunity"},{"startTime":2445.99,"endTime":2448.21,"body":"to reinvest these earnings"},{"startTime":2448.21,"endTime":2450.423,"body":"at a profitable reinvestment rate."},{"startTime":2451.55,"endTime":2455.692,"body":"So 20% of its earnings, it can reinvest"},{"startTime":2455.692,"endTime":2460.692,"body":"and it can get a return of 15%"},{"startTime":2455.692,"endTime":2460.692,"body":"on those reinvested earnings."},{"startTime":2461.05,"endTime":2462.86,"body":"So how do we use that number?"},{"startTime":2462.86,"endTime":2465.92,"body":"Well, it affects the growth"},{"startTime":2462.86,"endTime":2465.92,"body":"rate because you might think,"},{"startTime":2465.92,"endTime":2469.34,"body":"well, I gave you the growth"},{"startTime":2465.92,"endTime":2469.34,"body":"rate being 2% or 1.5%"},{"startTime":2469.34,"endTime":2471.98,"body":"but I plucked that out of thin air."},{"startTime":2471.98,"endTime":2475.85,"body":"How can we estimate how"},{"startTime":2471.98,"endTime":2475.85,"body":"fast a company's dividends"},{"startTime":2475.85,"endTime":2477.01,"body":"will grow?"},{"startTime":2477.01,"endTime":2479.08,"body":"Well, actually we can put"},{"startTime":2477.01,"endTime":2479.08,"body":"some science behind it."},{"startTime":2479.08,"endTime":2481.118,"body":"How fast a company grows, it depends"},{"startTime":2481.118,"endTime":2484.079,"body":"on how much you are reinvesting"},{"startTime":2484.079,"endTime":2487.94,"body":"multiplied by the return"},{"startTime":2484.079,"endTime":2487.94,"body":"on the reinvestment."},{"startTime":2487.94,"endTime":2492.14,"body":"So if we are reinvesting 20%"},{"startTime":2487.94,"endTime":2492.14,"body":"of the company's earnings"},{"startTime":2492.14,"endTime":2497.14,"body":"and that 20%, we can earn a"},{"startTime":2492.14,"endTime":2497.14,"body":"15% return when we reinvest,"},{"startTime":2498.16,"endTime":2503.16,"body":"that gives us 20% times 15% gives us 3%."},{"startTime":2504.58,"endTime":2506.76,"body":"So we're going to go through"},{"startTime":2504.58,"endTime":2506.76,"body":"the exact same calculation"},{"startTime":2506.76,"endTime":2509.276,"body":"as before, but two things change."},{"startTime":2509.276,"endTime":2511.83,"body":"First what is the dividend"},{"startTime":2509.276,"endTime":2511.83,"body":"in the first year?"},{"startTime":2511.83,"endTime":2515.22,"body":"It's no longer 10, it's only eight"},{"startTime":2515.22,"endTime":2517.79,"body":"because we're reinvesting 20% of it."},{"startTime":2517.79,"endTime":2519.516,"body":"So that reduces the valuation."},{"startTime":2519.516,"endTime":2523.49,"body":"But on the flip side, the growth"},{"startTime":2519.516,"endTime":2523.49,"body":"rate now is no longer zero"},{"startTime":2524.34,"endTime":2525.521,"body":"it's three."},{"startTime":2525.521,"endTime":2528.33,"body":"And overall we're getting"},{"startTime":2525.521,"endTime":2528.33,"body":"a higher price than before,"},{"startTime":2528.33,"endTime":2532.02,"body":"which is 114, before it was 100."},{"startTime":2532.02,"endTime":2532.853,"body":"Now it's 114."},{"startTime":2532.853,"endTime":2537.402,"body":"And as a result, what we have"},{"startTime":2532.853,"endTime":2537.402,"body":"is that price earnings ratio"},{"startTime":2537.402,"endTime":2539.19,"body":"is 11.4."},{"startTime":2540.57,"endTime":2542.123,"body":"Now this looks expensive."},{"startTime":2542.123,"endTime":2544.561,"body":"You are having a price"},{"startTime":2542.123,"endTime":2544.561,"body":"earnings ratio of 11.4"},{"startTime":2544.561,"endTime":2548.13,"body":"when other banks have a"},{"startTime":2544.561,"endTime":2548.13,"body":"price earnings ratio of 10,"},{"startTime":2548.13,"endTime":2550.17,"body":"but why is it expensive?"},{"startTime":2550.17,"endTime":2552.68,"body":"It's because the earnings"},{"startTime":2550.17,"endTime":2552.68,"body":"are growing in the future."},{"startTime":2552.68,"endTime":2557.297,"body":"I am quite happy to buy NatWest"},{"startTime":2557.297,"endTime":2560.596,"body":"even though it's more"},{"startTime":2557.297,"endTime":2560.596,"body":"expensive than other banks,"},{"startTime":2560.596,"endTime":2563.45,"body":"because I know that the earnings"},{"startTime":2560.596,"endTime":2563.45,"body":"that they have right now"},{"startTime":2563.45,"endTime":2565.34,"body":"are not going to stay at that level."},{"startTime":2565.34,"endTime":2569.17,"body":"They're going to be growing"},{"startTime":2565.34,"endTime":2569.17,"body":"in the future by this 3% rate,"},{"startTime":2569.17,"endTime":2571.58,"body":"just like houses in"},{"startTime":2569.17,"endTime":2571.58,"body":"different neighborhoods"},{"startTime":2571.58,"endTime":2573.759,"body":"will have different"},{"startTime":2571.58,"endTime":2573.759,"body":"prices per square foot,"},{"startTime":2573.759,"endTime":2578.2,"body":"but is it expensive for"},{"startTime":2573.759,"endTime":2578.2,"body":"a house in Noting Hill"},{"startTime":2578.2,"endTime":2580.15,"body":"to trade at a higher valuation"},{"startTime":2580.15,"endTime":2581.881,"body":"than maybe a house in Bristol?"},{"startTime":2581.881,"endTime":2583.24,"body":"Not necessarily."},{"startTime":2583.24,"endTime":2584.1,"body":"Why?"},{"startTime":2584.1,"endTime":2586.227,"body":"Because the neighborhood"},{"startTime":2584.1,"endTime":2586.227,"body":"is more attractive."},{"startTime":2586.227,"endTime":2588.88,"body":"And the analogy of the"},{"startTime":2586.227,"endTime":2588.88,"body":"neighborhood for companies"},{"startTime":2588.88,"endTime":2590.559,"body":"is the growth rate."},{"startTime":2590.559,"endTime":2592.97,"body":"And just to show you how this might work"},{"startTime":2592.97,"endTime":2595.15,"body":"in just real numbers."},{"startTime":2595.15,"endTime":2599.16,"body":"These are numbers that I took"},{"startTime":2595.15,"endTime":2599.16,"body":"from an industry website,"},{"startTime":2599.16,"endTime":2603.13,"body":"banks have a low price"},{"startTime":2599.16,"endTime":2603.13,"body":"earnings ratio of about 30."},{"startTime":2603.13,"endTime":2604.62,"body":"They don't grow that quickly."},{"startTime":2604.62,"endTime":2607.063,"body":"Pharmaceuticals is about 34."},{"startTime":2607.97,"endTime":2612.243,"body":"Internet 48, biotech 75."},{"startTime":2613.26,"endTime":2616.05,"body":"So the faster the growing the company,"},{"startTime":2616.05,"endTime":2619.47,"body":"that means even if they have"},{"startTime":2616.05,"endTime":2619.47,"body":"very few earnings today,"},{"startTime":2619.47,"endTime":2622.08,"body":"you might pay a massive amount for them."},{"startTime":2622.08,"endTime":2622.913,"body":"Why?"},{"startTime":2622.913,"endTime":2625.48,"body":"Because they're earning"},{"startTime":2622.913,"endTime":2625.48,"body":"so much in the future,"},{"startTime":2625.48,"endTime":2627.603,"body":"they've got such high growth potential."},{"startTime":2629.56,"endTime":2631.46,"body":"So let me just have one final wrap up"},{"startTime":2631.46,"endTime":2633.7,"body":"to reconcile everything"},{"startTime":2631.46,"endTime":2633.7,"body":"I've done in this lecture"},{"startTime":2633.7,"endTime":2636.03,"body":"before opening up to questions."},{"startTime":2636.03,"endTime":2638.46,"body":"So at the start of this lecture,"},{"startTime":2638.46,"endTime":2642.158,"body":"I said, we value a company"},{"startTime":2638.46,"endTime":2642.158,"body":"based on the dividends."},{"startTime":2642.158,"endTime":2646.01,"body":"A company makes profits,"},{"startTime":2642.158,"endTime":2646.01,"body":"it generates some earnings,"},{"startTime":2646.01,"endTime":2650.32,"body":"but we only care about the"},{"startTime":2646.01,"endTime":2650.32,"body":"dividends that actually pays out"},{"startTime":2650.32,"endTime":2651.92,"body":"when we value the company."},{"startTime":2651.92,"endTime":2655.576,"body":"We don't count the"},{"startTime":2651.92,"endTime":2655.576,"body":"earnings that you reinvest."},{"startTime":2655.576,"endTime":2660.26,"body":"However, when I just talked"},{"startTime":2655.576,"endTime":2660.26,"body":"about the price earnings ratio,"},{"startTime":2660.26,"endTime":2663.2,"body":"when we think about comparing"},{"startTime":2660.26,"endTime":2663.2,"body":"companies with each other,"},{"startTime":2663.2,"endTime":2665.433,"body":"we compare the price per earnings."},{"startTime":2665.433,"endTime":2668.0,"body":"That is the equivalent of"},{"startTime":2665.433,"endTime":2668.0,"body":"the price per square foot"},{"startTime":2668.0,"endTime":2669.04,"body":"of the house."},{"startTime":2669.04,"endTime":2672.1,"body":"And you might think, well,"},{"startTime":2669.04,"endTime":2672.1,"body":"isn't there some inconsistency."},{"startTime":2672.1,"endTime":2674.51,"body":"On the first level I've"},{"startTime":2672.1,"endTime":2674.51,"body":"said we value the company"},{"startTime":2674.51,"endTime":2676.49,"body":"by its dividends."},{"startTime":2676.49,"endTime":2679.43,"body":"But then when we compare, which"},{"startTime":2676.49,"endTime":2679.43,"body":"companies are cheap or not,"},{"startTime":2679.43,"endTime":2681.745,"body":"we look at the price to earnings."},{"startTime":2681.745,"endTime":2683.65,"body":"And in fact, there's no inconsistency."},{"startTime":2683.65,"endTime":2684.85,"body":"Why?"},{"startTime":2684.85,"endTime":2687.17,"body":"Because when I said we value the company"},{"startTime":2687.17,"endTime":2688.84,"body":"based on its dividends,"},{"startTime":2688.84,"endTime":2691.677,"body":"we value all of the future"},{"startTime":2688.84,"endTime":2691.677,"body":"dividends of a company"},{"startTime":2691.677,"endTime":2695.33,"body":"from now until the end of time."},{"startTime":2695.33,"endTime":2697.621,"body":"That is what we did in the calculation."},{"startTime":2697.621,"endTime":2700.19,"body":"But the price to earnings ratio,"},{"startTime":2700.19,"endTime":2702.02,"body":"that's something we're comparing the price"},{"startTime":2702.02,"endTime":2704.936,"body":"just to the earnings right now."},{"startTime":2704.936,"endTime":2707.85,"body":"We're only comparing it to one number."},{"startTime":2707.85,"endTime":2710.43,"body":"And why is the earnings the correct number"},{"startTime":2710.43,"endTime":2713.26,"body":"to think about right now,"},{"startTime":2710.43,"endTime":2713.26,"body":"rather than dividends."},{"startTime":2713.26,"endTime":2716.23,"body":"It's because some companies"},{"startTime":2713.26,"endTime":2716.23,"body":"might not pay dividends"},{"startTime":2716.23,"endTime":2717.66,"body":"at the moment."},{"startTime":2717.66,"endTime":2720.21,"body":"Now, if a company's not paying"},{"startTime":2717.66,"endTime":2720.21,"body":"dividends at the moment,"},{"startTime":2720.21,"endTime":2722.501,"body":"it will be paying dividends in the future."},{"startTime":2722.501,"endTime":2725.73,"body":"So this is why the valuation"},{"startTime":2722.501,"endTime":2725.73,"body":"will take the future dividends"},{"startTime":2725.73,"endTime":2727.08,"body":"into account."},{"startTime":2727.08,"endTime":2727.913,"body":"But remember right now,"},{"startTime":2727.913,"endTime":2730.387,"body":"when we're looking at whether"},{"startTime":2727.913,"endTime":2730.387,"body":"a company's cheap or not,"},{"startTime":2730.387,"endTime":2732.09,"body":"we are looking at the price compared"},{"startTime":2732.09,"endTime":2734.03,"body":"to what it generates right now."},{"startTime":2734.03,"endTime":2736.51,"body":"And if it's not generating any dividends,"},{"startTime":2736.51,"endTime":2739.498,"body":"we can't look at a price"},{"startTime":2736.51,"endTime":2739.498,"body":"to dividends ratio."},{"startTime":2739.498,"endTime":2741.24,"body":"So instead, what we're going to look at"},{"startTime":2741.24,"endTime":2743.06,"body":"is the price to earnings ratio"},{"startTime":2743.06,"endTime":2745.03,"body":"when we're comparing different companies,"},{"startTime":2745.03,"endTime":2747.73,"body":"because those earnings, most"},{"startTime":2745.03,"endTime":2747.73,"body":"companies will have them."},{"startTime":2747.73,"endTime":2749.831,"body":"And that is what's the sustainable value"},{"startTime":2749.831,"endTime":2751.32,"body":"that the company creates."},{"startTime":2751.32,"endTime":2754.38,"body":"We don't really care about"},{"startTime":2751.32,"endTime":2754.38,"body":"how much it's paying right now"},{"startTime":2754.38,"endTime":2755.49,"body":"in terms of sustainability"},{"startTime":2755.49,"endTime":2758.18,"body":"if a company's generating profits,"},{"startTime":2758.18,"endTime":2760.535,"body":"those earnings are what we"},{"startTime":2758.18,"endTime":2760.535,"body":"expect to be sustainable"},{"startTime":2760.535,"endTime":2762.694,"body":"in the future."},{"startTime":2762.694,"endTime":2766.653,"body":"Okay, so let me just sum up"},{"startTime":2762.694,"endTime":2766.653,"body":"and then open it up to Q\u0026A."},{"startTime":2766.653,"endTime":2769.62,"body":"So earnings or profits."},{"startTime":2769.62,"endTime":2772.696,"body":"That's how much shareholders"},{"startTime":2769.62,"endTime":2772.696,"body":"are better off by,"},{"startTime":2772.696,"endTime":2773.529,"body":"at the end of the year,"},{"startTime":2773.529,"endTime":2776.06,"body":"some of those earnings are"},{"startTime":2773.529,"endTime":2776.06,"body":"reinvested in the company"},{"startTime":2776.06,"endTime":2779.175,"body":"and the rest is paid out to"},{"startTime":2776.06,"endTime":2779.175,"body":"shareholders as dividends."},{"startTime":2779.175,"endTime":2780.83,"body":"When we value a company,"},{"startTime":2780.83,"endTime":2783.2,"body":"we value all of those future dividends"},{"startTime":2783.2,"endTime":2785.117,"body":"from now into the future."},{"startTime":2785.117,"endTime":2788.29,"body":"And that applies irrespective"},{"startTime":2785.117,"endTime":2788.29,"body":"of whether we intend"},{"startTime":2788.29,"endTime":2791.3,"body":"to hold the company forever or"},{"startTime":2788.29,"endTime":2791.3,"body":"whether we intend to sell it"},{"startTime":2791.3,"endTime":2792.4,"body":"for two years."},{"startTime":2792.4,"endTime":2795.23,"body":"So this means that the stock"},{"startTime":2792.4,"endTime":2795.23,"body":"market is not short termist."},{"startTime":2795.23,"endTime":2798.96,"body":"We always care about the long"},{"startTime":2795.23,"endTime":2798.96,"body":"term prospects of a company,"},{"startTime":2798.96,"endTime":2802.31,"body":"because even we're not going to"},{"startTime":2798.96,"endTime":2802.31,"body":"be around whoever we sell it to"},{"startTime":2802.31,"endTime":2804.42,"body":"will care about those future prospects."},{"startTime":2804.42,"endTime":2806.78,"body":"Now forecasting dividends"},{"startTime":2804.42,"endTime":2806.78,"body":"until the end of time,"},{"startTime":2806.78,"endTime":2808.3,"body":"that will take a long time,"},{"startTime":2808.3,"endTime":2811.74,"body":"but there are shortcut"},{"startTime":2808.3,"endTime":2811.74,"body":"formulas that we can apply."},{"startTime":2811.74,"endTime":2813.922,"body":"And even if we can only"},{"startTime":2811.74,"endTime":2813.922,"body":"apply the shortcut formula"},{"startTime":2813.922,"endTime":2817.87,"body":"after a certain period, then"},{"startTime":2813.922,"endTime":2817.87,"body":"we do a two step process."},{"startTime":2817.87,"endTime":2821.27,"body":"First value a company for the"},{"startTime":2817.87,"endTime":2821.27,"body":"first let's say five years."},{"startTime":2821.27,"endTime":2823.2,"body":"And then after the company is matured,"},{"startTime":2823.2,"endTime":2826.445,"body":"we can use that shortcut formula"},{"startTime":2823.2,"endTime":2826.445,"body":"if we can predict dividends"},{"startTime":2826.445,"endTime":2828.3,"body":"and think they will grow constantly."},{"startTime":2828.3,"endTime":2831.06,"body":"And even we can't predict dividends,"},{"startTime":2831.06,"endTime":2832.42,"body":"we will value a company"},{"startTime":2832.42,"endTime":2835.3,"body":"by looking at other comparable companies."},{"startTime":2835.3,"endTime":2838.05,"body":"But the trick is how do"},{"startTime":2835.3,"endTime":2838.05,"body":"we compare the companies?"},{"startTime":2838.05,"endTime":2842.15,"body":"Is it going to be on the book"},{"startTime":2838.05,"endTime":2842.15,"body":"value, the earnings, the sales,"},{"startTime":2842.15,"endTime":2843.62,"body":"the number of customers, the subscribers,"},{"startTime":2843.62,"endTime":2847.0,"body":"that's where a lot of the art finance is."},{"startTime":2847.0,"endTime":2850.16,"body":"And finally, how do we measure"},{"startTime":2847.0,"endTime":2850.16,"body":"how expensive a company is?"},{"startTime":2850.16,"endTime":2853.12,"body":"Just like we'd look at prices"},{"startTime":2850.16,"endTime":2853.12,"body":"per square foot of a house."},{"startTime":2853.12,"endTime":2855.76,"body":"We would look at the"},{"startTime":2853.12,"endTime":2855.76,"body":"price to earnings ratio,"},{"startTime":2855.76,"endTime":2858.24,"body":"compare the price that"},{"startTime":2855.76,"endTime":2858.24,"body":"the company's trading at"},{"startTime":2858.24,"endTime":2860.64,"body":"to the earnings that"},{"startTime":2858.24,"endTime":2860.64,"body":"it's currently having."},{"startTime":2860.64,"endTime":2862.64,"body":"And why might price earnings be higher"},{"startTime":2862.64,"endTime":2864.35,"body":"in some industries than others?"},{"startTime":2864.35,"endTime":2866.37,"body":"Not because they're massively overpriced."},{"startTime":2866.37,"endTime":2869.26,"body":"It could be that it's fair"},{"startTime":2866.37,"endTime":2869.26,"body":"for them to have a high price"},{"startTime":2869.26,"endTime":2871.91,"body":"because those industries are growing."},{"startTime":2871.91,"endTime":2873.54,"body":"Okay well thank you so"},{"startTime":2871.91,"endTime":2873.54,"body":"much for your attention"},{"startTime":2873.54,"endTime":2875.18,"body":"to a rather more technical lecture today,"},{"startTime":2875.18,"endTime":2877.94,"body":"but this is really the"},{"startTime":2875.18,"endTime":2877.94,"body":"essentials of stock valuation."},{"startTime":2877.94,"endTime":2879.282,"body":"Let me now open it up to questions."},{"startTime":2879.282,"endTime":2883.187,"body":"So let's welcome Simon to lead them."},{"startTime":2883.187,"endTime":2886.437,"body":"(audience applauding)"},{"startTime":2889.08,"endTime":2892.362,"body":"- Great, thank you very much"},{"startTime":2889.08,"endTime":2892.362,"body":"for another tremendous lecture."},{"startTime":2892.362,"endTime":2895.08,"body":"We've got quite a few questions online"},{"startTime":2895.08,"endTime":2897.31,"body":"and we'll probably have a"},{"startTime":2895.08,"endTime":2897.31,"body":"few from the hall as well."},{"startTime":2897.31,"endTime":2900.023,"body":"I'm going to start off with"},{"startTime":2897.31,"endTime":2900.023,"body":"one of the online questions."},{"startTime":2900.023,"endTime":2905.023,"body":"It is have you ever applied"},{"startTime":2900.023,"endTime":2905.023,"body":"these rules of thumb"},{"startTime":2905.12,"endTime":2907.38,"body":"and found a stock has massively"},{"startTime":2907.38,"endTime":2910.604,"body":"either under or"},{"startTime":2907.38,"endTime":2910.604,"body":"overperformed its valuation?"},{"startTime":2910.604,"endTime":2913.861,"body":"- I think stocks will often"},{"startTime":2910.604,"endTime":2913.861,"body":"overvalue or underperform,"},{"startTime":2913.861,"endTime":2917.06,"body":"but this is something this"},{"startTime":2913.861,"endTime":2917.06,"body":"is often due to new news,"},{"startTime":2917.06,"endTime":2918.8,"body":"which is not known at the time."},{"startTime":2918.8,"endTime":2920.84,"body":"So at the time that you apply evaluation,"},{"startTime":2920.84,"endTime":2923.82,"body":"you will have your estimates"},{"startTime":2920.84,"endTime":2923.82,"body":"as to the growth of a dividend."},{"startTime":2923.82,"endTime":2926.66,"body":"Now, after the fact, it"},{"startTime":2923.82,"endTime":2926.66,"body":"might be that the growth rate"},{"startTime":2926.66,"endTime":2928.6,"body":"ends up much higher or much lower,"},{"startTime":2928.6,"endTime":2931.52,"body":"but the thing is at the time"},{"startTime":2928.6,"endTime":2931.52,"body":"could we have predicted that"},{"startTime":2931.52,"endTime":2934.6,"body":"and often you couldn't and had"},{"startTime":2931.52,"endTime":2934.6,"body":"you been able to predict it,"},{"startTime":2934.6,"endTime":2936.34,"body":"then everybody would've traded on it"},{"startTime":2936.34,"endTime":2937.52,"body":"and been able to make money."},{"startTime":2937.52,"endTime":2939.05,"body":"So often people will say after the fact,"},{"startTime":2939.05,"endTime":2940.6,"body":"oh yeah, I knew it all along,"},{"startTime":2940.6,"endTime":2941.941,"body":"but actually that's often a bias"},{"startTime":2941.941,"endTime":2944.6,"body":"because it's often that"},{"startTime":2941.941,"endTime":2944.6,"body":"we didn't predict it"},{"startTime":2944.6,"endTime":2945.433,"body":"after we see it."},{"startTime":2945.433,"endTime":2947.74,"body":"And that's why it's quite"},{"startTime":2945.433,"endTime":2947.74,"body":"difficult to make money"},{"startTime":2947.74,"endTime":2948.66,"body":"on the stock market."},{"startTime":2948.66,"endTime":2951.67,"body":"So if you went to my third"},{"startTime":2948.66,"endTime":2951.67,"body":"Gresham series last year,"},{"startTime":2951.67,"endTime":2954.166,"body":"the psychology of finance,"},{"startTime":2951.67,"endTime":2954.166,"body":"a lot of times people think,"},{"startTime":2954.166,"endTime":2956.22,"body":"oh, we apply these formulas"},{"startTime":2956.22,"endTime":2958.61,"body":"and we're going to have a different"},{"startTime":2956.22,"endTime":2958.61,"body":"valuation from the market."},{"startTime":2958.61,"endTime":2961.63,"body":"When in fact sometimes they'll"},{"startTime":2958.61,"endTime":2961.63,"body":"be often getting it wrong"},{"startTime":2961.63,"endTime":2964.545,"body":"because the market is up and"},{"startTime":2961.63,"endTime":2964.545,"body":"actually getting a right price."},{"startTime":2964.545,"endTime":2968.33,"body":"- Do you think most people"},{"startTime":2964.545,"endTime":2968.33,"body":"should be investing in stocks,"},{"startTime":2968.33,"endTime":2971.538,"body":"given the complex maths involved?"},{"startTime":2971.538,"endTime":2975.23,"body":"- I'd say they shouldn't be"},{"startTime":2971.538,"endTime":2975.23,"body":"investing in stocks directly,"},{"startTime":2975.23,"endTime":2976.95,"body":"but investing in mutual funds."},{"startTime":2976.95,"endTime":2978.607,"body":"So why, what is a mutual fund?"},{"startTime":2978.607,"endTime":2980.9,"body":"You might buy a fund from Fidelity"},{"startTime":2980.9,"endTime":2982.837,"body":"and they will hire a"},{"startTime":2980.9,"endTime":2982.837,"body":"professional fund manager."},{"startTime":2982.837,"endTime":2985.63,"body":"And what she will do is"},{"startTime":2982.837,"endTime":2985.63,"body":"do these calculations."},{"startTime":2985.63,"endTime":2987.67,"body":"So she will look at the risk,"},{"startTime":2987.67,"endTime":2989.38,"body":"which determines the denominator."},{"startTime":2989.38,"endTime":2991.09,"body":"She will forecast the future growth,"},{"startTime":2991.09,"endTime":2992.72,"body":"which determines the numerator."},{"startTime":2992.72,"endTime":2994.72,"body":"And she has a big team"},{"startTime":2992.72,"endTime":2994.72,"body":"of analysts to do that."},{"startTime":2994.72,"endTime":2997.28,"body":"And in return you'll have to pay a fee,"},{"startTime":2997.28,"endTime":2998.92,"body":"but that fee is pretty small"},{"startTime":2998.92,"endTime":3001.21,"body":"compared to the amount"},{"startTime":2998.92,"endTime":3001.21,"body":"of analysis required."},{"startTime":3001.21,"endTime":3002.79,"body":"And also what a fund manager does"},{"startTime":3002.79,"endTime":3006.41,"body":"is she typically diversifies"},{"startTime":3002.79,"endTime":3006.41,"body":"and holds multiple stocks."},{"startTime":3006.41,"endTime":3008.54,"body":"So as per my answer to the first question,"},{"startTime":3008.54,"endTime":3011.1,"body":"you could have got the"},{"startTime":3008.54,"endTime":3011.1,"body":"valuation right at the start,"},{"startTime":3011.1,"endTime":3013.89,"body":"but then unexpected things"},{"startTime":3011.1,"endTime":3013.89,"body":"happen like a pandemic."},{"startTime":3013.89,"endTime":3016.88,"body":"And if you are diversified, it"},{"startTime":3013.89,"endTime":3016.88,"body":"might be that some companies"},{"startTime":3016.88,"endTime":3019.72,"body":"in your portfolio might"},{"startTime":3016.88,"endTime":3019.72,"body":"be the Amazons or Zooms"},{"startTime":3019.72,"endTime":3021.24,"body":"that benefit from the pandemic,"},{"startTime":3021.24,"endTime":3023.12,"body":"just as much as you might"},{"startTime":3021.24,"endTime":3023.12,"body":"own some restaurants,"},{"startTime":3023.12,"endTime":3024.68,"body":"which suffer in the pandemic."},{"startTime":3024.68,"endTime":3025.96,"body":"And so this is why it's much better"},{"startTime":3025.96,"endTime":3029.57,"body":"to hold a diversified portfolio"},{"startTime":3025.96,"endTime":3029.57,"body":"than individual stocks."},{"startTime":3029.57,"endTime":3031.61,"body":"- Well, Professor Edmonds,"},{"startTime":3029.57,"endTime":3031.61,"body":"thank you very much"},{"startTime":3031.61,"endTime":3033.34,"body":"for another tremendous lecture."},{"startTime":3033.34,"endTime":3034.9,"body":"- Thank you very much and the final--"},{"startTime":3034.9,"endTime":3038.067,"body":"(audience applauding)"},{"startTime":3040.08,"endTime":3041.03,"body":"Thank you so much, Simon"},{"startTime":3041.03,"endTime":3043.41,"body":"and my final ever Gresham lecture series,"},{"startTime":3043.41,"endTime":3045.56,"body":"before I retire and hand"},{"startTime":3043.41,"endTime":3045.56,"body":"over to my successor"},{"startTime":3045.56,"endTime":3046.55,"body":"will be next month."},{"startTime":3046.55,"endTime":3048.6,"body":"It's on how to finance a company."},{"startTime":3048.6,"endTime":3050.74,"body":"We're going to look at whether"},{"startTime":3048.6,"endTime":3050.74,"body":"a company should finance itself"},{"startTime":3050.74,"endTime":3051.97,"body":"with debt or equity."},{"startTime":3051.97,"endTime":3053.55,"body":"So that will be my final time addressing,"},{"startTime":3053.55,"endTime":3054.475,"body":"but thank you so much to everybody"},{"startTime":3054.475,"endTime":3055.72,"body":"who supported my lecture series."},{"startTime":3055.72,"endTime":3058.935,"body":"(audience applauding)"}]}