Cupcake economics 3

WEBVTT
Kind: captions
Language: en

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In the last couple of videos,
I had started a cupcake

00:00:04.059 --> 00:00:08.440
factory and I was the richest
guy in town and I was doing so

00:00:08.440 --> 00:00:10.080
well that it attracted
competition.

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And then Imran came
in and he started

00:00:11.720 --> 00:00:13.040
his own cupcake factory.

00:00:13.040 --> 00:00:14.520
And he took all of my
business and he

00:00:14.520 --> 00:00:17.340
ended up charging $2.90.

00:00:17.340 --> 00:00:19.440
And, I think, the number I used
in the last video, he

00:00:19.440 --> 00:00:20.980
sold 500,000 cupcakes.

00:00:20.980 --> 00:00:22.340
And he had this great
return on asset.

00:00:22.340 --> 00:00:23.710
I think it was 20%
of something.

00:00:23.710 --> 00:00:26.060
He took away all my business
and I got decimated.

00:00:26.060 --> 00:00:28.440
I think my cupcakes-- I was
originally charging

00:00:28.440 --> 00:00:29.540
something like $3.

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And my cupcakes, I only started
selling 250,000 of

00:00:33.170 --> 00:00:35.160
them and then my
return on asset

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essentially went to zero.

00:00:36.390 --> 00:00:37.545
I was kind of break-even.

00:00:37.545 --> 00:00:40.550
And at the end of the last
video, not being a great

00:00:40.550 --> 00:00:41.860
businessman, I said, oh
well, actually let

00:00:41.860 --> 00:00:43.140
me just raise prices.

00:00:43.140 --> 00:00:47.360
Because I have this set number
of customers and they like the

00:00:47.360 --> 00:00:49.990
way I operate the cash register
a little bit, or

00:00:49.990 --> 00:00:52.400
maybe they live a little bit
closer to my cupcake factory,

00:00:52.400 --> 00:00:54.460
or my bakery, or whatever
you want to call it.

00:00:54.460 --> 00:00:57.672
And so I actually
raised prices.

00:00:57.672 --> 00:01:00.560
I cut out a little bit of a
profit, but actually by doing

00:01:00.560 --> 00:01:03.310
that, I do lose a couple of
these people because they are

00:01:03.310 --> 00:01:06.680
willing to walk a little bit
further for a cupcake.

00:01:06.680 --> 00:01:08.150
But I get an OK return.

00:01:08.150 --> 00:01:11.150
But this is kind of maximizing
it and then, over time, more

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and more people realize that
Imran's charging so much less

00:01:13.930 --> 00:01:14.840
for cupcakes.

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So actually my revenue stream
starts to decline because

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fewer and fewer people
show up.

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I say this really isn't a
sustainable situation.

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Imran came here.

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I think he was he was selling
500,000, right?

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He's getting this great
return on asset.

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I'm getting this crummy
return on asset.

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I'm only making $40,000
a year; he's

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making $300,000 a year.

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I need to get back at him.

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So what I do is, I say, let me
lower the price and, besides

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taking some of his business,
there will actually be some

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incremental more people in the
town who will actually

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start buying it.

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So it's not a zero sum game.

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A zero sum game means that if I
win, someone else is losing

00:01:52.580 --> 00:01:53.250
by that amount.

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If I lower prices, I'll take
some business from Imran.

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But there will also be people
who were probably eating

00:01:59.080 --> 00:02:02.910
something more nutritious than
cupcakes who might now eat

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cupcakes to get their daily
requirements of sugar and

00:02:06.440 --> 00:02:09.810
trans-fat then, in the case
of my cupcakes, nicotine.

00:02:09.810 --> 00:02:12.840
So, let's say, I cut prices
below Imran because I realize

00:02:12.840 --> 00:02:15.250
this increase price strategy
was kind of silly.

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So I lower my prices to $2.70
and, at $2.70, I'm able to

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sell, I don't know,
400,000 cupcakes.

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And I took some business
from Imran, right?

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I'm not a lot cheaper
than him, but

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I'm a good bit cheaper.

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So, let's say, I took some
business, so he's only selling

00:02:34.770 --> 00:02:40.020
400,000 cupcakes and now, the
aggregate cupcake and--

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actually not.

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Let's ignore this for a little
bit because now, in this

00:02:44.380 --> 00:02:47.130
reality, I'm getting a 15%
return on my asset.

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Imran's getting a 7% percent
return on asset.

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Let's say there's a third party,
Vikram And he just has

00:02:52.260 --> 00:02:54.570
a love for making cupcakes and
he says, well, you know, what

00:02:54.570 --> 00:02:57.410
if I could spend my life making
cupcakes and, even if I

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just get a 7% return, that's
a pretty good living.

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And a 15% return
would be great.

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So he also enters the market.

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He's kind of a smaller
operator.

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He didn't have quite as much so
he puts $500,000 into it.

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He has a 400,000 cupcake
per year capacity.

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Since there's a smaller
factory , it's

00:03:13.415 --> 00:03:14.300
a little less efficient.

00:03:14.300 --> 00:03:17.320
It costs them a little bit more
to produce a cupcake.

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And he comes in and he says, you
know, my joy in life isn't

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so much-- he obviously has to
pay his bills, he likes to be

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rich --but he says, he just
derives joy from seeing people

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eat cupcakes.

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So he undercuts everybody.

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And in doing so he just operates
at full capacity.

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He operates at 400,000.

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He operates at full capacity.

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And then he takes business
from these guys.

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And then he takes business
from me as well.

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And then, what's the state of
affairs in our city now?

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So my return on asset is 7%.

00:03:58.400 --> 00:04:00.290
Imran is essentially
at break-even.

00:04:00.290 --> 00:04:02.160
He's making no money.

00:04:02.160 --> 00:04:06.020
And then Vikram is making a 12%
return on asset because--

00:04:06.020 --> 00:04:08.080
essentially, he undercut
everyone and was able to take

00:04:08.080 --> 00:04:09.440
all the volume.

00:04:09.440 --> 00:04:13.850
And, if you look at the city
as a whole, that's the

00:04:13.850 --> 00:04:15.320
aggregate capacity right here.

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And this is the second worksheet
in that-- Let me

00:04:20.190 --> 00:04:22.460
tell you where it is again, if
you didn't watch the last

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video, is khanacademy.org/
downloads/cupcakes.xls.

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But anyway, Vikram had entered
the market, and now I

00:04:31.440 --> 00:04:34.130
calculated here aggregate
capacity.

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This is the total number of
cupcakes all of the factories

00:04:36.930 --> 00:04:38.240
in the market can produce.

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This is the aggregate demand.

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So 1.1 million cupcakes are
getting sold a year and then

00:04:43.730 --> 00:04:46.550
this is the average return
on asset, right?

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But in this situation, what
continues to happen?

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I have all of this
extra capacity.

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Only 32% of my capacity is being
utilized and, obviously,

00:04:57.460 --> 00:05:00.000
right now you can say the market
price for cupcakes is

00:05:00.000 --> 00:05:03.760
well above the marginal cost
of producing a cupcake.

00:05:03.760 --> 00:05:06.600
And Imran's sitting there with
this huge amount of capacity,

00:05:06.600 --> 00:05:09.480
and maybe he's the richest guy,
because he has a huge

00:05:09.480 --> 00:05:13.080
inheritance from grandma.

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And so he says, this is silly.

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I'm the biggest guy in town.

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I'm the most efficient
guy in town.

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I have all the capacity.

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I'm the richest guy in town
and I'm making the worst

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returns on assets.

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So what he says is, you know
what, I'm just going to

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undercut everybody.

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I'm going to charge
$1.70 per cupcake.

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At $1.70 per cupcake, all of a
sudden, there's a whole new

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market for people who want
to eat cupcakes.

00:05:37.560 --> 00:05:39.220
There's a lot of people who
might have been eating

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Twinkies and other things, that
maybe they could get at

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$1.80 per Twinkie, and now
cupcakes are the desired

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source of food.

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So, obviously, aggregate demand
is going to go up and,

00:05:48.690 --> 00:05:51.160
let's say, he just sells out.

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He just goes and he sells two
million cupcakes a year.

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And so he makes a huge
return and he

00:05:57.880 --> 00:06:01.020
just kills our business.

00:06:01.020 --> 00:06:04.380
So I'm just taking huge losses
and Vikram is taking huge

00:06:04.380 --> 00:06:08.340
losses, right?

00:06:08.340 --> 00:06:12.660
He's like, you know what, we
have to match his prices.

00:06:12.660 --> 00:06:19.650
I sell it at $1.70 and then
Vikram sells at $1.70.

00:06:19.650 --> 00:06:21.960
And we said at $1.70, people are
willing to eat two million

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cupcakes in a year.

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So, let's say, at $1.70 it's
split evenly between-- well

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Vikram can only produce
400,000 cupcakes.

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So let's say he sells 400,000.

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And then the remainder split
between the other two.

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So, let's see, 800,000
and 800,000.

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And, as you can see here,
there's a general trend that,

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as people have extra capacity,
there's almost this incentive

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to lower your price relative
to the other person.

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Because if you're not using your
capacity, then that's a

00:07:03.390 --> 00:07:06.300
cupcake that's not being
made that otherwise

00:07:06.300 --> 00:07:07.270
could have been made.

00:07:07.270 --> 00:07:11.060
And your cost of producing that
incremental cupcake is a

00:07:11.060 --> 00:07:13.170
lot lower, so you're just
like, well, as long as I

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charge something more than that,
I'm going to make money

00:07:16.600 --> 00:07:18.600
that I otherwise wouldn't
have made.

00:07:18.600 --> 00:07:19.920
But when you do that,
you're actually

00:07:19.920 --> 00:07:21.060
lowering the market price.

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And then all the parties keep
wanting to do that.

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And that's why competition
really is good for customers.

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And that's why a monopoly
is bad.

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If you were a monopoly, if Sal's
Cupcakes were the only

00:07:29.430 --> 00:07:31.950
guy in town, he could just
keep his prices high.

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And even if his utilization went
down, there would be no

00:07:34.220 --> 00:07:36.090
incentive for him
to lower prices.

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But in this reality with
competition, there's this huge

00:07:38.850 --> 00:07:43.640
incentive that, when you have
extra capacity, especially if

00:07:43.640 --> 00:07:46.190
you have a lot of extra
capacity, there's this huge

00:07:46.190 --> 00:07:48.640
incentive to lower prices
so that you can

00:07:48.640 --> 00:07:50.140
utilize that capacity.

00:07:50.140 --> 00:07:53.220
Likewise, if you're running near
full capacity, there's a

00:07:53.220 --> 00:07:54.670
huge incentive to
raise prices.

00:07:54.670 --> 00:07:57.080
Because if you're at full
capacity, and we saw that in

00:07:57.080 --> 00:07:59.460
the last video, when it was
just me, I went to full

00:07:59.460 --> 00:08:02.280
capacity and I was able to raise
prices because all that

00:08:02.280 --> 00:08:03.740
extra money just goes to me.

00:08:03.740 --> 00:08:07.640
But, as you can see, there's a
couple of key learning points

00:08:07.640 --> 00:08:09.370
in this set of videos.

00:08:09.370 --> 00:08:13.420
When you have huge returns, as
Sal's Cupcakes had in this

00:08:13.420 --> 00:08:16.730
video or in this worksheet over
here-- When you have huge

00:08:16.730 --> 00:08:19.730
returns, it attracts
competition.

00:08:19.730 --> 00:08:22.140
The competition attracts
capacity, right?

00:08:22.140 --> 00:08:24.410
We went from aggregate capacity
from one million with

00:08:24.410 --> 00:08:28.040
my original factory,
to now 3.4 million.

00:08:28.040 --> 00:08:30.560
And then, when you have that
extra capacity, everyone's

00:08:30.560 --> 00:08:34.570
incentive is really to lower
prices so that they can try to

00:08:34.570 --> 00:08:36.350
grab some of that utilization.

00:08:36.350 --> 00:08:39.340
The only way that you could
avoid this is, if Sal, Imran,

00:08:39.340 --> 00:08:42.789
and Vikram were to meet in a
room and say, hey guys what

00:08:42.789 --> 00:08:46.450
we're doing is silly why don't
we just all agree on a price.

00:08:46.450 --> 00:08:49.020
And you might say that's a good
business move and, if you

00:08:49.020 --> 00:08:50.750
actually did it, you would
end up in jail.

00:08:50.750 --> 00:08:52.330
Well, hopefully you'd be
in jail if you had good

00:08:52.330 --> 00:08:54.570
regulators, because that's
called collusion.

00:08:54.570 --> 00:08:56.100
You'd be forming a cartel.

00:08:56.100 --> 00:08:59.120
You'd be forming a group that
is trying to control prices.

00:08:59.120 --> 00:09:02.170
So in a truly competitive
environment, we're not allowed

00:09:02.170 --> 00:09:04.630
to communicate and we're not
allowed to tell each other,

00:09:04.630 --> 00:09:08.430
hey, why don't we just
set prices at X.

00:09:08.430 --> 00:09:11.340
We always have to be competing
with each other and lowering

00:09:11.340 --> 00:09:11.870
our prices.

00:09:11.870 --> 00:09:14.010
But the general theme here
is, when you're at high

00:09:14.010 --> 00:09:17.350
utilization-- the whole reason
why I'm even entering into

00:09:17.350 --> 00:09:19.780
this whole spreadsheet and all
of that, is to talk about

00:09:19.780 --> 00:09:21.080
inflation in general.

00:09:21.080 --> 00:09:24.470
But, in general, prices will
go up when you have high

00:09:24.470 --> 00:09:26.150
utilization, right?

00:09:26.150 --> 00:09:29.130
If all of us were running
at 100% utilization--

00:09:29.130 --> 00:09:30.390
Actually, let's do
that scenario.

00:09:30.390 --> 00:09:32.810
Let's say, for whatever reason,
everyone is able to

00:09:32.810 --> 00:09:36.080
get cheap loans, and they take
home equity loans, and they

00:09:36.080 --> 00:09:38.570
decide to use all of that extra
money that is coming

00:09:38.570 --> 00:09:40.900
from their home ATM
to buy cupcakes.

00:09:40.900 --> 00:09:44.170
So aggregate demand goes up huge
and all of the cupcakes

00:09:44.170 --> 00:09:46.820
in the market get sold out.

00:09:46.820 --> 00:09:50.130
So I'm selling a million
cupcakes per year.

00:09:50.130 --> 00:09:53.980
Imran is selling two million
cupcakes per year.

00:09:53.980 --> 00:09:55.760
And then Vikram is
selling 400.

00:09:55.760 --> 00:09:59.620
So we're all tapped out, we're
at 100% capacity utilization.

00:09:59.620 --> 00:10:03.940
And then the return on assets
are pretty good.

00:10:03.940 --> 00:10:06.660
But we all, as a group, say,
wow, you know, if I'm already

00:10:06.660 --> 00:10:10.190
sold out, why don't I just raise
prices because it's not

00:10:10.190 --> 00:10:11.180
going to affect demand
so much.

00:10:11.180 --> 00:10:15.710
People want cupcakes so badly,
so I could raise prices to $2.

00:10:15.710 --> 00:10:17.770
That improves my return
on asset.

00:10:17.770 --> 00:10:19.880
Imran's no dummy, so he
does the same thing.

00:10:19.880 --> 00:10:21.370
He raises his price to $2.

00:10:21.370 --> 00:10:23.100
And let's say people are getting
so much money from

00:10:23.100 --> 00:10:26.790
their home equity loans and
they're still willing to buy

00:10:26.790 --> 00:10:27.750
the cupcakes from us.

00:10:27.750 --> 00:10:30.790
And Vikram does the
same at $2.

00:10:30.790 --> 00:10:34.170
And so everyone's return on
asset improves even more and

00:10:34.170 --> 00:10:35.910
you can even argue that it would
attract competition.

00:10:35.910 --> 00:10:37.670
But I think three players
is good enough.

00:10:37.670 --> 00:10:40.870
And let's say it just keeps
happening and I realize that I

00:10:40.870 --> 00:10:46.710
can raise my prices all the way
to $3 without affecting my

00:10:46.710 --> 00:10:51.620
utilization, without any
impact on demand.

00:10:51.620 --> 00:10:54.520
Let's say it has a slight
impact on utilization.

00:10:54.520 --> 00:10:57.620
So I'm selling 950,000
cupcakes a year.

00:10:57.620 --> 00:11:00.490
He's selling, I don't
know, 1.8 million

00:11:00.490 --> 00:11:01.900
cupcakes in a year.

00:11:01.900 --> 00:11:05.180
And let's say Vikram
is selling 380,000

00:11:05.180 --> 00:11:06.740
cupcakes in a year.

00:11:06.740 --> 00:11:10.000
But in general, if you look at
returns in the industry, in

00:11:10.000 --> 00:11:12.750
this situation, by raising our
prices, we're getting better

00:11:12.750 --> 00:11:13.770
and better returns, right?

00:11:13.770 --> 00:11:15.670
More money's coming to
the bottom line.

00:11:15.670 --> 00:11:18.140
So, as long as we have a pretty
high utilization-- and

00:11:18.140 --> 00:11:21.830
people debate on what is the
level of utilization in lot of

00:11:21.830 --> 00:11:24.260
industries where it makes
sense to raise prices.

00:11:24.260 --> 00:11:26.710
But, when you're at a relatively
high utilization,

00:11:26.710 --> 00:11:30.880
it really pays to increase
your price hurdle.

00:11:30.880 --> 00:11:33.740
And on the other side of the
coin, when you have a low

00:11:33.740 --> 00:11:36.890
utilization of your asset, even
though it might not be

00:11:36.890 --> 00:11:39.340
completely-- well, it is
rational if you're a

00:11:39.340 --> 00:11:40.360
competitor.

00:11:40.360 --> 00:11:43.160
But when you have very low
utilization, you essentially

00:11:43.160 --> 00:11:46.120
want to lower your prices so
that you can utilize your

00:11:46.120 --> 00:11:47.100
factory more.

00:11:47.100 --> 00:11:49.060
And you can play around with
this and just think about some

00:11:49.060 --> 00:11:50.070
scenarios yourself.

00:11:50.070 --> 00:11:52.710
And that's the real big take
away I wanted you to get at,

00:11:52.710 --> 00:11:55.420
is that high utilization of
anything, of our aggregate

00:11:55.420 --> 00:11:57.840
capacity, prices
will increase.

00:11:57.840 --> 00:12:00.600
Low utilization, prices
will decrease.

00:12:00.600 --> 00:12:01.850
And actually I'll
say two things.

00:12:04.410 --> 00:12:09.510
High utilization will allow you
to raise prices and when

00:12:09.510 --> 00:12:12.620
you raise price you'll get a
better return on your asset,

00:12:12.620 --> 00:12:14.560
and then the other side effect
is, when you have that high

00:12:14.560 --> 00:12:17.630
return on asset, you'll also
have more investment going on

00:12:17.630 --> 00:12:19.250
to build more capacity.

00:12:19.250 --> 00:12:20.990
So aggregate capacity
will go on.

00:12:20.990 --> 00:12:25.570
So those are the two side
effects of high utilization.

00:12:25.570 --> 00:12:28.560
You have prices increasing and
then you have more capacity or

00:12:28.560 --> 00:12:30.200
more investment coming on.

00:12:30.200 --> 00:12:32.730
Low utilization, you have kind
of the opposite situation.

00:12:32.730 --> 00:12:35.560
No incentive for someone to add
a factory, like we did in

00:12:35.560 --> 00:12:38.800
these situations, and there's
every incentive for every

00:12:38.800 --> 00:12:41.840
player in the market to the
lower prices because they just

00:12:41.840 --> 00:12:43.110
want to use their factories.

00:12:43.110 --> 00:12:46.680
Otherwise their factories
just go unutilized.

00:12:46.680 --> 00:12:48.900
Anyway, I think I said the
same thing five times in

00:12:48.900 --> 00:12:50.410
different ways, but I think
that's your point.

00:12:50.410 --> 00:12:53.050
I'll return to the drawing
board, literally, in the next

00:12:53.050 --> 00:12:56.540
video and we can proceed with
our discussion of inflation

00:12:56.540 --> 00:12:58.060
and deflation.


Cupcake economics 2

WEBVTT
Kind: captions
Language: en

00:00:01.600 --> 00:00:05.180
In the last video we talked a
little bit about, at least

00:00:05.180 --> 00:00:06.820
potentially, starting
a cupcake factory.

00:00:06.820 --> 00:00:09.800
But this is a major investment
that I'm thinking about

00:00:09.800 --> 00:00:12.950
making, so at minimum, I made
a spreadsheet here in Excel

00:00:12.950 --> 00:00:15.455
and it's available at
khanacademy.org/

00:00:15.455 --> 00:00:16.705
downloads/cupcakes.xls.

00:00:21.140 --> 00:00:23.710
If you just click slash here,
you'll see everything in the

00:00:23.710 --> 00:00:25.550
download directory, but I'm
going to start putting more

00:00:25.550 --> 00:00:26.360
stuff there.

00:00:26.360 --> 00:00:27.860
So I encourage you
to play with it.

00:00:27.860 --> 00:00:30.760
But this is essentially-- it'll
do all the math for us

00:00:30.760 --> 00:00:34.240
that we did in the
last video, --the

00:00:34.240 --> 00:00:35.160
investment in the factory.

00:00:35.160 --> 00:00:37.590
Let's say in the real world,
once I actually got bids from

00:00:37.590 --> 00:00:39.090
contractors and things
like that, it ends up

00:00:39.090 --> 00:00:41.470
costing $1.1 million.

00:00:41.470 --> 00:00:44.450
The annual capacity is a million
cupcakes per year.

00:00:44.450 --> 00:00:46.290
The cost per cupcake is-- let's
say, I don't know, input

00:00:46.290 --> 00:00:48.070
costs went up for
whatever reason.

00:00:48.070 --> 00:00:51.020
Now that I have a computer doing
the math for me, I can

00:00:51.020 --> 00:00:52.440
deal with a little bit
funnier numbers.

00:00:52.440 --> 00:00:54.680
So let's say it's $1.05.

00:00:54.680 --> 00:00:58.740
The price charged per
cupcake is $2.

00:00:58.740 --> 00:01:00.820
Well, actually, it can
be anything, right?

00:01:00.820 --> 00:01:02.470
And so this is going to
be an input field and

00:01:02.470 --> 00:01:04.760
right now it says $2.

00:01:04.760 --> 00:01:06.100
Let's say this is what
we assume is how

00:01:06.100 --> 00:01:07.400
many cupcakes we sell.

00:01:07.400 --> 00:01:10.680
In this scenario, this is the
income statement, at least as

00:01:10.680 --> 00:01:13.630
far as we get to the operating
income line.

00:01:13.630 --> 00:01:18.090
And so it calculates that you
have $2 million of revenue.

00:01:18.090 --> 00:01:19.570
Notice what happens
when I change it.

00:01:19.570 --> 00:01:24.160
If I sell my cupcakes for a
$1.50 per cupcake, then I only

00:01:24.160 --> 00:01:26.030
have $1.5 million.

00:01:26.030 --> 00:01:28.760
So it actually computes what
we need it to compute.

00:01:28.760 --> 00:01:30.340
It computes the cost
of goods sold.

00:01:30.340 --> 00:01:33.040
If I change the number of
cupcakes, let's see, if

00:01:33.040 --> 00:01:39.150
instead of a million, I sell
five 500,000, it calculates

00:01:39.150 --> 00:01:40.140
everything accordingly.

00:01:40.140 --> 00:01:43.040
And in all these scenarios it
tells me my operating income.

00:01:43.040 --> 00:01:46.380
And if you go a little bit
lower, it tells me capacity

00:01:46.380 --> 00:01:46.880
utilization.

00:01:46.880 --> 00:01:49.740
That's just how many cupcakes I
sold, divided by how many I

00:01:49.740 --> 00:01:50.650
could make.

00:01:50.650 --> 00:01:56.450
So it's 50% utilization and
then, my return on asset is my

00:01:56.450 --> 00:02:00.960
operating income divided by my
initial investment, right?

00:02:00.960 --> 00:02:05.300
So this is 275,000 divided by
1.1, it was a minus 25.

00:02:05.300 --> 00:02:07.610
So this is actually
a bad outcome.

00:02:07.610 --> 00:02:10.919
So in the last one, I touched on
a little bit that the real

00:02:10.919 --> 00:02:16.080
lever that I, as the owner
of my cupcake factory,

00:02:16.080 --> 00:02:17.320
can change is price.

00:02:17.320 --> 00:02:19.230
And then, obviously, if I charge
a lower price more

00:02:19.230 --> 00:02:21.110
people are going to want to
buy my cupcakes and if I

00:02:21.110 --> 00:02:23.260
charge a higher price,
fewer people.

00:02:23.260 --> 00:02:25.260
Allthough, there are some things
that when you charge a

00:02:25.260 --> 00:02:27.510
higher price people think it
must be better so maybe they

00:02:27.510 --> 00:02:31.230
want it, or they want to show
off to their friends, and look

00:02:31.230 --> 00:02:33.810
at this expensive cupcake that
I eat, and it's kind of a

00:02:33.810 --> 00:02:34.410
status symbol.

00:02:34.410 --> 00:02:36.860
But for the most part
the lower the price,

00:02:36.860 --> 00:02:38.390
the more you sell.

00:02:38.390 --> 00:02:41.370
And now we can actually figure
out under what combinations am

00:02:41.370 --> 00:02:42.720
I going to make certain
amounts of money.

00:02:42.720 --> 00:02:45.770
So if I charge $1.50 per cupcake
and I'm only able to

00:02:45.770 --> 00:02:49.280
sell 500,000 cupcakes, I'm going
to take a loss per year

00:02:49.280 --> 00:02:51.240
of $275,000.

00:02:51.240 --> 00:02:57.100
If I sell them for $1.75 and
if I sell, I don't know,

00:02:57.100 --> 00:03:00.570
700,000 cupcakes, I'm almost
at break-even.

00:03:00.570 --> 00:03:02.850
So, let's see, you
have to do $1.85.

00:03:02.850 --> 00:03:04.790
Here in this situation,
I actually make money.

00:03:04.790 --> 00:03:07.410
I have a 5% return on asset.

00:03:07.410 --> 00:03:09.760
And, just so you know, this is
a major investment that I'm

00:03:09.760 --> 00:03:11.670
making, $1.1 million.

00:03:11.670 --> 00:03:13.400
I actually want to make sure
I understand all of the

00:03:13.400 --> 00:03:15.330
scenarios of price and sales.

00:03:15.330 --> 00:03:18.070
So what I did is actually
used Excel to do

00:03:18.070 --> 00:03:19.180
a sensitivity study.

00:03:19.180 --> 00:03:23.960
So what I did here is I put all
of the-- let me just go to

00:03:23.960 --> 00:03:26.680
that part of the spreadsheet.

00:03:26.680 --> 00:03:29.120
And I encourage you to play
with this, because it's

00:03:29.120 --> 00:03:29.750
interesting.

00:03:29.750 --> 00:03:31.690
It shows you that even in a
fairly simple business, you

00:03:31.690 --> 00:03:33.770
can do a lot of analysis.

00:03:33.770 --> 00:03:37.000
And, if you're in high school
or in middle school, this

00:03:37.000 --> 00:03:38.860
could actually be a fun-- I
don't know if they allow this

00:03:38.860 --> 00:03:40.140
type of thing for science
projects.

00:03:40.140 --> 00:03:43.160
But go to a local business and
kind of analyze the business

00:03:43.160 --> 00:03:44.150
in a hundred different ways.

00:03:44.150 --> 00:03:46.270
And actually, if you watch the
probability videos, I do all

00:03:46.270 --> 00:03:48.030
those things on [UNINTELLIGIBLE]

00:03:48.030 --> 00:03:49.400
processes and things
like that.

00:03:49.400 --> 00:03:51.720
You can analyze the business and
do Excel spreadsheets and

00:03:51.720 --> 00:03:54.520
you'll probably end up winning
soon. the state science fair.

00:03:54.520 --> 00:03:56.740
Call it a math project or
engineering project.

00:03:56.740 --> 00:03:59.130
But anyway, here I want
to figure, out what is

00:03:59.130 --> 00:04:00.550
my return on asset?

00:04:00.550 --> 00:04:05.080
So essentially my operating
profit divided by my initial

00:04:05.080 --> 00:04:07.690
investment, depending on the
different prices I might

00:04:07.690 --> 00:04:10.030
charge and the different
quantities.

00:04:10.030 --> 00:04:13.640
And here it's kind of hard to
visualize, so I graphed it as

00:04:13.640 --> 00:04:16.800
a three dimensional surface.

00:04:16.800 --> 00:04:19.560
3D.

00:04:19.560 --> 00:04:23.900
So as you see here, if I charge
$2.80 and I only sell

00:04:23.900 --> 00:04:28.950
300,000, then this is my return
on asset right here.

00:04:28.950 --> 00:04:32.070
This curve is actually the
zero curve, right?

00:04:32.070 --> 00:04:33.900
So this is actually my
break-even right here.

00:04:33.900 --> 00:04:38.360
So any point along this curve
right here I'm at break-even.

00:04:38.360 --> 00:04:43.280
So if I'm at $2.80 per cupcake
and I only sell 300,000, I'm

00:04:43.280 --> 00:04:45.550
at break-even.

00:04:45.550 --> 00:04:47.240
Let's see, what is
this right here?

00:04:47.240 --> 00:04:54.270
If I sell $1.60 per cupcake and
if I sell 900,000, then

00:04:54.270 --> 00:04:55.870
I'm also at break-even.

00:04:55.870 --> 00:04:57.810
So this is my break-even
curve.

00:04:57.810 --> 00:04:59.490
This is what I want to avoid.

00:04:59.490 --> 00:05:02.850
Everything here is in the
negative, right, according to

00:05:02.850 --> 00:05:05.870
the legend, minus 50% to
zero percent return.

00:05:05.870 --> 00:05:08.620
So here I'm losing money and I
would color it in if I wasn't

00:05:08.620 --> 00:05:10.700
in Excel mode.

00:05:10.700 --> 00:05:14.520
If I charge $1.60 per cupcake
and I only sell 400,000

00:05:14.520 --> 00:05:16.700
cupcakes, I'm going to have
a negative return.

00:05:16.700 --> 00:05:18.030
And we can figure it
out in that little

00:05:18.030 --> 00:05:19.700
worksheet I just did.

00:05:19.700 --> 00:05:21.580
But anyway this is fun to look
at and I encourage you

00:05:21.580 --> 00:05:24.040
to play with it.

00:05:24.040 --> 00:05:26.710
And it actually shows you that
it's a fairly interesting and

00:05:26.710 --> 00:05:28.110
sophisticated thing, that
you have these two

00:05:28.110 --> 00:05:29.020
variables that change.

00:05:29.020 --> 00:05:32.430
And this is about as simple
as a business can get.

00:05:32.430 --> 00:05:34.420
You can only imagine what
happens when you start varying

00:05:34.420 --> 00:05:36.500
the other parameters, but these
are the two big ones.

00:05:36.500 --> 00:05:41.500
So let's say, when I come out
the gate, I want everyone in

00:05:41.500 --> 00:05:43.380
town to taste my cupcakes.

00:05:43.380 --> 00:05:47.980
Because I think, once they taste
it, they'll realize that

00:05:47.980 --> 00:05:48.790
they're delicious.

00:05:48.790 --> 00:05:51.800
And by the way, I've also
learned from the cigarette

00:05:51.800 --> 00:05:54.220
companies and I put nicotine
in my cupcake, so I think

00:05:54.220 --> 00:05:56.550
people will become
addicted to it.

00:05:56.550 --> 00:05:58.320
So what I do is, I want
to charge a relatively

00:05:58.320 --> 00:05:59.110
low price for it.

00:05:59.110 --> 00:06:04.130
Let's say I do come out the gate
at, I don't know, $1.75.

00:06:04.130 --> 00:06:06.470
And that's a very cheap
price for cupcakes.

00:06:06.470 --> 00:06:08.740
There's actually no cupcake
producers in

00:06:08.740 --> 00:06:09.560
this town right now.

00:06:09.560 --> 00:06:13.220
So I just sell out
one, two, three.

00:06:13.220 --> 00:06:14.930
I just sell out of cupcakes.

00:06:14.930 --> 00:06:17.550
And so I'm making $200,000
per year, that's an

00:06:17.550 --> 00:06:19.190
18% return on asset.

00:06:19.190 --> 00:06:21.800
And a lot of people would be
happy with that, but I'm like,

00:06:21.800 --> 00:06:25.480
hey, I'm leaving money on the
table because I'm selling out

00:06:25.480 --> 00:06:26.440
of my cupcakes.

00:06:26.440 --> 00:06:30.280
So what happens if I raise
my price a little bit?

00:06:30.280 --> 00:06:31.950
I'm fully utilized, right?

00:06:31.950 --> 00:06:33.430
I have 100% utilization.

00:06:33.430 --> 00:06:37.650
So it makes sense for me to
see if there's any-- maybe

00:06:37.650 --> 00:06:40.300
there's some people who want
cupcakes, who can't get them

00:06:40.300 --> 00:06:41.600
because I can't produce
that many.

00:06:41.600 --> 00:06:43.520
So let me raise my price
a little bit.

00:06:43.520 --> 00:06:47.580
Let me say I raise
it to $1.85.

00:06:47.580 --> 00:06:50.930
At $1.85 it still turns out
that I'm selling a million

00:06:50.930 --> 00:06:51.850
cupcakes in a year.

00:06:51.850 --> 00:06:53.010
Now, I was right.

00:06:53.010 --> 00:06:54.490
I was leaving money
on the table.

00:06:54.490 --> 00:06:57.380
Now I'm making $300,000
a year.

00:06:57.380 --> 00:06:58.400
This seems like a good idea.

00:06:58.400 --> 00:07:00.730
I want to see how much people
are willing to pay.

00:07:00.730 --> 00:07:03.750
So, let's say, I raise
the price to $2.

00:07:03.750 --> 00:07:06.350
But, in that scenario, $2, it
starts to get a little pricey

00:07:06.350 --> 00:07:06.810
for people.

00:07:06.810 --> 00:07:07.980
It's just kind of a little
sticker shock.

00:07:07.980 --> 00:07:10.050
Maybe I should have
done $1.99.

00:07:10.050 --> 00:07:12.030
And so I don't sell a million.

00:07:12.030 --> 00:07:15.930
I sell 950,000.

00:07:15.930 --> 00:07:18.580
There's maybe 50,000 thousand
people in the margin who said,

00:07:18.580 --> 00:07:22.000
hey, you know, I'd buy it at
$1.85 but I'm not willing to

00:07:22.000 --> 00:07:23.650
buy it at $2.

00:07:23.650 --> 00:07:24.950
But this still works
out, right?

00:07:24.950 --> 00:07:26.000
I'm still making more money.

00:07:26.000 --> 00:07:28.550
Even though I'm selling fewer
cupcakes, because I'm charging

00:07:28.550 --> 00:07:33.700
so much more per cupcake, and
I'm making a 37% return.

00:07:33.700 --> 00:07:35.360
Let's say I keep figuring
this out.

00:07:35.360 --> 00:07:37.310
And let's say I figured out
the optimal point is me

00:07:37.310 --> 00:07:39.950
charging $3 per cupcake.

00:07:39.950 --> 00:07:42.460
And at $3 per cupcake,
I'm able to

00:07:42.460 --> 00:07:47.110
sell you 750,000 cupcakes.

00:07:47.110 --> 00:07:50.770
And I make $962,000 a year
and I have a huge

00:07:50.770 --> 00:07:52.180
return on asset, 88%.

00:07:52.180 --> 00:07:55.030
Imagine a business or some
investment where you get 88%

00:07:55.030 --> 00:07:56.990
of your money every year.

00:07:56.990 --> 00:08:02.900
So that's all good and I'm
driving a Bentley and I have

00:08:02.900 --> 00:08:05.600
the biggest house on a hill
in town and all of that.

00:08:05.600 --> 00:08:07.230
But other people say,
hey, all Sal's

00:08:07.230 --> 00:08:08.910
doing is making cupcakes.

00:08:08.910 --> 00:08:10.840
I can make cupcakes too
and I have some

00:08:10.840 --> 00:08:13.260
money to build a factory.

00:08:13.260 --> 00:08:15.720
This is a better return on
investment than the stock

00:08:15.720 --> 00:08:17.350
market or anything else
that I know of.

00:08:17.350 --> 00:08:24.950
So I'm also going to get into
the cupcake factory business.

00:08:24.950 --> 00:08:27.000
And so, here, this is the
second worksheet in this

00:08:27.000 --> 00:08:28.250
spreadsheet.

00:08:32.090 --> 00:08:35.250
So let's say, I was
at $1.3 million.

00:08:38.150 --> 00:08:38.799
I don't know if you
can see this.

00:08:38.799 --> 00:08:40.474
Maybe I should zoom
in a little bit.

00:08:43.870 --> 00:08:45.166
There you go.

00:08:45.166 --> 00:08:46.110
So this is the same thing.

00:08:46.110 --> 00:08:50.540
So I said $3 and, 750,000
cupcakes and

00:08:50.540 --> 00:08:53.350
my cost was a $1.05.

00:08:53.350 --> 00:08:55.370
So I was making $962,000.

00:08:55.370 --> 00:08:58.020
But then Imran-- and just if
you're curious why I wasn't

00:08:58.020 --> 00:09:00.700
recording videos for the last
two weeks, actually Imran is

00:09:00.700 --> 00:09:04.350
the name of my son and he came
into the world two weeks ago,

00:09:04.350 --> 00:09:07.470
and so, I think it makes
sense to name a

00:09:07.470 --> 00:09:08.650
cupcake store after him.

00:09:08.650 --> 00:09:11.010
But let's say he comes in, and
he's like, I'm tired of

00:09:11.010 --> 00:09:13.460
getting an allowance
from dad; I also

00:09:13.460 --> 00:09:16.080
want to produce cupcakes.

00:09:16.080 --> 00:09:20.800
And he actually has more money
because his grandma gave him

00:09:20.800 --> 00:09:24.550
more money because she likes
him more than her son.

00:09:24.550 --> 00:09:27.560
And so he has $1.5 million to
invest because he's like, wow,

00:09:27.560 --> 00:09:29.340
this is such a good investment,
let me put more

00:09:29.340 --> 00:09:31.570
money into it. $1.5 million.

00:09:31.570 --> 00:09:33.090
He builds a factory that
can produce two

00:09:33.090 --> 00:09:36.180
million cupcakes a year.

00:09:36.180 --> 00:09:38.450
And also, it's a more efficient
factory, so it

00:09:38.450 --> 00:09:42.960
actually uses a little less
electricity, and wastes less

00:09:42.960 --> 00:09:47.430
cream and frosting, and, I
guess, nicotine as well.

00:09:47.430 --> 00:09:51.660
So the cost per cupcake
is less.

00:09:51.660 --> 00:09:58.060
And he decides to undercut his
father, so he charges $2.90

00:09:58.060 --> 00:09:59.360
per cupcake.

00:09:59.360 --> 00:10:03.210
And when he charges $2.90 per--
everyone just kind of

00:10:03.210 --> 00:10:05.550
runs to him, because his
cupcakes are just as good.

00:10:05.550 --> 00:10:06.890
There really wasn't
much of a barrier.

00:10:06.890 --> 00:10:13.250
So, let's say, he sells
500,000 cupcakes.

00:10:13.250 --> 00:10:19.190
Then I'm only selling
250,000 at $3.

00:10:19.190 --> 00:10:21.510
There's just some people
who like my cupcakes.

00:10:21.510 --> 00:10:25.080
So I'm pretty much almost
break-even and I say, well,

00:10:25.080 --> 00:10:27.060
these are my die-hard fans.

00:10:27.060 --> 00:10:29.300
And so, to benefit them-- these
guys aren't going to go

00:10:29.300 --> 00:10:31.150
anywhere else --I'm going to
raise my prices a little bit.

00:10:31.150 --> 00:10:34.180
Just because I know that
these guys like me.

00:10:34.180 --> 00:10:36.560
At least in that situation,
I'm cutting a profit.

00:10:36.560 --> 00:10:38.940
But then I say, well, you know,
this isn't a good state

00:10:38.940 --> 00:10:39.490
of affairs.

00:10:39.490 --> 00:10:40.800
He took all my business.

00:10:40.800 --> 00:10:43.590
I actually want you to notice
something right here, what

00:10:43.590 --> 00:10:44.240
happened immediately.

00:10:44.240 --> 00:10:47.620
I was making an 88% percent
return on my money, right?

00:10:47.620 --> 00:10:50.920
And just when this Imran comes
in, and he enters into the

00:10:50.920 --> 00:10:56.330
space, all of a sudden,
what is the return?

00:10:56.330 --> 00:10:58.732
He's only running at
25% utilization.

00:10:58.732 --> 00:11:02.530
But his return on asset has gone
down to 20-- and, because

00:11:02.530 --> 00:11:04.450
he's at that utilization,
his return on asset has

00:11:04.450 --> 00:11:06.460
gone down to 20%.

00:11:06.460 --> 00:11:09.400
And then my return on asset
has gone down to 1%.

00:11:09.400 --> 00:11:10.890
So there's a general
theme here.

00:11:10.890 --> 00:11:14.410
When someone is doing really
well and getting a really

00:11:14.410 --> 00:11:16.510
great return, it attracts
competition.

00:11:16.510 --> 00:11:19.250
It attracts capacity, right?

00:11:19.250 --> 00:11:22.670
And if there's enough demand to
satiate that new capacity,

00:11:22.670 --> 00:11:25.320
maybe they will get
a better return.

00:11:25.320 --> 00:11:27.910
But in general, over time, if
there's a very favorable

00:11:27.910 --> 00:11:29.510
return, more and more
competition

00:11:29.510 --> 00:11:30.760
will enter the market.

00:11:30.760 --> 00:11:32.370
Actually I've run out of
time in the studio.

00:11:32.370 --> 00:11:34.620
In the next video, I'll talk
about more scenarios with

00:11:34.620 --> 00:11:35.450
competition.

00:11:35.450 --> 00:11:36.700
See


Economics of a cupcake factory

WEBVTT
Kind: captions
Language: en

00:00:01.890 --> 00:00:04.730
All the talk today is about are
we going to see inflation

00:00:04.730 --> 00:00:05.185
or deflation.

00:00:05.185 --> 00:00:08.510
And before we do that, I think
it's really important to get a

00:00:08.510 --> 00:00:11.890
microeconomic level
understanding of why do prices

00:00:11.890 --> 00:00:13.120
increase or decrease.

00:00:13.120 --> 00:00:17.430
We'll do a little example of
me starting a business and

00:00:17.430 --> 00:00:20.690
when do the prices increase or
decrease in that market?

00:00:20.690 --> 00:00:23.970
So let's say I wanted to start
a cupcake factory.

00:00:29.440 --> 00:00:31.340
And then actually in the process
of this video, even

00:00:31.340 --> 00:00:33.730
though this isn't the intent of
this playlist The intent of

00:00:33.730 --> 00:00:36.340
this playlist is eventually for
you to be able to go to

00:00:36.340 --> 00:00:40.000
your econ professor and say, no,
we won't or we will have

00:00:40.000 --> 00:00:42.430
inflation or deflation for
reasons x, y, and z.

00:00:42.430 --> 00:00:44.220
But in the process you might
learn a little bit about

00:00:44.220 --> 00:00:47.020
accounting and starting
a cupcake factory.

00:00:47.020 --> 00:00:48.640
So let's say I want to start
a cupcake factory.

00:00:48.640 --> 00:00:51.150
It costs a million
dollars to build.

00:00:57.250 --> 00:01:05.250
And just the economics of the
factory is it costs $500,000 a

00:01:05.250 --> 00:01:07.370
year to operate.

00:01:07.370 --> 00:01:09.910
So that's literally to pay the
electric bills, to have people

00:01:09.910 --> 00:01:13.250
sitting there ready to make
cupcakes, and I have

00:01:13.250 --> 00:01:16.610
accountants and all the rest.
I have to pay people

00:01:16.610 --> 00:01:18.230
to clean the place.

00:01:18.230 --> 00:01:22.390
Let's say the economics of the
cupcakes themselves-- The cost

00:01:22.390 --> 00:01:26.180
per cupcake is $1.

00:01:26.180 --> 00:01:27.650
Let me do that in red.

00:01:27.650 --> 00:01:30.600
I'll do all of these in red
because these are-- I'll do

00:01:30.600 --> 00:01:32.090
that later.

00:01:32.090 --> 00:01:34.190
So the cost per cupcake
is a dollar.

00:01:38.760 --> 00:01:40.230
And where does that cost?

00:01:40.230 --> 00:01:43.270
Some of it is the incremental--
Let's assume

00:01:43.270 --> 00:01:48.910
that I had a completely
automated, robotic factory.

00:01:48.910 --> 00:01:51.550
Let's say there's very little
labor at my factory.

00:01:51.550 --> 00:01:55.540
And this is just the cost of
ingredients: cream, and sugar,

00:01:55.540 --> 00:01:58.630
and butter, and those little
wax paper things that the

00:01:58.630 --> 00:02:02.230
cupcake is held in, and the
electricity to run my robots,

00:02:02.230 --> 00:02:06.620
and then overtime to kind of
maintain the robots that make

00:02:06.620 --> 00:02:07.870
my factory.

00:02:11.150 --> 00:02:15.330
Let's say I think that I can
charge $2 per cupcake.

00:02:23.370 --> 00:02:29.250
Oh and one other thing, my $1
million factory can produce

00:02:29.250 --> 00:02:35.940
one million cupcakes per year.

00:02:35.940 --> 00:02:37.350
So this is a couple
of exercises.

00:02:37.350 --> 00:02:39.850
Because I'm a businessman, I'm
not just going to plunk down a

00:02:39.850 --> 00:02:43.170
million dollars before
I figure out how

00:02:43.170 --> 00:02:43.950
much money I can make.

00:02:43.950 --> 00:02:45.770
Let's think about how much
money we can make

00:02:45.770 --> 00:02:47.475
in different scenarios.

00:02:47.475 --> 00:02:49.640
Let's call this scenario
one, which is

00:02:49.640 --> 00:02:51.630
kind of the best scenario.

00:02:51.630 --> 00:02:57.450
So call this the optimistic
optimist-- is that I sell a

00:02:57.450 --> 00:02:58.610
million cupcakes.

00:02:58.610 --> 00:03:01.770
So my factory can produce a
million cupcakes and I sell a

00:03:01.770 --> 00:03:04.410
million cupcakes.

00:03:04.410 --> 00:03:09.530
If I sell one million cupcakes--
And I'll take a

00:03:09.530 --> 00:03:11.640
side here because this is
an issue that I want

00:03:11.640 --> 00:03:12.330
to bring up a lot.

00:03:12.330 --> 00:03:14.340
I am fully utilized.

00:03:14.340 --> 00:03:17.570
My factory can produce one
million cupcakes and, in this

00:03:17.570 --> 00:03:20.270
scenario, I'm producing
a million cupcakes.

00:03:20.270 --> 00:03:21.880
So we would say we're
100% utilized.

00:03:21.880 --> 00:03:23.270
How much are you producing
relative to

00:03:23.270 --> 00:03:24.390
what you can produce?

00:03:24.390 --> 00:03:25.540
100%

00:03:25.540 --> 00:03:27.200
So, if I sell a million
cupcakes,

00:03:27.200 --> 00:03:29.560
what would be my revenue?

00:03:29.560 --> 00:03:31.220
And I won't go into the
details of accounting.

00:03:31.220 --> 00:03:35.390
Let me make revenue in green
because that's a good thing.

00:03:35.390 --> 00:03:37.160
So what is my revenue?

00:03:37.160 --> 00:03:39.280
If my background weren't already
black, I would make

00:03:39.280 --> 00:03:40.530
that in black.

00:03:40.530 --> 00:03:43.080
That's why people say being in
the black or being in the red.

00:03:43.080 --> 00:03:44.830
Because being in the black
means you're positive and

00:03:44.830 --> 00:03:46.080
being in the red means
you're negative.

00:03:46.080 --> 00:03:48.180
But my background is black
so I'll use green.

00:03:48.180 --> 00:03:49.900
So we'll say being
in the green.

00:03:49.900 --> 00:03:50.880
So what would be my revenue?

00:03:50.880 --> 00:03:54.260
Well, I'm selling one million
cupcakes and this is my

00:03:54.260 --> 00:03:55.450
optimistic scenario.

00:03:55.450 --> 00:03:59.190
Let's say I actually am able
to charge $2 per cupcake.

00:03:59.190 --> 00:04:01.440
Obviously the whole discussion
is: what happens to this price

00:04:01.440 --> 00:04:04.100
over a bunch of different
scenarios?

00:04:04.100 --> 00:04:07.550
So I am able to charge $2 per
cupcake, so my revenue is

00:04:07.550 --> 00:04:11.540
equal to $2 million per year.

00:04:11.540 --> 00:04:12.630
Right?

00:04:12.630 --> 00:04:15.160
This is a million cupcakes
per year.

00:04:15.160 --> 00:04:16.700
What are my cost of goods?

00:04:19.230 --> 00:04:21.800
And I'll write the common
acronym in there, COGS.

00:04:21.800 --> 00:04:24.280
And this is what you'll see if
you actually look at income

00:04:24.280 --> 00:04:27.930
statements for public
companies.

00:04:27.930 --> 00:04:32.800
You'll see something like cost
of goods or variable costs.

00:04:32.800 --> 00:04:34.857
Usually, actually, cost of goods
or cost of services is

00:04:34.857 --> 00:04:37.030
what you'll see most often.

00:04:37.030 --> 00:04:39.560
So if I have a million
cupcakes-- let me do this in

00:04:39.560 --> 00:04:40.900
red, I said I would
do this in red.

00:04:40.900 --> 00:04:44.930
So I have a million cupcakes
times-- what's my cost per

00:04:44.930 --> 00:04:49.280
cupcake?-- times $1
cost per cupcake.

00:04:49.280 --> 00:04:54.700
So it's $1 million per year.

00:04:54.700 --> 00:04:58.120
And so what is my profit just
from selling the cupcakes?

00:04:58.120 --> 00:05:01.190
Before I think about how much
does it cost for me, all of

00:05:01.190 --> 00:05:02.300
the overhead expenses.

00:05:02.300 --> 00:05:05.650
Just the money I'm getting from
selling the cupcakes, and

00:05:05.650 --> 00:05:07.270
that term is called
gross profit.

00:05:14.050 --> 00:05:15.610
And that's essentially
how much am I

00:05:15.610 --> 00:05:17.360
bringing in from the cupcakes?

00:05:17.360 --> 00:05:20.510
And then how much are just those
cupcakes costing me?

00:05:20.510 --> 00:05:21.310
So I'll do a line here.

00:05:21.310 --> 00:05:23.070
I'll subtract that from that.

00:05:23.070 --> 00:05:27.580
So gross profit, I'm
making $1 million.

00:05:27.580 --> 00:05:29.090
Two minus one.

00:05:29.090 --> 00:05:31.130
You might say, oh
that's great!

00:05:31.130 --> 00:05:32.520
You're making a million dollars
on your cupcake

00:05:32.520 --> 00:05:34.470
factory in this scenario and
oh no, we're not done yet.

00:05:34.470 --> 00:05:36.150
This is just the gross profit.

00:05:36.150 --> 00:05:39.020
This is just the money directly
from the cupcakes.

00:05:39.020 --> 00:05:41.830
I have all of this overhead
expense and often times, on a

00:05:41.830 --> 00:05:44.040
regular income statement, it
will be called selling,

00:05:44.040 --> 00:05:47.130
general and administrative, or
overhead costs, or operating

00:05:47.130 --> 00:05:48.790
costs or something like that.

00:05:48.790 --> 00:05:50.550
I'll just call it overhead.

00:05:50.550 --> 00:05:51.460
I'll make it red because
it's an expense.

00:05:51.460 --> 00:05:55.990
So this should be
red too: COGS.

00:05:55.990 --> 00:05:57.396
So I'll call it overhead.

00:05:57.396 --> 00:06:00.300
So once again, this is kind of
the offices, the accountants,

00:06:00.300 --> 00:06:01.420
the bookkeepers.

00:06:01.420 --> 00:06:06.040
So that's going to be
$500,000 a year.

00:06:06.040 --> 00:06:11.150
And then, how much am I making
from the business now?

00:06:11.150 --> 00:06:12.730
And this is called
operating profit.

00:06:15.240 --> 00:06:18.900
How much am I making from
operating the business?

00:06:18.900 --> 00:06:20.990
And I won't go into all of
the details of an income

00:06:20.990 --> 00:06:23.010
statement, but any income
statement you look at will

00:06:23.010 --> 00:06:24.720
have this operating
profit line.

00:06:24.720 --> 00:06:27.110
And everything below the
operating profit line, just as

00:06:27.110 --> 00:06:29.900
an aside, will kind of cover
things not related to the

00:06:29.900 --> 00:06:31.390
actual operations
of the business.

00:06:31.390 --> 00:06:34.890
It'll be expenses related to
financing the business if I

00:06:34.890 --> 00:06:37.010
took a loan for that million
dollars, or it will be

00:06:37.010 --> 00:06:39.020
expenses related to taxes
and all that.

00:06:39.020 --> 00:06:42.280
But we're just assuming
an ideal world that

00:06:42.280 --> 00:06:43.360
doesn't have taxes.

00:06:43.360 --> 00:06:45.750
And let's say, assume if I
inherited this million

00:06:45.750 --> 00:06:46.920
dollars, I didn't finance it.

00:06:46.920 --> 00:06:49.660
So my operating profit is really
my profit because I

00:06:49.660 --> 00:06:51.230
don't have to pay taxes on it.

00:06:51.230 --> 00:06:53.560
So let's see, I got gross profit
just from selling the

00:06:53.560 --> 00:06:55.300
cupcakes: a million.

00:06:55.300 --> 00:06:58.810
Overhead: the accountants and
the people cleaning the

00:06:58.810 --> 00:06:59.860
factory and et cetera,
et cetera.

00:06:59.860 --> 00:07:01.390
That's $500,000 a year.

00:07:01.390 --> 00:07:05.290
So my operating profit
is $500,000 and

00:07:05.290 --> 00:07:06.550
that's pretty good.

00:07:06.550 --> 00:07:09.900
I had a $1 million investment,
one time investment.

00:07:09.900 --> 00:07:13.120
And I'm assuming that this
$500,000 a year to operate

00:07:13.120 --> 00:07:14.510
also maintains my building.

00:07:14.510 --> 00:07:16.740
So this kind of $1 million
investment will

00:07:16.740 --> 00:07:19.410
exist forever, right?

00:07:19.410 --> 00:07:23.750
And I'm making $500,000 a
year in this scenario.

00:07:23.750 --> 00:07:26.210
So that's a 50% return,
right, which is great.

00:07:26.210 --> 00:07:28.180
If I told you I had an
investment where I could make

00:07:28.180 --> 00:07:31.420
50% a year on your money
you'd say here's my

00:07:31.420 --> 00:07:33.140
money, here's a check.

00:07:33.140 --> 00:07:36.370
But this is, of course, an
optimistic scenario.

00:07:36.370 --> 00:07:37.320
Let's think of other
scenarios.

00:07:37.320 --> 00:07:39.220
There's actually a ton of
scenarios because you can keep

00:07:39.220 --> 00:07:41.720
adjusting how much you sell and
the price you sell it for

00:07:41.720 --> 00:07:43.220
and come up with different
numbers here.

00:07:43.220 --> 00:07:45.590
It's actually a fun exercise to
do in Excel and you could

00:07:45.590 --> 00:07:47.350
do probability distributions
and all that, but I won't

00:07:47.350 --> 00:07:48.690
worry about that right now.

00:07:48.690 --> 00:07:51.170
Let's do a pessemistic--
actually

00:07:51.170 --> 00:07:52.100
let's do this scenario.

00:07:52.100 --> 00:07:54.620
What do I have to do just to
make sure that I don't lose

00:07:54.620 --> 00:07:56.060
money, right?

00:07:56.060 --> 00:07:59.010
So to make sure I don't
lose money, let's

00:07:59.010 --> 00:08:01.560
kind of do it backwards.

00:08:01.560 --> 00:08:04.780
So we're going to do a
break-even analysis.

00:08:04.780 --> 00:08:09.030
And trust me, this will
eventually lead to whether

00:08:09.030 --> 00:08:12.960
we're going to see inflation or
deflation in this economy.

00:08:12.960 --> 00:08:15.760
And I think in the meantime
you might learn a little

00:08:15.760 --> 00:08:19.200
interesting things about
starting a business.

00:08:19.200 --> 00:08:23.770
So let's say I just want to know
what has to happen for my

00:08:23.770 --> 00:08:25.960
operating profit to be zero.

00:08:25.960 --> 00:08:26.170
Right?

00:08:26.170 --> 00:08:28.840
To not be negative, what's the
minimum number of cupcakes I

00:08:28.840 --> 00:08:30.350
need to make or what price
I have to charge.

00:08:30.350 --> 00:08:35.235
So if my operating profit is
zero, we know my overhead.

00:08:38.570 --> 00:08:39.450
This is fixed.

00:08:39.450 --> 00:08:40.135
This is a fixed expense.

00:08:40.135 --> 00:08:41.730
There's nothing I
can do about it.

00:08:41.730 --> 00:08:44.410
If you want to have a
cupcake factory, it

00:08:44.410 --> 00:08:47.410
will cost you $500,000.

00:08:47.410 --> 00:08:48.680
And I'll write it as a negative
number because we're

00:08:48.680 --> 00:08:51.880
going to subtract it from
the gross profit.

00:08:51.880 --> 00:08:53.620
So what does the gross
profit have to be?

00:08:59.160 --> 00:09:01.460
In order for this to come out
to be zero, the gross profit

00:09:01.460 --> 00:09:06.980
has to be $500,000.

00:09:06.980 --> 00:09:10.350
And so now we can think of a
bunch of scenarios where we

00:09:10.350 --> 00:09:13.440
end up with $500,000
gross profit.

00:09:13.440 --> 00:09:19.810
We could, if we sold--
what'd we say?

00:09:19.810 --> 00:09:21.120
So how can we get to $500,000?

00:09:21.120 --> 00:09:24.570
So let's say we're selling, I
don't know, instead of selling

00:09:24.570 --> 00:09:29.930
a million cupcakes we're only
selling 500,000 cupcakes.

00:09:29.930 --> 00:09:31.220
Right this should work out.

00:09:31.220 --> 00:09:36.310
So then our revenue
will be $500,000.

00:09:36.310 --> 00:09:39.310
And let's say I'm still selling
it for $2 a cupcake.

00:09:39.310 --> 00:09:42.020
Times $2.

00:09:42.020 --> 00:09:45.010
So that would be $1 million
of revenue coming into

00:09:45.010 --> 00:09:47.200
the door per year.

00:09:47.200 --> 00:09:50.800
And then my cost of cupcakes,
or my cost of

00:09:50.800 --> 00:09:52.360
goods sold, is what?

00:09:52.360 --> 00:09:54.850
I should be doing this in red,
I'm not being consistent.

00:09:54.850 --> 00:09:57.890
My cost of goods sold is what?

00:09:57.890 --> 00:10:00.480
We said it was a dollar
per cupcake, right?

00:10:00.480 --> 00:10:05.330
So that's 500,000 times $1.

00:10:05.330 --> 00:10:07.700
It would be silly to ever sell
a cupcake for less than a

00:10:07.700 --> 00:10:08.260
dollar, right?

00:10:08.260 --> 00:10:11.040
Then you're just handing
checks out to

00:10:11.040 --> 00:10:12.370
your cupcake eaters.

00:10:12.370 --> 00:10:16.070
But anyway, in this case, my
cost for goods sold would be

00:10:16.070 --> 00:10:17.930
$500,000 and everything
would work out.

00:10:17.930 --> 00:10:22.180
So this is a break-even
scenario, where I sell 500,000

00:10:22.180 --> 00:10:25.030
cupcakes at $2 per cupcake,
with this

00:10:25.030 --> 00:10:27.070
being the cost of goods.

00:10:27.070 --> 00:10:30.830
And then I'll make $500,000
gross profit and then, take

00:10:30.830 --> 00:10:31.740
out the overhead.

00:10:31.740 --> 00:10:34.050
At least I won't make a loss.

00:10:34.050 --> 00:10:36.670
This is interesting because this
tells me, if I'm charging

00:10:36.670 --> 00:10:43.500
$2 per cupcake, I have to sell
at least 500,000 cupcakes to

00:10:43.500 --> 00:10:43.950
make money.

00:10:43.950 --> 00:10:48.380
So you might say, oh yeah, so it
would never be rational to

00:10:48.380 --> 00:10:50.420
sell anything less than
500,000 cupcakes.

00:10:50.420 --> 00:10:51.960
Otherwise you should not
operate the business.

00:10:51.960 --> 00:10:54.240
And what we'll do in future
videos is we'll actually

00:10:54.240 --> 00:10:57.180
explore situations in which
that does happen.

00:10:57.180 --> 00:10:59.000
And in which people start
to kind of cut

00:10:59.000 --> 00:11:01.600
prices to actually compete.

00:11:01.600 --> 00:11:04.160
And in the process they'll be
doing very irrational things.

00:11:04.160 --> 00:11:07.320
But anyway, I realize I've run
out of time in this video.

00:11:07.320 --> 00:11:09.570
I'll see you in the next one
and we'll actually see what

00:11:09.570 --> 00:11:12.540
happens once I start
my cupcake factory.


Law of large numbers

WEBVTT
Kind: captions
Language: en

00:00:01.880 --> 00:00:08.300
Let's learn a little bit about
the law of large numbers, which

00:00:08.300 --> 00:00:11.730
is on many levels, one of the
most intuitive laws in

00:00:11.730 --> 00:00:14.190
mathematics and in
probability theory.

00:00:14.190 --> 00:00:18.570
But because it's so applicable
to so many things, it's often a

00:00:18.570 --> 00:00:22.190
misused law or sometimes,
slightly misunderstood.

00:00:22.190 --> 00:00:26.250
So just to be a little bit
formal in our mathematics, let

00:00:26.250 --> 00:00:28.570
me just define it for you first
and then we'll talk a little

00:00:28.570 --> 00:00:29.435
bit about the intuition.

00:00:29.435 --> 00:00:33.990
So let's say I have a
random variable, X.

00:00:33.990 --> 00:00:38.750
And we know its expected value
or its population mean.

00:00:38.750 --> 00:00:41.790
The law of large numbers just
says that if we take a sample

00:00:41.790 --> 00:00:46.480
of n observations of our random
variable, and if we were

00:00:46.480 --> 00:00:49.080
to average all of those
observations-- and let me

00:00:49.080 --> 00:00:50.680
define another variable.

00:00:50.680 --> 00:00:54.150
Let's call that x sub n
with a line on top of it.

00:00:54.150 --> 00:00:56.970
This is the mean of n
observations of our

00:00:56.970 --> 00:00:57.760
random variable.

00:00:57.760 --> 00:01:00.530
So it's literally this is
my first observation.

00:01:00.530 --> 00:01:03.230
So you can kind of say I run
the experiment once and I get

00:01:03.230 --> 00:01:07.120
this observation and I run it
again, I get that observation.

00:01:07.120 --> 00:01:11.640
And I keep running it n times
and then I divide by my

00:01:11.640 --> 00:01:12.630
number of observations.

00:01:12.630 --> 00:01:14.150
So this is my sample mean.

00:01:14.150 --> 00:01:17.340
This is the mean of all the
observations I've made.

00:01:17.340 --> 00:01:23.210
The law of large numbers just
tells us that my sample mean

00:01:23.210 --> 00:01:27.580
will approach my expected
value of the random variable.

00:01:27.580 --> 00:01:32.760
Or I could also write it as my
sample mean will approach my

00:01:32.760 --> 00:01:39.910
population mean for n
approaching infinity.

00:01:39.910 --> 00:01:43.290
And I'll be a little informal
with what does approach or

00:01:43.290 --> 00:01:44.270
what does convergence mean?

00:01:44.270 --> 00:01:46.410
But I think you have the
general intuitive sense that if

00:01:46.410 --> 00:01:50.510
I take a large enough sample
here that I'm going to end up

00:01:50.510 --> 00:01:54.210
getting the expected value of
the population as a whole.

00:01:54.210 --> 00:01:56.800
And I think to a lot of us
that's kind of intuitive.

00:01:56.800 --> 00:02:01.610
That if I do enough trials that
over large samples, the trials

00:02:01.610 --> 00:02:04.070
would kind of give me the
numbers that I would expect

00:02:04.070 --> 00:02:06.720
given the expected value and
the probability and all that.

00:02:06.720 --> 00:02:09.330
But I think it's often a little
bit misunderstood in terms

00:02:09.330 --> 00:02:10.620
of why that happens.

00:02:10.620 --> 00:02:13.280
And before I go into
that let me give you

00:02:13.280 --> 00:02:15.090
a particular example.

00:02:15.090 --> 00:02:17.400
The law of large numbers will
just tell us that-- let's say I

00:02:17.400 --> 00:02:24.540
have a random variable-- X is
equal to the number of heads

00:02:24.540 --> 00:02:30.780
after 100 tosses of a fair
coin-- tosses or flips

00:02:30.780 --> 00:02:33.426
of a fair coin.

00:02:36.090 --> 00:02:37.890
First of all, we know what
the expected value of

00:02:37.890 --> 00:02:39.840
this random variable is.

00:02:39.840 --> 00:02:43.080
It's the number of tosses,
the number of trials times

00:02:43.080 --> 00:02:46.500
the probabilities of
success of any trial.

00:02:46.500 --> 00:02:49.175
So that's equal to 50.

00:02:49.175 --> 00:02:53.480
So the law of large numbers
just says if I were to take a

00:02:53.480 --> 00:02:57.530
sample or if I were to average
the sample of a bunch of these

00:02:57.530 --> 00:03:03.350
trials, so you know, I get-- my
first time I run this trial I

00:03:03.350 --> 00:03:06.280
flip 100 coins or have 100
coins in a shoe box and I shake

00:03:06.280 --> 00:03:10.280
the shoe box and I count the
number of heads, and I get 55.

00:03:10.280 --> 00:03:11.880
So that Would be X1.

00:03:11.880 --> 00:03:15.240
Then I shake the box
again and I get 65.

00:03:15.240 --> 00:03:18.110
Then I shake the box
again and I get 45.

00:03:18.110 --> 00:03:22.760
And I do this n times and then
I divide it by the number

00:03:22.760 --> 00:03:24.000
of times I did it.

00:03:24.000 --> 00:03:27.060
The law of large numbers just
tells us that this the

00:03:27.060 --> 00:03:31.050
average-- the average of all
of my observations, is going

00:03:31.050 --> 00:03:38.700
to converge to 50 as n
approaches infinity.

00:03:38.700 --> 00:03:40.890
Or for n approaching 50.

00:03:40.890 --> 00:03:42.770
I'm sorry, n
approaching infinity.

00:03:42.770 --> 00:03:45.150
And I want to talk a little
bit about why this happens

00:03:45.150 --> 00:03:47.000
or intuitively why this is.

00:03:47.000 --> 00:03:50.520
A lot of people kind of feel
that oh, this means that if

00:03:50.520 --> 00:03:54.950
after 100 trials that if I'm
above the average that somehow

00:03:54.950 --> 00:03:57.650
the laws of probability are
going to give me more heads

00:03:57.650 --> 00:04:00.150
or fewer heads to kind of
make up the difference.

00:04:00.150 --> 00:04:01.940
That's not quite what's
going to happen.

00:04:01.940 --> 00:04:04.440
That's often called the
gambler's fallacy.

00:04:04.440 --> 00:04:05.480
Let me differentiate.

00:04:05.480 --> 00:04:06.510
And I'll use this example.

00:04:06.510 --> 00:04:08.420
So let's say-- let
me make a graph.

00:04:08.420 --> 00:04:09.285
And I'll switch colors.

00:04:23.010 --> 00:04:25.200
This is n, my x-axis is n.

00:04:25.200 --> 00:04:27.650
This is the number
of trials I take.

00:04:27.650 --> 00:04:32.520
And my y-axis, let me make
that the sample mean.

00:04:32.520 --> 00:04:36.190
And we know what the expected
value is, we know the expected

00:04:36.190 --> 00:04:39.090
value of this random
variable is 50.

00:04:39.090 --> 00:04:40.055
Let me draw that here.

00:04:42.670 --> 00:04:43.345
This is 50.

00:04:47.410 --> 00:04:49.710
So just going to
the example I did.

00:04:49.710 --> 00:04:53.760
So when n is equal to--
let me just [INAUDIBLE]

00:04:53.760 --> 00:04:54.890
here.

00:04:54.890 --> 00:04:59.250
So my first trial I got 55
and so that was my average.

00:04:59.250 --> 00:05:00.750
I only had one data point.

00:05:00.750 --> 00:05:04.720
Then after two trials,
let's see, then I have 65.

00:05:04.720 --> 00:05:09.150
And so my average is going to
be 65 plus 55 divided by 2.

00:05:09.150 --> 00:05:10.490
which is 60.

00:05:10.490 --> 00:05:13.410
So then my average
went up a little bit.

00:05:13.410 --> 00:05:15.380
Then I had a 45, which
will bring my average

00:05:15.380 --> 00:05:16.880
down a little bit.

00:05:16.880 --> 00:05:18.210
I won't plot a 45 here.

00:05:18.210 --> 00:05:19.500
Now I have to average
all of these out.

00:05:19.500 --> 00:05:22.410
What's 45 plus 65?

00:05:22.410 --> 00:05:23.700
Let me actually just
get the number just

00:05:23.700 --> 00:05:24.580
so you get the point.

00:05:24.580 --> 00:05:28.670
So it's 55 plus 65.

00:05:28.670 --> 00:05:32.930
It's 120 plus 45 is 165.

00:05:32.930 --> 00:05:36.370
Divided by 3.

00:05:36.370 --> 00:05:39.890
3 goes into 165 5--
5 times 3 is 15.

00:05:39.890 --> 00:05:42.280
It's 53.

00:05:42.280 --> 00:05:43.520
No, no, no.

00:05:43.520 --> 00:05:45.310
55.

00:05:45.310 --> 00:05:46.990
So the average goes
down back down to 55.

00:05:46.990 --> 00:05:49.420
And we could keep
doing these trials.

00:05:49.420 --> 00:05:51.630
So you might say that the law
of large numbers tell this,

00:05:51.630 --> 00:05:56.640
OK, after we've done 3 trials
and our average is there.

00:05:56.640 --> 00:06:00.110
So a lot of people think that
somehow the gods of probability

00:06:00.110 --> 00:06:02.310
are going to make it more
likely that we get fewer

00:06:02.310 --> 00:06:03.170
heads in the future.

00:06:03.170 --> 00:06:06.150
That somehow the next couple of
trials are going to have to

00:06:06.150 --> 00:06:09.030
be down here in order to
bring our average down.

00:06:09.030 --> 00:06:10.720
And that's not
necessarily the case.

00:06:10.720 --> 00:06:13.240
Going forward the probabilities
are always the same.

00:06:13.240 --> 00:06:15.200
The probabilities are
always 50% that I'm

00:06:15.200 --> 00:06:16.160
going to get heads.

00:06:16.160 --> 00:06:19.660
It's not like if I had a bunch
of heads to start off with or

00:06:19.660 --> 00:06:22.100
more than I would have expected
to start off with, that all of

00:06:22.100 --> 00:06:25.360
a sudden things would be made
up and I would get more tails.

00:06:25.360 --> 00:06:27.530
That would the
gambler's fallacy.

00:06:27.530 --> 00:06:29.910
That if you have a long streak
of heads or you have a

00:06:29.910 --> 00:06:32.020
disproportionate number of
heads, that at some point

00:06:32.020 --> 00:06:35.070
you're going to have-- you have
a higher likelihood of having a

00:06:35.070 --> 00:06:37.010
disproportionate
number of tails.

00:06:37.010 --> 00:06:38.440
And that's not quite true.

00:06:38.440 --> 00:06:41.230
What the law of large numbers
tells us is that it doesn't

00:06:41.230 --> 00:06:45.700
care-- let's say after some
finite number of trials your

00:06:45.700 --> 00:06:48.130
average actually-- it's a low
probability of this happening,

00:06:48.130 --> 00:06:50.300
but let's say your average
is actually up here.

00:06:50.300 --> 00:06:52.270
Is actually at 70.

00:06:52.270 --> 00:06:56.000
You're like, wow, we really
diverged a good bit from

00:06:56.000 --> 00:06:57.020
the expected value.

00:06:57.020 --> 00:06:58.450
But what the law of large
numbers says, well, I don't

00:06:58.450 --> 00:07:00.270
care how many trials this is.

00:07:00.270 --> 00:07:03.870
We have an infinite
number of trials left.

00:07:03.870 --> 00:07:06.590
And the expected value for that
infinite number of trials,

00:07:06.590 --> 00:07:11.570
especially in this type of
situation is going to be this.

00:07:11.570 --> 00:07:15.680
So when you average a finite
number that averages out to

00:07:15.680 --> 00:07:18.390
some high number, and then an
infinite number that's going to

00:07:18.390 --> 00:07:22.890
converge to this, you're going
to over time, converge back

00:07:22.890 --> 00:07:24.030
to the expected value.

00:07:24.030 --> 00:07:27.310
And that was a very informal
way of describing it, but

00:07:27.310 --> 00:07:29.580
that's what the law or
large numbers tells you.

00:07:29.580 --> 00:07:30.940
And it's an important thing.

00:07:30.940 --> 00:07:33.560
It's not telling you that if
you get a bunch of heads that

00:07:33.560 --> 00:07:36.190
somehow the probability of
getting tails is going

00:07:36.190 --> 00:07:38.260
to increase to kind of
make up for the heads.

00:07:38.260 --> 00:07:41.660
What it's telling you is, is
that no matter what happened

00:07:41.660 --> 00:07:44.590
over a finite number of trials,
no matter what the average is

00:07:44.590 --> 00:07:46.560
over a finite number of
trials, you have an infinite

00:07:46.560 --> 00:07:47.960
number of trials left.

00:07:47.960 --> 00:07:51.850
And if you do enough of them
it's going to converge back

00:07:51.850 --> 00:07:52.800
to your expected value.

00:07:52.800 --> 00:07:54.430
And this is an important
thing to think about.

00:07:54.430 --> 00:07:57.770
But this isn't used in practice
every day with the lottery and

00:07:57.770 --> 00:08:02.220
with casinos because they know
that if you do large enough

00:08:02.220 --> 00:08:04.960
samples-- and we could even
calculate-- if you do large

00:08:04.960 --> 00:08:07.760
enough samples, what's the
probability that things

00:08:07.760 --> 00:08:09.510
deviate significantly?

00:08:09.510 --> 00:08:12.960
But casinos and the lottery
every day operate on this

00:08:12.960 --> 00:08:15.640
principle that if you take
enough people-- sure, in the

00:08:15.640 --> 00:08:18.240
short-term or with a few
samples, a couple people

00:08:18.240 --> 00:08:19.570
might beat the house.

00:08:19.570 --> 00:08:22.210
But over the long-term the
house is always going to win

00:08:22.210 --> 00:08:24.300
because of the parameters of
the games that they're

00:08:24.300 --> 00:08:25.300
making you play.

00:08:25.300 --> 00:08:28.180
Anyway, this is an important
thing in probability and I

00:08:28.180 --> 00:08:29.760
think it's fairly intuitive.

00:08:29.760 --> 00:08:32.590
Although, sometimes when you
see it formally explained like

00:08:32.590 --> 00:08:34.290
this with the random variables
and that it's a little

00:08:34.290 --> 00:08:34.940
bit confusing.

00:08:34.940 --> 00:08:39.550
All it's saying is that as you
take more and more samples, the

00:08:39.550 --> 00:08:44.590
average of that sample is going
to approximate the

00:08:44.590 --> 00:08:45.670
true average.

00:08:45.670 --> 00:08:47.410
Or I should be a little
bit more particular.

00:08:47.410 --> 00:08:51.690
The mean of your sample is
going to converge to the true

00:08:51.690 --> 00:08:54.970
mean of the population or to
the expected value of

00:08:54.970 --> 00:08:56.130
the random variable.

00:08:56.130 --> 00:08:58.850
Anyway, see you in
the next video.


Is short selling bad?

WEBVTT
Kind: captions
Language: en

00:00:01.920 --> 00:00:04.770
I think we know enough about
shorting now that we can start

00:00:04.770 --> 00:00:07.390
thinking about whether it's a
good or bad thing to have in

00:00:07.390 --> 00:00:08.290
financial markets.

00:00:08.290 --> 00:00:10.040
And what I've done here is
I've drawn a hypothetical

00:00:10.040 --> 00:00:11.310
stock chart for a company.

00:00:11.310 --> 00:00:13.790
This time right here.

00:00:13.790 --> 00:00:15.980
This is the price
of the company.

00:00:15.980 --> 00:00:18.860
And let's just say that this is
a chart in a universe that

00:00:18.860 --> 00:00:20.810
doesn't have short
sellers in it.

00:00:20.810 --> 00:00:23.920
So this is all-- here a lot of
people are buying the stock,

00:00:23.920 --> 00:00:26.140
then over here some people,
maybe they get freaked out or

00:00:26.140 --> 00:00:27.510
whatever, they start selling.

00:00:27.510 --> 00:00:28.780
And then more people buy.

00:00:28.780 --> 00:00:32.880
So demands a little higher
than supply, so

00:00:32.880 --> 00:00:34.290
the price goes up.

00:00:34.290 --> 00:00:37.940
And that just generally
drives the volatility.

00:00:37.940 --> 00:00:40.140
Now in a short selling world,
what would happen?

00:00:40.140 --> 00:00:42.980
Let's let's think about two
scenarios, a short seller who

00:00:42.980 --> 00:00:46.290
makes money, and a short
seller who loses money.

00:00:46.290 --> 00:00:51.400
So a short seller
making money.

00:00:51.400 --> 00:00:53.890
What would a short seller making
money have to do if

00:00:53.890 --> 00:00:54.900
this is the stock chart.

00:00:54.900 --> 00:00:56.960
Obviously, they don't see the
stock chart beyond the day

00:00:56.960 --> 00:00:59.170
that they're actually making
the trade, but in order to

00:00:59.170 --> 00:01:02.820
make money they'll actually--
they'll have to short at the

00:01:02.820 --> 00:01:03.670
local peaks.

00:01:03.670 --> 00:01:05.209
And they would have to
cover their shorts

00:01:05.209 --> 00:01:05.940
at the local minimum.

00:01:05.940 --> 00:01:08.260
So a good short seller-- or
you can even say a perfect

00:01:08.260 --> 00:01:11.940
short seller would maybe short
here-- let me make it a

00:01:11.940 --> 00:01:15.100
different color so you can see
where he's acting-- would

00:01:15.100 --> 00:01:17.970
short here and then
cover there.

00:01:17.970 --> 00:01:21.310
And he would make that much
money on that move.

00:01:21.310 --> 00:01:23.190
And then he would wait a little
bit, wait for the stock

00:01:23.190 --> 00:01:24.880
to get expensive again
in his mind.

00:01:24.880 --> 00:01:27.820
And he would short here, and
then he would cover here.

00:01:27.820 --> 00:01:31.010
This would kind of be--
obviously it's very unlikely

00:01:31.010 --> 00:01:33.905
that someone could so well pick
tops and bottoms. But

00:01:33.905 --> 00:01:36.640
let's say they're just really
good at their analysis and

00:01:36.640 --> 00:01:38.900
figuring out market psychology
and things like that.

00:01:38.900 --> 00:01:40.120
And they would just
keep doing it.

00:01:40.120 --> 00:01:43.210
They would short here
and cover here.

00:01:43.210 --> 00:01:46.450
What would that actually
do to the stock?

00:01:46.450 --> 00:01:48.170
The green line was a
reality where you

00:01:48.170 --> 00:01:49.740
had no short sellers.

00:01:49.740 --> 00:01:51.700
Now if all of a sudden you
allowed short selling, and

00:01:51.700 --> 00:01:53.940
they had these guys come into
the market who know how to

00:01:53.940 --> 00:01:55.360
make money shorting.

00:01:55.360 --> 00:01:56.780
He's shorting up here.

00:01:56.780 --> 00:01:57.990
So what would shorting do?

00:01:57.990 --> 00:02:00.390
Shorting is you're borrowing
the stock and selling it.

00:02:00.390 --> 00:02:04.360
So he's creating extra supply
for the stock, right?

00:02:04.360 --> 00:02:06.760
So what he would be doing at
this point, by shorting, is he

00:02:06.760 --> 00:02:10.870
would actually be lowering
the price at this point.

00:02:10.870 --> 00:02:13.940
So let me draw the curve.

00:02:13.940 --> 00:02:16.690
So if there's a bunch of short
sellers acting in this range,

00:02:16.690 --> 00:02:19.360
it would actually
lower the peak.

00:02:19.360 --> 00:02:20.620
Because you have a bunch--
you have some

00:02:20.620 --> 00:02:22.250
more aggregate sellers.

00:02:22.250 --> 00:02:24.520
So the price wouldn't
go as high.

00:02:24.520 --> 00:02:26.200
And then on the other hand,
these short sellers have to

00:02:26.200 --> 00:02:28.860
cover right here, right?

00:02:28.860 --> 00:02:30.670
They're going to cover
their position.

00:02:30.670 --> 00:02:34.200
So at the low point you have
more aggregate buyers covering

00:02:34.200 --> 00:02:37.420
a short position, is just you're
buying the stock to pay

00:02:37.420 --> 00:02:39.460
it back, because you borrowed
it earlier.

00:02:39.460 --> 00:02:43.330
So here you would have more
aggregate buyers.

00:02:43.330 --> 00:02:45.450
And then at this point, once
again you have more aggregate

00:02:45.450 --> 00:02:48.680
sellers, so the price
won't go as high.

00:02:48.680 --> 00:02:51.490
You have more aggregate buyers
here, because the short

00:02:51.490 --> 00:02:54.790
sellers need to cover, so the
price won't go as low.

00:02:54.790 --> 00:02:56.630
And so forth and so on.

00:02:56.630 --> 00:03:01.020
And the bottom line is, a short
seller who's making

00:03:01.020 --> 00:03:03.480
money on the stock market, so
they're shorting the stock at

00:03:03.480 --> 00:03:06.850
peaks and covering the stock
at troughs, is actually

00:03:06.850 --> 00:03:09.840
reducing the volatility
of the stock.

00:03:09.840 --> 00:03:10.900
And that's good for everybody.

00:03:10.900 --> 00:03:12.300
That's good for the company's
management.

00:03:12.300 --> 00:03:15.050
That's good for the actual
shareholders of the company.

00:03:15.050 --> 00:03:17.780
And obviously it's good for the
short sellers because they

00:03:17.780 --> 00:03:20.950
are actually making money.

00:03:20.950 --> 00:03:22.830
And this is actually true for
anyone making money in the

00:03:22.830 --> 00:03:23.390
stock market.

00:03:23.390 --> 00:03:24.570
That they're reducing
volatility.

00:03:24.570 --> 00:03:27.620
What is a long-- just a regular
investor-- or I guess

00:03:27.620 --> 00:03:29.440
you could call them a trader
since they're buying and

00:03:29.440 --> 00:03:33.700
selling-- a regular trader would
make money by buying

00:03:33.700 --> 00:03:35.640
here and selling here.

00:03:38.190 --> 00:03:42.570
So really a regular trader
is not any different.

00:03:42.570 --> 00:03:44.670
A regular long trader is no
different than a short seller,

00:03:44.670 --> 00:03:46.870
it's just the order in which
they're buying or selling.

00:03:46.870 --> 00:03:49.750
But anyone making money is
buying at low points and

00:03:49.750 --> 00:03:51.070
selling at high points.

00:03:51.070 --> 00:03:53.820
And anyone doing that is
helping to reduce the

00:03:53.820 --> 00:03:55.170
volatility in the stock.

00:03:55.170 --> 00:03:59.130
And even if you're a long term
buy and hold player, you would

00:03:59.130 --> 00:04:05.470
rather sit and hold a stock--
you would rather be a holder

00:04:05.470 --> 00:04:09.460
of a stock that does this,
than a holder of a

00:04:09.460 --> 00:04:14.710
stock that does this.

00:04:14.710 --> 00:04:17.899
Now there are a lot of players
both on-- you could call them

00:04:17.899 --> 00:04:20.070
traders because they're buying
and selling on a regular

00:04:20.070 --> 00:04:25.450
basis-- that aren't kind
of doing this.

00:04:25.450 --> 00:04:29.210
Maybe they're piling on the
shorts at a low point and

00:04:29.210 --> 00:04:31.490
they're causing the stock
to go down even more.

00:04:31.490 --> 00:04:33.980
And then, when the stock starts
to move up they get

00:04:33.980 --> 00:04:36.160
scared and they buy it, and
it causes the stock to

00:04:36.160 --> 00:04:37.350
move up even more.

00:04:37.350 --> 00:04:40.180
And it increases the volatility
of the stock.

00:04:40.180 --> 00:04:42.020
But these guys are being
penalized because they're

00:04:42.020 --> 00:04:43.020
losing money.

00:04:43.020 --> 00:04:46.630
The people who sell at low
points and then buy at high

00:04:46.630 --> 00:04:48.590
points, and increase
the volatility,

00:04:48.590 --> 00:04:49.600
they're getting killed.

00:04:49.600 --> 00:04:52.020
They're falling every day.

00:04:52.020 --> 00:04:53.350
So it's not like you
have to create some

00:04:53.350 --> 00:04:54.420
penalty for those guys.

00:04:54.420 --> 00:04:55.980
Their penalty is that
they're just bad

00:04:55.980 --> 00:04:57.710
traders, they're bad investors.

00:04:57.710 --> 00:04:59.570
And they're just going
to lose their shirts.

00:04:59.570 --> 00:05:02.430
So if you're assuming that none
of these traders in any

00:05:02.430 --> 00:05:06.400
way manipulating the markets
or spreading false rumors.

00:05:06.400 --> 00:05:10.790
Anyone making money on a stock,
as long as they're not

00:05:10.790 --> 00:05:13.700
manipulating it, on either the
short or the long side, is

00:05:13.700 --> 00:05:15.290
actually a net asset
for the stock.

00:05:15.290 --> 00:05:17.540
That they're actually reducing
the volatility

00:05:17.540 --> 00:05:18.970
of the stock price.

00:05:18.970 --> 00:05:21.160
I guess another thing to think
about and this is just from

00:05:21.160 --> 00:05:22.490
a-- it's good.

00:05:22.490 --> 00:05:24.500
They're reducing the volatility,
so from that point

00:05:24.500 --> 00:05:27.270
sorting doesn't seem too
bad, for me, or in

00:05:27.270 --> 00:05:28.820
general to the market.

00:05:28.820 --> 00:05:31.150
But another way to think about
it is, kind of where are all

00:05:31.150 --> 00:05:33.490
the incentives in the markets?

00:05:33.490 --> 00:05:37.530
Who has an incentive to be
positive on a stock?

00:05:37.530 --> 00:05:39.710
And who has an incentive to
be a negative on a stock?

00:05:39.710 --> 00:05:40.960
Or to scrutinize a stocks?

00:05:48.640 --> 00:05:52.950
Well, the biggest, I guess
cheerleaders, for a stock, and

00:05:52.950 --> 00:05:56.800
it depends on their degree of
kind of credibility or ethics,

00:05:56.800 --> 00:05:58.300
would be the company's
management, right?

00:05:58.300 --> 00:06:08.180
These are people-- it would
be company's management.

00:06:08.180 --> 00:06:11.520
These are people who obviously
run the company, but they have

00:06:11.520 --> 00:06:14.890
the best transparency into the
financials of a company, and

00:06:14.890 --> 00:06:17.190
they tend to be shareholders
of the company or get

00:06:17.190 --> 00:06:19.160
compensated based on
how the stock does.

00:06:19.160 --> 00:06:22.190
So these guys have every
incentive to be positive.

00:06:22.190 --> 00:06:25.000
And, as we've seen multiple
examples of, whether you're

00:06:25.000 --> 00:06:28.450
talking about the investment
banks, or Enron, or Accenture,

00:06:28.450 --> 00:06:32.470
they'll often kind of hide the
truth when things get bad.

00:06:32.470 --> 00:06:37.410
So these guys are definitely big
time positive on stocks.

00:06:37.410 --> 00:06:39.300
Then, let's see, who are the
other players or the

00:06:39.300 --> 00:06:40.950
influencers on financial
markets?

00:06:40.950 --> 00:06:43.130
Well, a big one is the
financial press.

00:06:43.130 --> 00:06:45.740
And I'll write it out here so we
can have a discussion about

00:06:45.740 --> 00:06:49.340
whether they are pumpers of
stock or whether they tend to

00:06:49.340 --> 00:06:53.120
be more-- whether they tend
to scrutinize things

00:06:53.120 --> 00:06:54.480
a little bit more.

00:06:54.480 --> 00:06:56.350
An important thing to think
about with the financial

00:06:56.350 --> 00:06:59.130
press, and next time you watch
CNBC-- and I don't want to

00:06:59.130 --> 00:07:03.600
just pick on them-- is how
do they make money?

00:07:03.600 --> 00:07:06.560
Do they make money by
finding things that

00:07:06.560 --> 00:07:07.820
are wrong with companies?

00:07:07.820 --> 00:07:11.260
Do they make money by
making you money?

00:07:11.260 --> 00:07:12.950
No, they make money
by selling ads.

00:07:17.160 --> 00:07:18.640
And then the next question,
obviously, is who are they

00:07:18.640 --> 00:07:20.000
selling ads to?

00:07:20.000 --> 00:07:21.600
Are they selling ads for mops?

00:07:21.600 --> 00:07:24.430
Are they selling ads
for bicycles?

00:07:24.430 --> 00:07:29.485
No, they're selling ads to
financial services companies.

00:07:35.220 --> 00:07:38.180
So people who want to manage
your wealth, stock brokers,

00:07:38.180 --> 00:07:40.890
mutual fund companies, anyone
who can advertise.

00:07:40.890 --> 00:07:43.210
And this is key, too, because--
I don't know, you're

00:07:43.210 --> 00:07:46.700
probably not aware of it but
hedge funds can't advertise,

00:07:46.700 --> 00:07:51.080
so they're not consumers of the
financial-- or they're not

00:07:51.080 --> 00:07:52.500
customers of the financial
press.

00:07:52.500 --> 00:07:54.180
The only people who are
customers of the financial

00:07:54.180 --> 00:07:58.510
press are money managers,
financial planners, and things

00:07:58.510 --> 00:08:05.600
like that-- brokers,
mutual funds.

00:08:05.600 --> 00:08:10.320
And all of these guys benefit
when stock markets go up.

00:08:10.320 --> 00:08:15.530
Obviously mutual fund managers
will-- they tend to be long

00:08:15.530 --> 00:08:17.850
only, so they only want
things to go up.

00:08:17.850 --> 00:08:20.530
Stock brokers-- you might say,
oh you know, a stock broker

00:08:20.530 --> 00:08:22.790
can advise you to go long or
short and they just care about

00:08:22.790 --> 00:08:24.870
how many transactions
you make.

00:08:24.870 --> 00:08:28.110
But in general, more and more
people put money into the

00:08:28.110 --> 00:08:30.160
stock market in rising
markets.

00:08:30.160 --> 00:08:32.590
In a market like you're seeing
right now over the last year,

00:08:32.590 --> 00:08:36.010
people are pulling out-- you
could say oh, maybe people

00:08:36.010 --> 00:08:37.789
aren't doing more transactions,
but the general

00:08:37.789 --> 00:08:39.190
net effect is, people
are pulling

00:08:39.190 --> 00:08:41.240
money out of the markets.

00:08:41.240 --> 00:08:44.100
So when they're pulling money
out of the markets, brokers

00:08:44.100 --> 00:08:46.220
are getting less transactions,
they're managing less money.

00:08:46.220 --> 00:08:48.340
And that's also true of
the money managers.

00:08:48.340 --> 00:08:52.010
And there's also just another
ancillary side effect, is when

00:08:52.010 --> 00:08:55.760
markets go down and people
become less excited about the

00:08:55.760 --> 00:09:01.220
stock market, people stop
watching CNBC and CNNfn.

00:09:01.220 --> 00:09:06.200
And so even those few ads that
are for mops and for bicycles

00:09:06.200 --> 00:09:08.940
and for cars will get
fewer viewers.

00:09:08.940 --> 00:09:13.120
So in general the financial
press, at least in my opinion,

00:09:13.120 --> 00:09:14.600
is squarely in this camp.

00:09:18.680 --> 00:09:21.700
And then we can talk more, you
know, sell side analysts.

00:09:21.700 --> 00:09:25.910
You've probably heard the term
sell side and buy side.

00:09:25.910 --> 00:09:28.170
But sell side analysts are the
analysts that work for the

00:09:28.170 --> 00:09:30.780
major brokerages and investment
banks, who publish

00:09:30.780 --> 00:09:34.280
those reports that you see in
those ratings, a buy rating on

00:09:34.280 --> 00:09:35.680
IBM, or whatever.

00:09:35.680 --> 00:09:37.860
And the reason why they call
them sell side analysts is

00:09:37.860 --> 00:09:41.150
because they work for the people
who are essentially, on

00:09:41.150 --> 00:09:44.720
some level, selling-- you could
either view them as they

00:09:44.720 --> 00:09:48.460
often offer securities, or they
offer financial services

00:09:48.460 --> 00:09:52.860
to, often the companies
themselves, or to potential

00:09:52.860 --> 00:09:54.210
acquirers of the companies.

00:09:54.210 --> 00:09:58.070
Or they're selling their
services-- I mean, usually--

00:09:58.070 --> 00:10:00.150
they're brokerage services, so
they're trying to get people

00:10:00.150 --> 00:10:04.980
to transact, they're actually
brokers on some level.

00:10:04.980 --> 00:10:08.800
But clearly these guys, their
incentive, since their

00:10:08.800 --> 00:10:11.790
customer tends to be the
management of companies, is to

00:10:11.790 --> 00:10:13.840
be very, very, very positive.

00:10:13.840 --> 00:10:15.670
And you should say oh, there
are other people who, their

00:10:15.670 --> 00:10:17.950
whole job is to scrutinize
these people.

00:10:17.950 --> 00:10:19.930
Like, the government.

00:10:19.930 --> 00:10:22.470
But if you think about it once
again, the government likes a

00:10:22.470 --> 00:10:23.580
rising stock market.

00:10:23.580 --> 00:10:28.130
It takes-- when people's 401k's
are rising, the economy

00:10:28.130 --> 00:10:30.450
does better, the government
doesn't have to worry as much

00:10:30.450 --> 00:10:34.250
about other types of social
benefits, and unemployment,

00:10:34.250 --> 00:10:35.450
and things like that.

00:10:35.450 --> 00:10:39.770
So in general, and if you want
to be more, I guess, if you

00:10:39.770 --> 00:10:42.000
want to be more critical of the
government, you could also

00:10:42.000 --> 00:10:45.210
say that they are, to some
degree, very close to the

00:10:45.210 --> 00:10:48.550
management of these firms and
to financial companies.

00:10:48.550 --> 00:10:52.170
And to some degree, these guys
have significant clout in

00:10:52.170 --> 00:10:54.940
terms of lobbyists-- and, well
actually, I would even say the

00:10:54.940 --> 00:10:57.180
bankers, too.

00:10:57.180 --> 00:11:00.490
They have significant clout in
terms of lobbying, and just

00:11:00.490 --> 00:11:01.940
access to government,
generally.

00:11:01.940 --> 00:11:05.330
And government drives the
regulators, so these guys are

00:11:05.330 --> 00:11:06.490
also on the positive camp.

00:11:06.490 --> 00:11:08.120
And then finally you have
the ratings agencies.

00:11:08.120 --> 00:11:09.680
And the ratings agencies mainly

00:11:09.680 --> 00:11:10.870
operate in the debt world.

00:11:10.870 --> 00:11:12.400
And we'll talk more
about that.

00:11:12.400 --> 00:11:15.050
But, if you can scrutinize a
company on the debt level, and

00:11:15.050 --> 00:11:17.250
you say oh wow, this company
really isn't that good,

00:11:17.250 --> 00:11:19.050
they're not going to be
able pay off its debt.

00:11:19.050 --> 00:11:21.100
That kills the stock.

00:11:21.100 --> 00:11:22.940
But once again you have to
realize that the rating

00:11:22.940 --> 00:11:25.640
agencies are also paid by the
bankers, so the rating

00:11:25.640 --> 00:11:29.770
agencies are also-- have the
incentive to kind of not see

00:11:29.770 --> 00:11:31.270
things when things are bad.

00:11:31.270 --> 00:11:33.860
So out of everyone in the
financial services, or the

00:11:33.860 --> 00:11:36.170
financial world, that we've
talked about right now, they

00:11:36.170 --> 00:11:38.670
all benefit when stocks
continue to go up.

00:11:38.670 --> 00:11:42.350
Even when they go up beyond what
they really should go up.

00:11:42.350 --> 00:11:44.340
And even if they all kind of
know that things are a little

00:11:44.340 --> 00:11:45.350
bit too expensive.

00:11:45.350 --> 00:11:48.040
Or this management team might
be a little shady, or they

00:11:48.040 --> 00:11:49.530
might be covering
up something.

00:11:49.530 --> 00:11:51.060
None of these people
really have an

00:11:51.060 --> 00:11:52.980
incentive to expose it.

00:11:52.980 --> 00:11:56.310
And the only people who do
are the short sellers.

00:11:56.310 --> 00:11:59.870
These are the only people who
really have, arguably the

00:11:59.870 --> 00:12:03.040
sophistication and the time and
the monetary incentive to

00:12:03.040 --> 00:12:06.450
really look and scrutinize
what management is doing.

00:12:06.450 --> 00:12:10.960
To really look in the books
and kind of put a puzzle

00:12:10.960 --> 00:12:13.565
together, or put a bunch of
pieces together to come to the

00:12:13.565 --> 00:12:16.900
conclusion, wait, the numbers
that management is spouting

00:12:16.900 --> 00:12:17.960
really don't add up.

00:12:17.960 --> 00:12:21.250
And because of x, y and z,
this company really is

00:12:21.250 --> 00:12:22.480
overvalued.

00:12:22.480 --> 00:12:28.090
So to a large degree they are
kind of on society's side in

00:12:28.090 --> 00:12:32.670
preventing management from kind
of being overly bullish.

00:12:32.670 --> 00:12:35.800
And I don't want to sound like
someone who just broadly is

00:12:35.800 --> 00:12:36.760
defending short sellers.

00:12:36.760 --> 00:12:39.400
There is a class of short
sellers that I think would be

00:12:39.400 --> 00:12:42.600
bad, and that's the people who
are spreading false rumors,

00:12:42.600 --> 00:12:45.140
and being market manipulators.

00:12:45.140 --> 00:12:47.200
So there's just the
general market

00:12:47.200 --> 00:12:55.380
manipulation, or rumor mongering.

00:12:55.380 --> 00:12:58.000
And that definitely is bad, and
to some degree, if you can

00:12:58.000 --> 00:13:01.370
show someone is doing that,
there should be some type of

00:13:01.370 --> 00:13:02.600
penalty for doing it.

00:13:02.600 --> 00:13:06.380
But even there, and just it in
my experience participating in

00:13:06.380 --> 00:13:09.990
public markets, if I had to
pick-- if I had to pick

00:13:09.990 --> 00:13:14.200
between the left side of that
chart, between this side of

00:13:14.200 --> 00:13:16.890
this charge and this side of
this chart-- and if I had to

00:13:16.890 --> 00:13:20.290
say who does spread
false information

00:13:20.290 --> 00:13:21.760
when it does get spread?

00:13:21.760 --> 00:13:25.410
I think often times management
is a little bit more guilty of

00:13:25.410 --> 00:13:26.730
it than the short sellers.

00:13:26.730 --> 00:13:29.130
In fact there's very few times
that I've seen where the short

00:13:29.130 --> 00:13:32.670
sellers are-- there's some
negative thesis on the stock

00:13:32.670 --> 00:13:36.630
and where it really comes out
to be completely untrue.

00:13:36.630 --> 00:13:39.660
Although, there are examples,
and those short sellers, I

00:13:39.660 --> 00:13:42.380
don't think are really in the
mainstream Anyway, I don't

00:13:42.380 --> 00:13:43.330
want to meander too much.

00:13:43.330 --> 00:13:45.460
I realize that this video
has already gotten long.

00:13:45.460 --> 00:13:48.200
But I thought it's a nice,
useful discussion to maybe

00:13:48.200 --> 00:13:50.280
think a little bit about whether
short selling really

00:13:50.280 --> 00:13:54.230
is all that bad, even if you
are a long investor.