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Finance- a la shmoop. what are the five principles of Finance?

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well easiest way to remember these bad boys look at your hand. we're just gonna

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take them finger by finger. your thumb the time value of money. the mantra a [man holds up hand]

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dollar today is worth more than a dollar tomorrow.

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why? because you can in theory always invest a dollar and get a positive

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financial return from that investment almost guaranteed. well you could play it

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safe investing in low-yield American Treasury bills, or you could show a bit

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more gamble by investing that same money into a somewhat riskier index fund of

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bonds or stocks. either way here's the magic formula take the dollar amount you

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invested and multiply it by one plus the rate of return ^ years. so yeah you want

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to be making your money work for you. if you invest it it collects interest, or

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returns profits. keep it under your mattress and about the only thing it's [money on top of bond]

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gonna collect are bedbugs. okay second principle second finger risk

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and reward are related- kissing cousins- yeah so they can't get married shame

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they look like such a cute couple. okay so here's a question. why do you get

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8% returns from the stock market in equities and you only get 3% from safe T-Bills

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bills. well a bunch of things affect rates of investment return but the

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biggest issue revolves around whether you'll get your money back, and/or a

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positive multiple of your money back when you're done. check out bond

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performance over time. steadily onward and upward but nobody's becoming

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spectacular ly rich off of them. stocks on the other hand while you might make a

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fortune but he also might have to stomach some extreme lows along the way. [graph showing ups and downs of stocks]

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you're basically putting your money on a virtual rollercoaster and hoping it

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survives the experience, but hey no risk no reward.

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over time the stock market has a whole lot of reward. alright third principle

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the middle finger hey watch where you point that thing. the market as a

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popularity contest versus a weighing machine.Thank You Warren Buffett. what

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does this mean? well there's short term versus long term thinking. when it comes

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to investing. you want to be long-term greedy because hopefully well you're

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gonna be here for a while on earth. invest in a company like Google early in

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its history and you're gonna be set for life. same do the Amazon Facebook and

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those guys. invest instead in a crap company called fidget spinner mania who

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knows what your fortunes gonna do it's risky. you might go from $10 to $12 in a

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week but only wake up six months later when it's trading at 12 cents a share.

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yeah you want to avoid fads duh. and yeah it's not that easy to spot the early [stocks of fidget spinners down ]

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signs of the next google, but well that should be your goal. all right principle

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number four your ring finger, cash is king.

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well the dog toy company, bite me I squeak, yeah that's the name of it

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might show a million bucks in profit, but you don't know how they've expensed

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their plastic molding machine, what clever maneuvers they've used to pay

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minimal taxes. well the only way to fairly evaluate the value of the company

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is follow the cash. and look through accounting tricks which can change the

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bottom-line earnings in a whole lot of different ways all right moving quickly

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on and finally your pinky finger, agency problems. well you might be picturing [pinkie finger held up]

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this guy in a slick suit in a Hollywood office selling clients time into a

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studio system with let's do lunch a regular catchphrase.

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well yeah it's basically the same thing in finance. a client hires an agent and a

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relationship structure is formed. that is there are legal requirements around the

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behavior of that agent. specifically the agent has to look out for the best

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interests of his client, and he has to put his own best interest on the

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backburner. well this structure is a really big deal in the financial world

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because so many poor unsuspecting people have been screwed over in the process of

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big city slickers taking their dough with no comeuppance. those fast-talking

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grifters are really deserving of a yeah you know knuckle sandwich, yeah put all

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five of those fingers to good use if that ever happens to you. [man holds up hand ]

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