Scale of the large

WEBVTT
Kind: captions
Language: en

00:00:00.730 --> 00:00:03.210
The purpose of this
video is to just begin

00:00:03.210 --> 00:00:06.860
to appreciate how vast and
enormous the universe is.

00:00:06.860 --> 00:00:09.147
And frankly, our brains
really can't grasp it.

00:00:09.147 --> 00:00:11.230
What we'll see in this
video is that we can't even

00:00:11.230 --> 00:00:13.564
grasp things that are
actually super small compared

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to the size of the universe.

00:00:14.730 --> 00:00:16.230
And we actually
don't even know what

00:00:16.230 --> 00:00:17.890
the entire size of
the universe is.

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But with that said,
let's actually

00:00:19.306 --> 00:00:21.750
just try to appreciate
how small we are.

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So this is me right over here.

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I am 5 foot 9 inches, depending
on whether I'm wearing shoes--

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maybe 5 foot 10 with shoes.

00:00:30.377 --> 00:00:32.460
But for the sake of this
video, let's just roughly

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approximate around 6
feet, or around roughly--

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I'm not to go into the details
of the math-- around 2 meters.

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Now, if I were to lie
down 10 times in a row,

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you'd get about the
length of an 18-wheeler.

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That's about 60 feet long.

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So this is times 10.

00:00:49.770 --> 00:00:53.550
Now, if you were to put an
18-wheeler-- if you were

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to make it tall, as opposed to
long-- somehow stand it up--

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and you were to do
that 10 times in a row,

00:00:58.500 --> 00:01:03.330
you'll get to the height of
roughly a 60-story skyscraper.

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So once again, if you took me
and you piled me up 100 times,

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you'll get about a
60-story skyscraper.

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Now, if you took that
skyscraper and if you

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were to lie it down
10 times in a row,

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you'd get something of the
length of the Golden Gate

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Bridge.

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And once again, I'm not
giving you the exact numbers.

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It's not always going
to be exactly 10.

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But we're now getting to
about something that's

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a little on the
order of a mile long.

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So the Golden Gate Bridge is
actually longer than a mile.

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But if you go within the twin
spans, it's roughly about

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a mile.

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It's actually a little
longer than that.

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But that gives you
a sense of a mile.

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Now, if you multiply
that by 10, you

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get to the size of a large city.

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And this right here is
a satellite photograph

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of San Francisco.

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This is the actual
Golden Gate Bridge here.

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And when I copy and
pasted this picture,

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I tried to make it roughly
10 miles by 10 miles

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just so you
appreciate the scale.

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And what's interesting here--
and this picture's interesting.

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Because this is the first
time we can relate to cities.

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But when you look at
a city on this scale,

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it's starting to
get larger than what

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we're used to processing
on a daily basis.

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A bridge-- we've
been on a bridge.

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We know what a
bridge looks like.

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We know that a bridge is huge.

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But it doesn't
feel like something

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that we can't comprehend.

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Already, a city is
something that we

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can't comprehend all at once.

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We can drive across a city.

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We can look at
satellite imagery.

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But if I were to
show a human on this,

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it would be unbelievably,
unbelievably small.

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You wouldn't actually
be able to see it.

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It would be less than
a pixel on this image.

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A house is less than
a pixel on this image.

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But let's keep
multiplying by 10.

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If you multiply by 10
again, you get to something

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roughly the size of the
San Francisco Bay Area.

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This whole square over here
is roughly that square right

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over there.

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Let's multiply by 10 again.

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So this square is about
100 miles by 100 miles.

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So this one would be about
1,000 miles by 1,000 miles.

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And now you're including a
big part of the Western United

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States.

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You have California here.

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You Nevada here.

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You have Arizona
and New Mexico--

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so a big chunk of a
big continent we're

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already including.

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And frankly, this
is beyond the scale

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that we're used to operating.

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We've seen maps, so maybe
we're a little used to it.

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But if you ever had to walk
across this type of distance,

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it would take you a while.

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To some degree, the fact that
planes goes so fast-- almost

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unimaginably fast
for us-- that it's

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made it feel like things like
continents aren't as big.

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Because you can fly across
them in five or six hours.

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But these are already
huge, huge, huge distances.

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But once again, you
take this square

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that's about 1,000
miles by 1,000 miles,

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and you multiply that by 10.

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And you get pretty
close-- a little bit

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over-- the diameter of
the Earth-- a little bit

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over the diameter of the Earth.

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But once again,
we're on the Earth.

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We kind of relate to the Earth.

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If you look carefully
at the horizon,

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you might see a little
bit of a curvature,

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especially if you were
to get into the plane.

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So even though this
is, frankly, larger

00:04:01.250 --> 00:04:03.260
than my brain can
really grasp, we

00:04:03.260 --> 00:04:06.360
can kind of relate to the Earth.

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Now you multiply the
diameter of Earth times 10.

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And you get to the
diameter of Jupiter.

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And so if you were to sit
Earth right next to Jupiter--

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obviously, they're
nowhere near that close.

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That would destroy
both of the planets.

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Actually, it would
definitely destroy Earth.

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It would probably just
be merged into Jupiter.

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So if you put Earth
next to Jupiter,

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it would look something
like that right over there.

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So I would say that Jupiter is
definitely-- on this diagram

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that I'm drawing
here-- is definitely

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the first thing that I
have I can't comprehend.

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The Earth, itself,
is so vastly huge.

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Jupiter is-- it's 10
times bigger in diameter.

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It's much larger in terms
of mass, and volume,

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and all the rest.

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But just in terms of diameter,
it is 10 times bigger.

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But let's keep going.

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10 times Jupiter
gets us to the sun.

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This is times 10.

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So if this is the Sun-- and
if I were to draw Jupiter,

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it would look
something like-- I'll

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do Jupiter in pink-- Jupiter
would be around that big.

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And then the Earth
would be around that big

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if you were to put them
all next to each other.

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So the Sun, once again, is huge.

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Even though we see
it almost every day,

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it is unimaginably huge.

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Even the Earth is
unimaginably huge.

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And the Sun is 100 times
more unimaginably bigger.

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Now we're going to start getting
really, really, really wacky.

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You multiply the diameter
of the Sun, which is already

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100 times the diameter
of the Earth-- you

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multiply that times 100.

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And that is the distance
from the Earth to the Sun.

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So I've drawn the Sun
here as a little pixel.

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And I didn't even draw
the Earth as a pixel.

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Because a pixel would
be way too large.

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It would have to be a
hundredth of a pixel

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in order to draw
the Earth properly.

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So this is a
unbelievable distance

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between the Earth and the Sun.

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It's 100 times the distance of
the diameter of the Sun itself.

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So it's massive, massive.

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But once again, these
things are relatively close

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compared to where
we're about to go.

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Because if we want to get to
the nearest star-- so remember,

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the Sun is 100 times the
diameter of the Earth.

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The distance between the Sun
and the Earth is 100 times that.

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Or you could say it's
10,000 times the diameter

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of the Earth.

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So these are
unimaginable distances.

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But to get to the nearest star,
which is 4.2 light years away,

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it's 200,000 times-- and
once again, unimaginable.

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It's 200,000 times the distance
between the Earth and the Sun.

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And to give you a rough sense of
how far apart these things are,

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if the Sun was roughly
the size of a basketball--

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if the average star was about
the size of a basketball--

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in our part of the galaxy in a
volume the size of the Earth--

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so if you had a big volume
the size of the Earth,

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if the stars were the
sizes of basketballs,

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in our part of the
galaxy, you would only

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have a handful of
basketballs per that volume.

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So unbelievably sparse.

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Even though, when you
look at the galaxy--

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and this is just an
artist's depiction of it--

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it looks like something
that has the spray of stars,

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and it looks
reasonably dense, there

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is actually a huge
amount of space

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that the great, great,
great, great, great majority

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of the volume in the galaxy
is just empty, empty space.

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There's no stars, no
planets, no nothing.

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I mean, this is a huge jump
that I'm talking about.

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And then if you
really want to realize

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how large a galaxy,
itself, can be,

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you take this distance
between the Sun,

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or between our solar system
and the nearest star--

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so that's 200,000 times the
distance between the Earth

00:08:07.080 --> 00:08:10.452
and the Sun-- and you multiply
that distance by 25,000.

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So if the Sun is right
here, our nearest star

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will be in that same pixel.

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They'll actually be
within-- you'd actually

00:08:20.370 --> 00:08:22.780
get a ton of stars
within that one pixel,

00:08:22.780 --> 00:08:24.800
even though they're
so far apart.

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And then this whole thing
is 100,000 light years.

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It's 25,000 times the
distance than the distance

00:08:33.059 --> 00:08:35.830
between the Sun and
the nearest star.

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So we're talking about
unimaginable, unfathomable

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distances, just for a galaxy.

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And now we're going
to get our-- frankly,

00:08:44.880 --> 00:08:48.040
my brain is already
well beyond anything

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that it can really process.

00:08:49.380 --> 00:08:52.940
At this point, it almost just
becomes abstract thinking.

00:08:52.940 --> 00:08:55.760
It just becomes playing with
numbers and mathematics.

00:08:55.760 --> 00:08:58.817
But to get a sense of
the universe, itself,

00:08:58.817 --> 00:09:00.900
the observable universe--
and we have to be clear.

00:09:00.900 --> 00:09:02.274
Because we can
only observe light

00:09:02.274 --> 00:09:06.010
that started leaving from its
source 13.7 billion years ago.

00:09:06.010 --> 00:09:08.340
Because that's how
old the universe is.

00:09:08.340 --> 00:09:13.190
The observable universe is about
93 billion light years across.

00:09:13.190 --> 00:09:16.780
And the reason why it's
larger than 13.7 billion

00:09:16.780 --> 00:09:20.750
is that the points
in space that emitted

00:09:20.750 --> 00:09:22.960
light 13.7 billion
years ago, those

00:09:22.960 --> 00:09:24.330
have been going away from us.

00:09:24.330 --> 00:09:27.200
So now they're on the order of
40 billion light years away.

00:09:27.200 --> 00:09:29.120
But this isn't about cosmology.

00:09:29.120 --> 00:09:31.120
This is just about
scale and appreciating

00:09:31.120 --> 00:09:33.930
how huge the universe is.

00:09:33.930 --> 00:09:36.770
Just in the part of the universe
that we can theoretically

00:09:36.770 --> 00:09:43.180
observe, you have to get--
and that we can observe,

00:09:43.180 --> 00:09:47.300
just because we're getting
electromagnetic radiation

00:09:47.300 --> 00:09:50.510
from those parts
of the universe--

00:09:50.510 --> 00:09:52.260
you would have to
multiply this number.

00:09:52.260 --> 00:09:53.343
So let me make this clear.

00:09:53.343 --> 00:09:55.875
100,000 light years-- that's
the diameter of the Milky Way.

00:10:01.420 --> 00:10:04.530
You would have to
multiply not by 1,000.

00:10:04.530 --> 00:10:10.440
1,000 would get you to
100 million light years.

00:10:10.440 --> 00:10:13.220
This is 100,000 times
1,000 is 100 million.

00:10:13.220 --> 00:10:18.120
You have to multiply
by 1,000 again

00:10:18.120 --> 00:10:21.034
to get to 100
billion light years.

00:10:21.034 --> 00:10:22.450
And the universe,
for all we know,

00:10:22.450 --> 00:10:24.450
might be much, much,
much, much, larger.

00:10:24.450 --> 00:10:26.620
It might even be infinite.

00:10:26.620 --> 00:10:27.850
Who knows?

00:10:27.850 --> 00:10:32.440
But to get from just the
diameter of the Milky Way

00:10:32.440 --> 00:10:35.620
to the observable universe, you
have to multiply by a million.

00:10:35.620 --> 00:10:38.670
And already, this is an
unfathomable distance.

00:10:38.670 --> 00:10:42.360
So in the whole
scheme of things,

00:10:42.360 --> 00:10:46.450
not only are we pretty small,
and not only are the things

00:10:46.450 --> 00:10:51.180
we build pretty small, and not
only is our planet ultra small,

00:10:51.180 --> 00:10:54.200
and not only is our
Sun ultra small,

00:10:54.200 --> 00:10:56.330
and our solar
system ultra small,

00:10:56.330 --> 00:10:59.370
but our galaxy is
really nothing compared

00:10:59.370 --> 00:11:02.110
to the vastness of the universe.


Corporate debt versus traditional mortgages

WEBVTT
Kind: captions
Language: en

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The type of debt that most
of us are most familiar with

00:00:03.570 --> 00:00:05.960
are mortgages that we might
take out on our homes.

00:00:05.960 --> 00:00:07.376
What I want to do
in this video is

00:00:07.376 --> 00:00:10.240
clarify how a mortgage is
different than the type of debt

00:00:10.240 --> 00:00:12.910
that many corporations
would take on.

00:00:12.910 --> 00:00:16.560
So if I were to take out a
million dollar mortgage, what

00:00:16.560 --> 00:00:19.390
happens is is that the bank
figures out a fixed payment

00:00:19.390 --> 00:00:22.130
that I could pay,
really, every month.

00:00:22.130 --> 00:00:24.320
And as I pay that
payment-- and that payment

00:00:24.320 --> 00:00:27.840
will not change over the course
of the term of that mortgage,

00:00:27.840 --> 00:00:29.900
so maybe it's a
10-year mortgage--

00:00:29.900 --> 00:00:31.660
the payment won't change.

00:00:31.660 --> 00:00:36.360
But as I pay that mortgage,
some part of it is interest,

00:00:36.360 --> 00:00:40.200
and some part of it is actually
paying down the mortgage.

00:00:40.200 --> 00:00:42.100
So early on in the
life of the mortgage--

00:00:42.100 --> 00:00:45.020
maybe this is the first payment
here-- most of the payment

00:00:45.020 --> 00:00:52.030
is going to be interest, and
a little bit of the mortgage

00:00:52.030 --> 00:00:54.110
payment is going
to be principal.

00:00:54.110 --> 00:00:56.660
And when I say principal, that
little pink part right there,

00:00:56.660 --> 00:00:59.460
that's actually being
used to pay down

00:00:59.460 --> 00:01:00.800
the debt on the mortgage.

00:01:00.800 --> 00:01:04.200
So after this first payment, now
the debt is a little bit less.

00:01:04.200 --> 00:01:07.660
I'm going to make the same
total mortgage payment.

00:01:07.660 --> 00:01:11.682
But since the total
debt is now less,

00:01:11.682 --> 00:01:13.140
I'm taking the same
interest rate--

00:01:13.140 --> 00:01:15.112
I'm assuming it's a
fixed interest rate here.

00:01:15.112 --> 00:01:16.570
But the amount of
interest is going

00:01:16.570 --> 00:01:19.069
to be less, because I paid off
a little bit of the principal

00:01:19.069 --> 00:01:19.574
already.

00:01:19.574 --> 00:01:21.490
So on the next payment,
the amount of interest

00:01:21.490 --> 00:01:23.500
is going to be a
little bit less.

00:01:23.500 --> 00:01:25.870
And for that fixed
payment that I'm making,

00:01:25.870 --> 00:01:28.600
I'm now going to be able
to give more principal.

00:01:28.600 --> 00:01:32.030
And we keep doing that.

00:01:32.030 --> 00:01:33.980
I want do that in
the same color.

00:01:33.980 --> 00:01:37.690
So the next payment after that--
that's not the same color.

00:01:37.690 --> 00:01:39.690
The next payment after
that, even though it's

00:01:39.690 --> 00:01:42.140
the exact same
payment, it's going

00:01:42.140 --> 00:01:44.885
to have less interest, because
I've paid down more of the debt

00:01:44.885 --> 00:01:45.540
now.

00:01:45.540 --> 00:01:47.040
So it's going to
have less interest.

00:01:47.040 --> 00:01:48.873
And it normally doesn't
happen this quickly,

00:01:48.873 --> 00:01:50.470
but hopefully this
gives you the idea.

00:01:50.470 --> 00:01:52.850
And it's also going to
have more principal.

00:01:52.850 --> 00:01:55.080
So that you fast
forward all the way to

00:01:55.080 --> 00:01:58.160
near the end of the term, so
this is many payments later.

00:01:58.160 --> 00:01:59.950
This is the end of the 10 years.

00:01:59.950 --> 00:02:02.850
I think I said this was
a 10-year mortgage loan.

00:02:02.850 --> 00:02:04.860
On that last payment,
even though every payment

00:02:04.860 --> 00:02:07.340
was exactly the same
amount-- the mortgage payment

00:02:07.340 --> 00:02:09.770
was the same dollar
amount every month--

00:02:09.770 --> 00:02:17.560
that last payment is going to be
very little interest and mostly

00:02:17.560 --> 00:02:18.680
principal.

00:02:18.680 --> 00:02:21.000
And then after
that last payment,

00:02:21.000 --> 00:02:23.530
you would-- or if I'm that
person taking out the mortgage

00:02:23.530 --> 00:02:27.340
loan, I would have
paid off the loan.

00:02:27.340 --> 00:02:31.160
So loan paid off.

00:02:31.160 --> 00:02:35.800
And I own the house outright
in a traditional fixed rate

00:02:35.800 --> 00:02:37.070
mortgage.

00:02:37.070 --> 00:02:39.390
With corporate debt it's
not always like that.

00:02:39.390 --> 00:02:41.380
In fact, it's not
usually like that.

00:02:41.380 --> 00:02:44.750
Corporate debt is usually
interest only debt.

00:02:44.750 --> 00:02:47.379
And there usually might be some
things where the corporation

00:02:47.379 --> 00:02:49.920
has to pay off certain amounts
of the loans at certain times,

00:02:49.920 --> 00:02:52.310
but it isn't the model where
you have a fixed payment

00:02:52.310 --> 00:02:54.960
and you pay off the debt over
a certain amount of time.

00:02:54.960 --> 00:02:57.790
Most corporate debt-- let's
say a corporation takes

00:02:57.790 --> 00:02:59.690
a million dollars in
debt, and let's say

00:02:59.690 --> 00:03:01.440
it's a 10-year loan as well.

00:03:01.440 --> 00:03:05.070
But the corporation is just
going to pay the interest only.

00:03:05.070 --> 00:03:07.550
It is going to pay the
interest only the entire time.

00:03:07.550 --> 00:03:09.710
So whatever this
amount was, roughly,

00:03:09.710 --> 00:03:13.000
is what the corporation
will pay every month.

00:03:13.000 --> 00:03:17.220
So they'll pay exactly that
much every time period,

00:03:17.220 --> 00:03:20.120
maybe every quarter, every
year, whatever it might be.

00:03:20.120 --> 00:03:25.730
And then you fast forward to
the end of the term of the loan,

00:03:25.730 --> 00:03:29.930
so they continue paying
that same amount.

00:03:29.930 --> 00:03:31.690
And at the end of
the term of the loan

00:03:31.690 --> 00:03:36.500
they have to pay that amount,
plus all of the principal

00:03:36.500 --> 00:03:37.045
at once.

00:03:39.800 --> 00:03:43.040
Now, most companies won't have
all of that principal sitting

00:03:43.040 --> 00:03:44.810
around, whatever it might be.

00:03:44.810 --> 00:03:47.030
They have to pay all of
the principal at once

00:03:47.030 --> 00:03:50.120
at the end of the
term of the loan.

00:03:50.120 --> 00:03:52.570
Well, if they have the cash,
they could pay off the loan.

00:03:52.570 --> 00:03:54.470
But if they don't have the
cash-- and most corporations

00:03:54.470 --> 00:03:55.990
would not have the
cash in this situation.

00:03:55.990 --> 00:03:58.198
That's why they borrowed it
in the first place-- what

00:03:58.198 --> 00:04:00.996
they would do, is they
would take out a new loan.

00:04:00.996 --> 00:04:02.370
So they would take
out a new loan

00:04:02.370 --> 00:04:04.590
for the same amount
of principal,

00:04:04.590 --> 00:04:06.590
maybe to the same bank,
maybe a different bank.

00:04:06.590 --> 00:04:08.339
But it might now have
a different interest

00:04:08.339 --> 00:04:10.080
rate, different loan
terms, whatever.

00:04:10.080 --> 00:04:11.650
So they'll now
take out a new loan

00:04:11.650 --> 00:04:13.680
at the end of the
term period, use

00:04:13.680 --> 00:04:16.910
that to pay the principal
on their old loan.

00:04:16.910 --> 00:04:18.620
And then they'll
continue paying interest

00:04:18.620 --> 00:04:20.579
for the term of this new loan.

00:04:20.579 --> 00:04:22.230
So it's a slightly
different process,

00:04:22.230 --> 00:04:24.390
and I just wanted to make
sure you understood that.

00:04:24.390 --> 00:04:26.515
And the other thing, this
isn't all corporate debt.

00:04:26.515 --> 00:04:29.070
They could be fixed interest
rate, floating interest rate.

00:04:29.070 --> 00:04:32.300
There's often things
called covenants

00:04:32.300 --> 00:04:34.310
that the bank will
place on the corporation

00:04:34.310 --> 00:04:36.210
to make sure that the
corporation isn't doing

00:04:36.210 --> 00:04:38.500
dangerous things that will make
it less likely that they'll

00:04:38.500 --> 00:04:40.010
eventually be able
to pay off the debt,

00:04:40.010 --> 00:04:42.010
or less likely they could
eventually get a loan

00:04:42.010 --> 00:04:43.820
to pay off the current loan.

00:04:43.820 --> 00:04:47.260
So there are controls
that the bank

00:04:47.260 --> 00:04:49.750
has to make sure
that the company is

00:04:49.750 --> 00:04:51.524
good for this near
the end of the term.

00:04:51.524 --> 00:04:53.940
But as you can see, it's a
fundamentally different process

00:04:53.940 --> 00:04:56.400
than most mortgage loans.


Salman Khan on Big Think

WEBVTT
Kind: captions
Language: en

00:00:03.610 --> 00:00:05.762
When you are 13
and 1/2 years old,

00:00:05.762 --> 00:00:07.470
you need to be learning
negative numbers.

00:00:07.470 --> 00:00:09.970
When you are 14, you need
to be learning exponents.

00:00:09.970 --> 00:00:10.600
That's silly.

00:00:10.600 --> 00:00:11.975
You need to be
learning exponents

00:00:11.975 --> 00:00:13.917
once you really
understand multiplication.

00:00:13.917 --> 00:00:15.750
And you need to be
learning negative numbers

00:00:15.750 --> 00:00:17.510
once you really understand
the number line.

00:00:17.510 --> 00:00:19.080
Once you get rid of the
stigma and you open it up,

00:00:19.080 --> 00:00:20.913
and everyone's a learner
and everyone's just

00:00:20.913 --> 00:00:22.595
on the same playing
field, it actually

00:00:22.595 --> 00:00:23.720
is empowering for everyone.

00:00:23.720 --> 00:00:25.303
I have a two-year-old
son named Emron,

00:00:25.303 --> 00:00:28.840
and obviously I care about
what his academic experience is

00:00:28.840 --> 00:00:29.730
going to look like.

00:00:29.730 --> 00:00:31.520
And I'm hoping that
when he's five or six,

00:00:31.520 --> 00:00:35.020
he goes to a classroom that not
only has five or six-year-olds

00:00:35.020 --> 00:00:37.690
in it, but has kids of all
ages in that one classroom.

00:00:37.690 --> 00:00:40.700
It's kind of a reversion back
to the one room schoolhouse.

00:00:40.700 --> 00:00:42.940
And when he goes to that
classroom, some part

00:00:42.940 --> 00:00:45.148
of his day-- and I'm not
talking about the whole day,

00:00:45.148 --> 00:00:46.700
maybe 20 to 30
minutes of the day,

00:00:46.700 --> 00:00:48.460
especially for the
core subjects--

00:00:48.460 --> 00:00:51.292
are spent on the Khan
Academy watching videos.

00:00:51.292 --> 00:00:53.750
And by that time, it won't just
be mathematics and science.

00:00:53.750 --> 00:00:54.541
It will be grammar.

00:00:54.541 --> 00:00:56.760
It'll be vocabulary.

00:00:56.760 --> 00:00:59.150
He starts with the
most basic concepts.

00:00:59.150 --> 00:01:01.030
He doesn't move on to
more advanced concepts

00:01:01.030 --> 00:01:04.269
until he shows that he is
110% proficient at the more

00:01:04.269 --> 00:01:06.510
basic ones, and then
it moves him on.

00:01:06.510 --> 00:01:08.310
And he gets data,
and he gets feedback,

00:01:08.310 --> 00:01:09.890
and his teachers get feedback.

00:01:09.890 --> 00:01:12.114
And the paradigm is,
all of these students

00:01:12.114 --> 00:01:13.530
at all different
ages, they're all

00:01:13.530 --> 00:01:15.800
going to be working at their
own pace in every class,

00:01:15.800 --> 00:01:18.500
in grammar, in
mathematics, in everything.

00:01:18.500 --> 00:01:20.880
The teacher now, instead of
having to give this one size

00:01:20.880 --> 00:01:23.460
fits all lecture to everybody,
can now look at the data,

00:01:23.460 --> 00:01:25.430
see where every student
is, and the software

00:01:25.430 --> 00:01:26.750
identifies who's stuck.

00:01:26.750 --> 00:01:29.170
The teacher every now and
then, will sit next to Emron,

00:01:29.170 --> 00:01:30.960
and help Emron as
a mentor, actually

00:01:30.960 --> 00:01:32.146
have that human interaction.

00:01:32.146 --> 00:01:34.020
And even better, if the
teacher isn't around,

00:01:34.020 --> 00:01:35.394
or even if the
teacher is around,

00:01:35.394 --> 00:01:38.180
it might be better for Emron to
be tutored by one of his peers.

00:01:38.180 --> 00:01:40.840
Maybe another six year
old, maybe a 10-year-old

00:01:40.840 --> 00:01:42.570
who's a little ahead
of the curve, who's

00:01:42.570 --> 00:01:44.112
well respected as
a teacher already.

00:01:44.112 --> 00:01:45.820
I mean, what's really
exciting about this

00:01:45.820 --> 00:01:47.770
is an interactive experience.

00:01:47.770 --> 00:01:49.892
I cringe at the idea
of my son in a room,

00:01:49.892 --> 00:01:52.350
at the same rooms that I used
to sit in, sitting like this,

00:01:52.350 --> 00:01:54.620
staring at the clock,
waiting for the bell to ring.

00:01:54.620 --> 00:01:56.180
I don't want him to
do that for 12 years.

00:01:56.180 --> 00:01:57.763
I want him interacting
with his peers.

00:01:57.763 --> 00:01:59.530
I want him teaching his peers.

00:01:59.530 --> 00:02:02.810
I want my son to be
respected in his classroom,

00:02:02.810 --> 00:02:06.330
not because he got a
perfect on his SATs,

00:02:06.330 --> 00:02:09.885
not because he's the
smartest kid in the class.

00:02:09.885 --> 00:02:11.510
I want him to be
respected because he's

00:02:11.510 --> 00:02:14.230
the best teacher in the class,
because he communicates well,

00:02:14.230 --> 00:02:15.840
because he has
empathy for his peers,

00:02:15.840 --> 00:02:17.298
because he's always
willing to stop

00:02:17.298 --> 00:02:19.781
what he's doing to help
one of his friends.

00:02:19.781 --> 00:02:22.030
I think if that happens than
I wouldn't worry too much

00:02:22.030 --> 00:02:25.825
about what my son
does afterwards.


Basic leveraged buyout (LBO)

WEBVTT
Kind: captions
Language: en

00:00:00.515 --> 00:00:01.936
Let's say that many years ago,

00:00:01.936 --> 00:00:03.803
you started yourself a
nice little business.

00:00:03.803 --> 00:00:06.582
You have no debt and
your business every year

00:00:06.582 --> 00:00:08.189
generates a pre-tax income

00:00:08.189 --> 00:00:09.641
of a million and a half a year and a

00:00:09.641 --> 00:00:11.404
third of that goes to taxes.

00:00:11.404 --> 00:00:13.937
So you get a nice one million dollars

00:00:13.937 --> 00:00:17.144
a year of net income and
it's a super stable business,

00:00:17.144 --> 00:00:19.336
nothing risky over here.

00:00:19.336 --> 00:00:21.738
Just by virtue of what your business does,

00:00:21.738 --> 00:00:23.670
the odds of this one million a year

00:00:23.670 --> 00:00:26.868
changing for the better or
the worse isn't that likely.

00:00:26.868 --> 00:00:29.137
So this is essentially your ...
This is what your balance sheet

00:00:29.137 --> 00:00:29.893
would look like.

00:00:29.893 --> 00:00:30.893
These are your assets.

00:00:30.893 --> 00:00:32.144
You have no debt.

00:00:32.144 --> 00:00:33.736
Let's assume you have no liabilities

00:00:33.736 --> 00:00:35.811
and so you own all of the equity.

00:00:35.811 --> 00:00:37.978
You essentially own all of the assets,

00:00:37.978 --> 00:00:39.478
but you're nearing retirement

00:00:39.478 --> 00:00:41.336
and you want to kind of cash out.

00:00:41.336 --> 00:00:43.203
You don't necessarily want
to sell to your competitors

00:00:43.203 --> 00:00:45.561
or maybe there aren't any
natural competitors to sell to

00:00:45.561 --> 00:00:47.895
because you've been comp
... Well, you don't want to

00:00:47.895 --> 00:00:49.669
sell to them if they exist
because you've been competing

00:00:49.669 --> 00:00:51.478
with them for your ... for your whole life

00:00:51.478 --> 00:00:53.802
and this isn't the type of
business that you can IPO

00:00:53.802 --> 00:00:55.803
because it's not quite big enough.

00:00:55.803 --> 00:00:57.604
So maybe we bump into
to each other and I say,

00:00:57.604 --> 00:01:00.405
"Hey, this business looks
interesting. I like the idea that"

00:01:00.405 --> 00:01:03.203
"your business is stable and
can generate a lot of income"

00:01:03.203 --> 00:01:05.135
"year after year after year."

00:01:05.135 --> 00:01:07.336
So what I say is, "Hey,
would you be willing to take"

00:01:07.336 --> 00:01:09.144
"10 million dollars for your business?"

00:01:09.144 --> 00:01:13.604
So I offer ... I offer 10 million dollars.

00:01:13.604 --> 00:01:15.071
And to you that sounds pretty good.

00:01:15.071 --> 00:01:17.700
That's about ten times ...
That's exactly ten times

00:01:17.700 --> 00:01:19.311
your yearly net income.

00:01:19.311 --> 00:01:21.475
This isn't a growing
business, just very stable.

00:01:21.475 --> 00:01:24.269
Seems like a reasonable deal to you.

00:01:24.269 --> 00:01:25.978
On the other hand for
me, I'm like you know

00:01:25.978 --> 00:01:28.338
paying 10 million dollars
and getting a million dollars

00:01:28.338 --> 00:01:30.337
a year, that's kind of 10% on my money.

00:01:30.337 --> 00:01:33.270
That's okay, but maybe I
can get some leverage here.

00:01:33.270 --> 00:01:35.467
Maybe I don't have to put
all of the 10 million in

00:01:35.467 --> 00:01:36.978
maybe I could borrow some of it

00:01:36.978 --> 00:01:39.336
and maybe I'll get a
better return that way.

00:01:39.336 --> 00:01:42.404
So when it comes time to closing
... When it comes time to

00:01:42.404 --> 00:01:44.978
closing, so I'm buying the assets.

00:01:44.978 --> 00:01:46.736
So these are the same
assets that I'm buying

00:01:46.736 --> 00:01:49.603
and I'm gonna give them ...
and the money that I raise

00:01:49.603 --> 00:01:51.210
for these assets are gonna go to you,

00:01:51.210 --> 00:01:53.337
the person who started this business.

00:01:53.337 --> 00:01:55.135
So here are the assets.

00:01:55.135 --> 00:01:57.603
So instead of me putting up
the entire 10 million dollars,

00:01:57.603 --> 00:02:01.644
what I do is I put up one
million dollars myself

00:02:01.644 --> 00:02:04.870
So I put up one million dollars myself,

00:02:04.870 --> 00:02:07.671
one million from ... from me.

00:02:07.671 --> 00:02:09.003
And I go to a bank and I say,

00:02:09.003 --> 00:02:11.939
"Look, will you lend me 9
million dollars? I'm going to

00:02:11.939 --> 00:02:14.145
"put a million dollars of my
own money. Will you lend me"

00:02:14.145 --> 00:02:16.961
"9 million dollars to
help borrow ... to help"

00:02:16.961 --> 00:02:18.478
"buy this business for
10 millions dollars?"

00:02:18.478 --> 00:02:19.004
and the banks says,

00:02:19.004 --> 00:02:20.311
"I don't know. That's a lot of money."

00:02:20.311 --> 00:02:22.444
"We're putting a lot of money at risk."

00:02:22.444 --> 00:02:24.535
and I'l say, "Look, you can
charge me a decent interest rate,"

00:02:24.535 --> 00:02:28.669
"maybe a 10% interest rate
and this is a super stable"

00:02:28.669 --> 00:02:31.004
"business, so clearly I'll
be able to pay the interest"

00:02:31.004 --> 00:02:34.478
"on that money from the business
and if for whatever reason"

00:02:34.478 --> 00:02:35.978
"I'm not able to pay you the money,"

00:02:35.978 --> 00:02:39.143
"you can get the business. So,
I'm essentially giving you"

00:02:39.143 --> 00:02:40.423
"the business as collateral."

00:02:40.454 --> 00:02:42.668
So you find some bank to agree to it

00:02:42.668 --> 00:02:45.643
and so they will lend
you 9 million dollars.

00:02:45.643 --> 00:02:47.737
They will not lend you 9 million dollars.

00:02:47.737 --> 00:02:50.004
Nine million dollar loan

00:02:50.004 --> 00:02:55.871
and let's say that it is at
a 10% ... 10% interest level.

00:02:55.871 --> 00:02:58.883
So now, after I have ...
So 9 million from the bank,

00:02:58.883 --> 00:03:01.449
one million from me. That goes to you.

00:03:01.549 --> 00:03:04.599
You can now retire and buy your dream home

00:03:04.599 --> 00:03:06.461
or whatever else you
might have needed to do

00:03:06.461 --> 00:03:06.961
with that money.

00:03:06.961 --> 00:03:10.404
You could leave it for your
children, whatever you might ...

00:03:10.404 --> 00:03:12.938
Donate it to charity,
whatever floats your boat

00:03:12.938 --> 00:03:15.003
but now the capital
structure of the business

00:03:15.003 --> 00:03:16.337
looks like this.

00:03:16.337 --> 00:03:17.670
I now do have a lot of debt.

00:03:17.670 --> 00:03:19.605
I bought you out using leverage.

00:03:19.605 --> 00:03:22.227
This is a leveraged buyout.

00:03:22.227 --> 00:03:24.730
So now, there is one
million dollars of equity

00:03:24.730 --> 00:03:25.833
that came from me

00:03:25.833 --> 00:03:30.478
and there's 9 million dollars
of debt that came from the bank.

00:03:30.478 --> 00:03:32.727
That's 9 million dollars of debt.

00:03:32.727 --> 00:03:37.144
Assets, at least what I paid
for it was 10 million dollars.

00:03:37.144 --> 00:03:39.144
Liabilities are 9 million dollars.

00:03:39.144 --> 00:03:40.803
So what's left over is one million.

00:03:40.803 --> 00:03:42.311
And let's think about how this investment,

00:03:42.311 --> 00:03:44.737
assuming the business keeps
generating a million a year,

00:03:44.737 --> 00:03:47.463
let's think about how good
of a payoff this might be

00:03:47.463 --> 00:03:50.334
for my one million dollar investment.

00:03:50.334 --> 00:03:54.143
So before I had a pre-tax
income of 1.5 million.

00:03:54.143 --> 00:03:59.739
So 1.5 million pre-tax. Pre-tax before.

00:03:59.739 --> 00:04:02.310
Now I'm going to have
to pay some interest.

00:04:02.310 --> 00:04:05.003
So now I'm going to have to
pay ... So 9 million dollars

00:04:05.003 --> 00:04:10.978
at 10%, that is $900,000 in interest.

00:04:10.978 --> 00:04:13.337
So now my pre-tax won't be 1.5 million.

00:04:13.337 --> 00:04:17.144
I'm also going to have
to pay 900k in interest.

00:04:17.144 --> 00:04:22.936
So minus 900k means that I have 600,000,

00:04:22.936 --> 00:04:30.404
so 1.5 - 900k is 600,000
per year pre-tax income,

00:04:30.404 --> 00:04:33.605
600,000 per year in pre-tax income

00:04:33.605 --> 00:04:35.402
and then I will pay taxes on that.

00:04:35.402 --> 00:04:37.670
The cool thing about corporate interest

00:04:37.670 --> 00:04:39.561
is that it's tax-deductible.

00:04:39.561 --> 00:04:41.894
It's deducted from your pre-tax income.

00:04:41.894 --> 00:04:45.009
So you take the 900 from
the 1.5, you have 600,000

00:04:45.009 --> 00:04:46.622
leftover and then you pay taxes on that

00:04:46.622 --> 00:04:48.643
and let's say it's
still the same tax rate,

00:04:48.643 --> 00:04:51.477
so roughly one-third of
it goes to the government

00:04:51.477 --> 00:04:56.136
and so that you are left
with 400,000 net income

00:04:56.136 --> 00:04:57.712
and if you look at the
math, this is actually

00:04:57.712 --> 00:05:01.003
a pretty good deal for me or
I should ... I was saying you,

00:05:01.003 --> 00:05:02.270
but I'm the guy who bought it.

00:05:02.270 --> 00:05:03.560
You're the guy who sold me the business,

00:05:03.560 --> 00:05:04.560
so this is me now.

00:05:04.560 --> 00:05:09.727
I am left with $400,000
net income per year,

00:05:09.727 --> 00:05:11.604
which is pretty good because I only made

00:05:11.604 --> 00:05:13.404
a one million dollar investment.

00:05:13.404 --> 00:05:15.405
So even though this looks
like a sleepy business,

00:05:15.405 --> 00:05:17.143
even though it looked
like it was only getting

00:05:17.143 --> 00:05:20.935
a 10% yield on it, because
I was able to leverage up.

00:05:20.935 --> 00:05:23.336
I was able to do this leveraged buyout,

00:05:23.336 --> 00:05:27.070
I'm now able to make $400,000 per year

00:05:27.070 --> 00:05:29.144
on a one million dollar investment

00:05:29.144 --> 00:05:34.310
and now all of a sudden that is
a not so sleepy annual return.


Simple merger arbitrage with share acquisition

WEBVTT
Kind: captions
Language: en

00:00:00.770 --> 00:00:03.025
In the last couple of videos
we set a scenario where

00:00:03.025 --> 00:00:06.609
company A intends to acquire company B.

00:00:06.609 --> 00:00:09.078
Their going to do it by
issuing 2 million shares

00:00:09.078 --> 00:00:11.944
and then giving those
2 million shares to the

00:00:11.944 --> 00:00:14.611
shareholders of company B, and company B

00:00:14.611 --> 00:00:16.353
shareholders will give,
essentially, all of their

00:00:16.353 --> 00:00:19.105
ownership away. Their will
be an exchange 2 million

00:00:19.105 --> 00:00:22.943
of company A shares for 1
million of company B shares.

00:00:22.943 --> 00:00:26.694
On a [per search 0:24] share
basis the owners of company B

00:00:26.694 --> 00:00:29.699
will give up one of their
shares, and in exchange

00:00:29.699 --> 00:00:33.028
they will get 2 shares of company A.

00:00:33.028 --> 00:00:36.618
They will get 2 shares in company.

00:00:36.618 --> 00:00:39.030
We saw that if everyone
thought that this transaction

00:00:39.030 --> 00:00:41.469
was going to happen,
theoretically, whatever

00:00:41.469 --> 00:00:44.069
A is trading at B should
trade at twice that.

00:00:44.069 --> 00:00:46.621
People know that they'll
always be a little trade-in,

00:00:46.621 --> 00:00:48.875
or when the transaction
happens there be a little

00:00:48.875 --> 00:00:52.670
trade-in of B for two of these A shares.

00:00:52.670 --> 00:00:55.139
What happens is a
situation, or why would a

00:00:55.139 --> 00:00:59.201
situation happen where B
doesn't trade at twice of A?

00:00:59.201 --> 00:01:02.072
This is a theoretical trading twice is A.

00:01:02.072 --> 00:01:05.333
This is 2 times A.

00:01:05.333 --> 00:01:07.136
What happens if it doesn't trade there?

00:01:07.136 --> 00:01:10.411
What happens if B's shares are trading ...

00:01:10.411 --> 00:01:12.474
let me do this in a color
I haven't used before.

00:01:12.474 --> 00:01:16.286
What if it's trading a
little bit lower there?

00:01:16.286 --> 00:01:18.370
Well, that might be the
case, because some people

00:01:18.370 --> 00:01:21.875
don't think that the
transactions going to happen.

00:01:21.875 --> 00:01:24.736
Their not willing to pay that full premium

00:01:24.736 --> 00:01:27.072
for B. Let's say that this were to happen,

00:01:27.072 --> 00:01:30.042
and you are working at
some type of a hedge fund

00:01:30.042 --> 00:01:32.474
that has some type of model,
maybe some mathematical

00:01:32.474 --> 00:01:34.625
model, maybe you have some
type of shady information.

00:01:34.625 --> 00:01:38.550
Where you know for a fact,
you are 100% certain,

00:01:38.550 --> 00:01:41.047
this transaction is going
to close. It's definitely

00:01:41.047 --> 00:01:46.204
going to close with these
terms. 2 million shares

00:01:46.204 --> 00:01:49.047
of A in exchange for
1 million shares of B.

00:01:49.047 --> 00:01:52.138
Your temptation might be,
well, why don't I just

00:01:52.138 --> 00:01:56.473
buy these shares of B,
because they will go up.

00:01:56.473 --> 00:01:58.136
What if the whole market goes down?

00:01:58.136 --> 00:02:02.380
What if the stock of
A goes down like this?

00:02:02.380 --> 00:02:04.555
Then 2 times A will also go down.

00:02:04.555 --> 00:02:06.801
You don't want to just buy
the stock of B thinking

00:02:06.801 --> 00:02:09.712
it's going to go up. If
the transaction is really

00:02:09.712 --> 00:02:12.719
going to happen, B is just
going to track 2 times

00:02:12.719 --> 00:02:14.470
the price of A.

00:02:14.470 --> 00:02:17.302
The best way to do it is
to really set up a bit

00:02:17.302 --> 00:02:20.308
of a pair trade here. What
you would do is if you

00:02:20.308 --> 00:02:22.676
think the transaction
is definitely happening,

00:02:22.676 --> 00:02:28.336
you could buy 1 share ...
let me write this down.

00:02:28.336 --> 00:02:35.224
You could buy 1 share of B. Share of B.

00:02:35.224 --> 00:02:38.403
You've gone long 1 share
of B. Then you can short

00:02:38.403 --> 00:02:47.721
2 shares of A. The reason
why this will work,

00:02:47.721 --> 00:02:49.876
and this will only work if you know the

00:02:49.876 --> 00:02:52.404
transaction is going to happen, is because

00:02:52.404 --> 00:02:55.890
right now 2 shares of
A are going to be ...

00:02:55.890 --> 00:02:59.738
at any point since B is trading
a little bit of a discount

00:02:59.738 --> 00:03:02.132
to that, the 2 shares of
A are going to be worth

00:03:02.132 --> 00:03:04.700
more than that the 1 share of B.

00:03:04.700 --> 00:03:07.606
When you sort 2 shares
of A, maybe, where this

00:03:07.606 --> 00:03:09.829
point right here ...
let's say that we are at

00:03:09.829 --> 00:03:12.269
this point on that day that everything was

00:03:12.269 --> 00:03:15.545
announced. When you short
2 shares of A, you're

00:03:15.545 --> 00:03:17.271
going to get $60.

00:03:17.271 --> 00:03:20.608
You're going to get $60. This is a review.

00:03:20.608 --> 00:03:23.416
You borrow the stock,
you sell it, and you're

00:03:23.416 --> 00:03:25.583
going have to buy it
back at some future date.

00:03:25.583 --> 00:03:28.835
You owe someone 2 shares
of A. When you buy

00:03:28.835 --> 00:03:31.407
1 share of B, it's not
going to be trading at $60,

00:03:31.407 --> 00:03:33.268
it's going to be trading at some discount.

00:03:33.268 --> 00:03:38.005
Let's say that that cost
you $55. It's trading

00:03:38.005 --> 00:03:40.674
a little bit of discount to 2 times A.

00:03:40.674 --> 00:03:43.929
Clearly just here, you have netted.

00:03:43.929 --> 00:03:47.272
$60 minus $55, you have netted $5.

00:03:47.272 --> 00:03:51.533
$5 net. Then assuming
the transaction happens

00:03:51.533 --> 00:03:55.334
at some future date, when
the transaction closes,

00:03:55.334 --> 00:03:58.425
that 1 share of B that
you had, you can exchange

00:03:58.425 --> 00:04:02.336
it for 2 shares of A. You get 2 times A.

00:04:02.336 --> 00:04:04.758
Then you could use that
to cover your short

00:04:04.758 --> 00:04:07.469
position. You use that to cover your short

00:04:07.469 --> 00:04:11.273
position, and you're
left standing with $5.

00:04:11.273 --> 00:04:13.348
You essentially made ...
well, there is a risk

00:04:13.348 --> 00:04:15.428
that the transaction
didn't close, but assuming

00:04:15.428 --> 00:04:17.538
the transaction happened,
this was kind of a

00:04:17.538 --> 00:04:20.676
[pedima 04:17] free $5 for your taking.


Acquisitions with shares

WEBVTT
Kind: captions
Language: en

00:00:00.605 --> 00:00:03.137
What I want to do in this
video is try to understand

00:00:03.137 --> 00:00:05.942
how one company can buy another company

00:00:05.942 --> 00:00:10.203
or could merge it with another
company by using its stock.

00:00:10.203 --> 00:00:13.146
So we have a situation
here, where Company A

00:00:13.146 --> 00:00:18.432
is acquiring Company B for
$60,000,000 in A's shares

00:00:18.451 --> 00:00:19.285
and what we'll see is,

00:00:19.285 --> 00:00:21.505
it's not going to exactly be $60,000,000.

00:00:21.505 --> 00:00:25.756
It'll depend on where
Company A's shares trade.

00:00:25.756 --> 00:00:28.861
Right now, they're trading at $30 a share.

00:00:28.861 --> 00:00:32.590
So in order to make this
transaction happen in A's shares,

00:00:32.590 --> 00:00:34.460
what would happen is, is that A says,

00:00:34.460 --> 00:00:38.424
"Look, I need to raise the
equivalent of $60,000,000"

00:00:38.424 --> 00:00:40.673
"in shares." or "I need to
create the equivalent of"

00:00:40.673 --> 00:00:42.593
"$60,000,000 in shares."

00:00:42.593 --> 00:00:44.924
"If each of my shares
right now on the market"

00:00:44.924 --> 00:00:48.195
"are worth $30 a share,
then I can do that by"

00:00:48.195 --> 00:00:51.924
"creating or issuing 2,000,000 shares."

00:00:51.924 --> 00:00:54.195
So Company A here is
going to create another

00:00:54.195 --> 00:00:57.272
2,000,000 shares. They're
going to create another

00:00:57.272 --> 00:01:00.164
2,000,000 shares and if
they wanted to do it as a

00:01:00.164 --> 00:01:03.299
cash transaction, they could
take these shares and sell them

00:01:03.299 --> 00:01:06.375
into the market, do a secondary
offering and then hopefully

00:01:06.375 --> 00:01:10.267
raise $60,000,000 in cash
and then use that cash to buy

00:01:10.267 --> 00:01:12.679
Company B, but this is a share offering.

00:01:12.679 --> 00:01:14.178
They're not going to do it with cash.

00:01:14.178 --> 00:01:17.262
They're going to directly
give, assuming Company B

00:01:17.262 --> 00:01:21.465
shareholders agree to this,
they're going to give the shares

00:01:21.465 --> 00:01:24.934
directly to Company B's
shareholders in exchange for

00:01:24.934 --> 00:01:28.679
essentially getting control of
these shares right over here.

00:01:28.679 --> 00:01:30.868
So, they're going to take
these 2,000,000 shares which

00:01:30.868 --> 00:01:34.429
right now in the market
look to be worth $60,000,000

00:01:34.429 --> 00:01:37.200
and they're going to give
them to all of Company B's

00:01:37.200 --> 00:01:40.333
shareholders in exchange
for all of Company B's

00:01:40.333 --> 00:01:42.203
existing shares.

00:01:42.203 --> 00:01:45.678
So what's going to happen is
Company A is going to give

00:01:45.678 --> 00:01:49.534
2,000,000 shares of Company
A to the shareholders of

00:01:49.534 --> 00:01:53.266
Company B and in exchange,
Company B will give all of the

00:01:53.266 --> 00:01:54.717
shareholders of the ... of company ...

00:01:54.717 --> 00:01:57.348
We will give their shares to Company A.

00:01:57.348 --> 00:02:01.077
So they will give, so ... or
their shares of Company B,

00:02:01.077 --> 00:02:01.514
I should say.

00:02:01.514 --> 00:02:03.599
Company B's shareholders are
going to give all of their

00:02:03.599 --> 00:02:07.267
1,000,000 shares in Company
B in exchange for those

00:02:07.267 --> 00:02:09.346
2,000,000 of Company A.

00:02:09.346 --> 00:02:12.202
So what's going to happen is
each of these shareholders

00:02:12.202 --> 00:02:16.933
of Company B are going to
get 2 shares of Company A

00:02:16.933 --> 00:02:20.176
for every 1 share of Company B.

00:02:20.176 --> 00:02:29.133
So they're going to get 2 shares
... 2 shares of A for every

00:02:29.133 --> 00:02:35.267
share of B they own and that
makes sense economically

00:02:35.267 --> 00:02:38.678
because right now on the market,
let's say that it's trading

00:02:38.678 --> 00:02:43.267
at $50 a share. It has a
$50,000,000 market cap.

00:02:43.267 --> 00:02:46.344
By offering a $60,000,000
in share, they're offering

00:02:46.344 --> 00:02:48.866
a premium. This is what will
kind of convince all of the

00:02:48.866 --> 00:02:51.012
shareholders to maybe say, "Hey,
this is a pretty good deal."

00:02:51.012 --> 00:02:54.347
"I'm getting 20% above the
market price" and when you get

00:02:54.347 --> 00:02:57.846
2 shares in exchange for your
one $50 share, you're getting

00:02:57.846 --> 00:03:02.467
2 shares that are right
now trading at $30 a share.

00:03:02.467 --> 00:03:04.868
So it seems like a good
deal for you. I can exchange

00:03:04.868 --> 00:03:09.067
something worth $50 for two
things worth 30 or essentially

00:03:09.067 --> 00:03:13.011
exchange something worth
50 for something worth $60.

00:03:13.011 --> 00:03:16.261
I'm going to take it and if
they do take it, then what's

00:03:16.261 --> 00:03:20.666
essentially going to happen is,
is that those 1,000,000 shares

00:03:20.666 --> 00:03:23.153
are going to be put onto the asset side of

00:03:23.153 --> 00:03:25.856
Company A's ... of
Company A's balance sheet

00:03:25.856 --> 00:03:27.345
or maybe we could just put that

00:03:27.345 --> 00:03:30.267
Company B is now here, because
all of the shares are here.

00:03:30.267 --> 00:03:32.694
It's not completely owned
and the company was able to

00:03:32.694 --> 00:03:34.601
do that by issuing these
shares. The other option,

00:03:34.601 --> 00:03:36.867
they could have issued ... They
could have sold those shares

00:03:36.867 --> 00:03:39.734
in the market, raised
$60,000,000, then given the

00:03:39.734 --> 00:03:42.985
$60,000,000 directly to the
Company B's shareholders

00:03:42.985 --> 00:03:46.400
and then it would have
had the exact same effect.


Price behavior after announced acquisition

WEBVTT
Kind: captions
Language: en

00:00:00.204 --> 00:00:01.802
Male: We finished the last video with

00:00:01.802 --> 00:00:04.279
the scenario where company A wants

00:00:04.279 --> 00:00:05.670
to buy company B,

00:00:05.670 --> 00:00:07.537
but they're not going to do it with cash,

00:00:07.537 --> 00:00:09.869
they're going to do it with their shares.

00:00:09.869 --> 00:00:11.693
They issue a press release saying

00:00:11.693 --> 00:00:14.474
that company A intends
to acquire company B

00:00:14.474 --> 00:00:18.281
for $60 million in A's shares.

00:00:18.281 --> 00:00:21.003
They want to give a price that's a premium

00:00:21.003 --> 00:00:23.403
to company B's current market cap

00:00:23.403 --> 00:00:24.610
so that it's compelling,

00:00:24.610 --> 00:00:27.277
so that the shareholders of
company B want to do this.

00:00:27.277 --> 00:00:29.408
They're like, wow, that's a 20% premium

00:00:29.408 --> 00:00:32.615
to our current market cap,
so we're willing to do it.

00:00:32.615 --> 00:00:34.950
Since this is a share transaction,

00:00:34.950 --> 00:00:38.611
company B shareholders won't
exactly get $60 million.

00:00:38.611 --> 00:00:40.608
What's going to happen
is company A's going

00:00:40.608 --> 00:00:42.737
to issue 2 million in new shares.

00:00:42.737 --> 00:00:45.073
Those 2 million new shares, in theory,

00:00:45.073 --> 00:00:46.803
could be worth $30 a share.

00:00:46.803 --> 00:00:48.535
Maybe they could sell
them in the open market

00:00:48.535 --> 00:00:51.723
at $30 a share so that they
would be worth $60 million.

00:00:51.723 --> 00:00:53.335
Instead of trying to raise the cash

00:00:53.335 --> 00:00:55.337
and then giving the cash to company B,

00:00:55.337 --> 00:00:57.435
they're just going to
take those shares directly

00:00:57.435 --> 00:01:00.707
and exchange them for all
of the shares of company B,

00:01:00.707 --> 00:01:03.673
essentially acquiring the
company with all of those shares.

00:01:03.673 --> 00:01:06.857
Every shareholder of company
B, for every share they have,

00:01:06.857 --> 00:01:09.123
they'll get 2 shares of company A.

00:01:09.123 --> 00:01:12.788
If at the time of closing, company A's

00:01:12.788 --> 00:01:15.988
stock price goes from $30 to $35 a share,

00:01:15.988 --> 00:01:17.853
then the transaction price would,

00:01:17.853 --> 00:01:20.191
if you think about the
market value of those shares

00:01:20.191 --> 00:01:22.191
that company B's shareholders
are going to get,

00:01:22.191 --> 00:01:24.603
the market price would
actually be $70 million.

00:01:24.603 --> 00:01:27.830
If the market price of company A goes down

00:01:27.830 --> 00:01:31.073
to $25 a share, then
they're only going to get

00:01:31.073 --> 00:01:34.738
$50 million worth of shares.

00:01:34.738 --> 00:01:36.557
What I want to think
about in this situation

00:01:36.557 --> 00:01:40.062
is what should happen to company B's stock

00:01:40.062 --> 00:01:44.399
before the transaction
closes, if we assume

00:01:44.399 --> 00:01:47.006
that everyone thinks the
transaction is going to happen?

00:01:47.006 --> 00:01:50.776
Let me draw a stock chart here.

00:01:50.776 --> 00:01:54.743
This is price.

00:01:54.743 --> 00:01:58.718
This is time right over here.

00:01:58.718 --> 00:02:01.326
Let me draw company B's stock price first.

00:02:01.326 --> 00:02:05.989
Let's say right now it is
trading at $50 a share.

00:02:05.989 --> 00:02:07.051
That is company B.

00:02:07.051 --> 00:02:13.858
Right now company A's
trading at $30 a share.

00:02:13.858 --> 00:02:15.662
Notice even though that their share price

00:02:15.662 --> 00:02:17.585
is lower than company B's share price,

00:02:17.585 --> 00:02:19.533
they have a much larger market cap

00:02:19.533 --> 00:02:21.124
because they have many, many more shares.

00:02:21.124 --> 00:02:22.512
They actually are a larger company

00:02:22.512 --> 00:02:26.195
so it doesn't sound crazy for
them to acquire company B.

00:02:26.195 --> 00:02:30.251
Now, this is the day that
everything was announced.

00:02:30.251 --> 00:02:33.852
Let's just assume that everyone thinks

00:02:33.852 --> 00:02:35.336
the transaction will happen.

00:02:35.336 --> 00:02:39.253
For every share of B a B shareholder has,

00:02:39.253 --> 00:02:41.620
they will get 2 shares of company A.

00:02:41.620 --> 00:02:46.522
If company A does this, what should happen

00:02:46.522 --> 00:02:49.338
to company B's stock price if everyone

00:02:49.338 --> 00:02:53.417
is 100% sure the
transaction's going to happen?

00:02:53.417 --> 00:02:58.580
Every share of B is going to be converted

00:02:58.580 --> 00:03:00.662
into 2 shares of A.

00:03:00.662 --> 00:03:02.839
After this point in time, if you're sure

00:03:02.839 --> 00:03:04.522
the transaction's going to happen,

00:03:04.522 --> 00:03:07.673
each of these B shares
should be worth 2 A shares,

00:03:07.673 --> 00:03:09.787
so they should trade exactly at twice

00:03:09.787 --> 00:03:11.584
the value of the A shares.

00:03:11.584 --> 00:03:13.716
Right when the transaction was announced,

00:03:13.716 --> 00:03:15.518
if everyone assumes it's going to occur,

00:03:15.518 --> 00:03:21.452
B shares should immediately
jump up to $60 a share,

00:03:21.452 --> 00:03:27.852
and then they should always
trade at double of A's shares.

00:03:27.852 --> 00:03:32.112
If they trade at less
than double of A's shares,

00:03:32.112 --> 00:03:34.421
then, instead of buying A shares, people

00:03:34.421 --> 00:03:37.671
would rather buy B
shares, or they could buy

00:03:37.671 --> 00:03:38.670
half of B shares.

00:03:38.670 --> 00:03:39.948
Or let's say there was
someone who was going

00:03:39.948 --> 00:03:42.129
to buy 2 of A shares, instead they'll say,

00:03:42.129 --> 00:03:43.796
"Hey, look, B shares are
trading for less than

00:03:43.796 --> 00:03:46.185
"2 of A shares, but
they're going to be worth

00:03:46.185 --> 00:03:48.656
"2 of A shares in the future
because of this merger,

00:03:48.656 --> 00:03:51.458
"so I'm just going to
buy B shares instead."

00:03:51.458 --> 00:03:54.185
There's no reason, if everyone assumes

00:03:54.185 --> 00:03:56.188
the transaction's happening, that before

00:03:56.188 --> 00:03:58.527
the transaction closes that B shouldn't

00:03:58.527 --> 00:04:02.527
trade at exactly twice
the stock price of A.


Stock dilution

WEBVTT
Kind: captions
Language: en

00:00:00.670 --> 00:00:02.200
Let's say we've
got a company here

00:00:02.200 --> 00:00:07.930
that has exactly four shares
just to simplify things.

00:00:07.930 --> 00:00:10.910
Obviously, very few companies
have only four shares,

00:00:10.910 --> 00:00:13.610
but this will simplify
the explanation.

00:00:13.610 --> 00:00:15.750
And let's say that
each of those shares

00:00:15.750 --> 00:00:18.195
right now they're
trading in the market,

00:00:18.195 --> 00:00:20.320
or I guess we could say
the last transaction that's

00:00:20.320 --> 00:00:22.260
occurred in trading
in the shares,

00:00:22.260 --> 00:00:25.070
they're trading at $2 a share.

00:00:29.490 --> 00:00:32.470
So the market is saying
that each of those shares

00:00:32.470 --> 00:00:33.620
are worth $2.

00:00:33.620 --> 00:00:35.642
There's four of these
shares in total.

00:00:35.642 --> 00:00:37.600
And we're going to assume
that this company has

00:00:37.600 --> 00:00:38.820
no liabilities.

00:00:38.820 --> 00:00:42.550
So the shareholders just
outright own the assets.

00:00:42.550 --> 00:00:45.060
So if there's four of
these shares times $2,

00:00:45.060 --> 00:00:48.810
the market is saying that
this company's assets are

00:00:48.810 --> 00:00:53.750
worth exactly $8
right over here.

00:00:56.681 --> 00:00:58.680
The market value of the
assets is the same thing

00:00:58.680 --> 00:01:02.405
as a market cap in this case
because we have no liabilities.

00:01:02.405 --> 00:01:03.780
Now what I want
to think about is

00:01:03.780 --> 00:01:08.130
what happens if the company
wants to raise some more money?

00:01:08.130 --> 00:01:10.520
Let's say that they want
to issue some more shares

00:01:10.520 --> 00:01:13.230
and sell them to raise
some money to buy a factory

00:01:13.230 --> 00:01:13.860
or whatever.

00:01:13.860 --> 00:01:15.580
So what they literally
do is the board

00:01:15.580 --> 00:01:18.535
approves for them to literally
create two more shares.

00:01:21.370 --> 00:01:24.900
So now they have a total
of six shares outstanding.

00:01:24.900 --> 00:01:27.350
And then the company goes,
they get an investment banker,

00:01:27.350 --> 00:01:30.140
and they do a secondary
offering in the public markets.

00:01:30.140 --> 00:01:31.799
And they sell these
incremental shares.

00:01:31.799 --> 00:01:33.340
And they're able to
sell them-- let's

00:01:33.340 --> 00:01:38.275
just say for simplicity--
at $2 per share.

00:01:38.275 --> 00:01:40.400
Normally when you increase
the supply a little bit,

00:01:40.400 --> 00:01:43.460
you won't get quite what the
previous market value was,

00:01:43.460 --> 00:01:48.300
but you get roughly $2
a share for simplicity.

00:01:48.300 --> 00:01:52.550
And by selling two shares that
it just created for $2 a share,

00:01:52.550 --> 00:01:57.630
the company is able
to raise another $4.

00:01:57.630 --> 00:02:00.060
So the whole reason why I'm
going through this exercise

00:02:00.060 --> 00:02:01.590
is to ask a question.

00:02:01.590 --> 00:02:06.165
Did dilution take place?

00:02:06.165 --> 00:02:07.790
And there's different
ways to think it.

00:02:07.790 --> 00:02:08.870
When you think
about dilution, it's

00:02:08.870 --> 00:02:11.160
like you could imagine
if you have a sweet syrup

00:02:11.160 --> 00:02:14.690
and if you add water to
it, it becomes less sweet.

00:02:14.690 --> 00:02:18.540
Each kind of a cube of that
water, each drop of that water

00:02:18.540 --> 00:02:19.720
has less sugar in it.

00:02:19.720 --> 00:02:20.940
You've diluted it.

00:02:20.940 --> 00:02:22.730
And so there seems to
be an analogy here.

00:02:22.730 --> 00:02:26.820
We now have more shares
for the same company.

00:02:26.820 --> 00:02:28.000
And it is true.

00:02:28.000 --> 00:02:29.960
If you are the
owner of this share

00:02:29.960 --> 00:02:34.910
over here before the
share offering up here,

00:02:34.910 --> 00:02:37.810
you owned 25% of the company.

00:02:37.810 --> 00:02:44.470
After the share
offering, you own 1/6.

00:02:44.470 --> 00:02:49.230
So after, you own 1/6
or approximately 16%.

00:02:49.230 --> 00:02:52.110
So it looks like the percentage
that you own of the company

00:02:52.110 --> 00:02:53.050
has been diluted.

00:02:53.050 --> 00:02:54.850
And that's true to some degree.

00:02:54.850 --> 00:02:57.230
But sometimes the dilution
takes on another meaning,

00:02:57.230 --> 00:02:59.950
that somehow because
more shares are

00:02:59.950 --> 00:03:02.880
being used for the ownership
of the same company,

00:03:02.880 --> 00:03:04.745
that maybe these
shares are worth less.

00:03:04.745 --> 00:03:06.620
And that's the one thing
I want to challenge.

00:03:06.620 --> 00:03:09.600
There is dilution in
the percentage you own,

00:03:09.600 --> 00:03:12.620
but there is not dilution in
what the shares are worth.

00:03:12.620 --> 00:03:15.920
Because before, if you had four
shares representing something

00:03:15.920 --> 00:03:19.410
that is worth $8, now
you have six shares

00:03:19.410 --> 00:03:22.047
representing
something that is $12.

00:03:22.047 --> 00:03:24.130
Because the company didn't
just issue these shares

00:03:24.130 --> 00:03:25.760
and get nothing
in return for it.

00:03:25.760 --> 00:03:27.310
It got $4 of cash.

00:03:27.310 --> 00:03:31.070
You can't debate the value
of $4. $4 are worth $4.

00:03:31.070 --> 00:03:35.240
So now the assets of the
company are worth $12.

00:03:35.240 --> 00:03:39.240
So you have $12 of assets,
no liabilities, six shares,

00:03:39.240 --> 00:03:43.670
$12 divided by six shares
is still $2 a share.

00:03:43.670 --> 00:03:45.670
So the value per
share has not been

00:03:45.670 --> 00:03:48.300
diluted, just the
percentage of the company

00:03:48.300 --> 00:03:50.950
that you happen to own.


Prime numbers

WEBVTT
Kind: captions
Language: en

00:00:00.421 --> 00:00:02.170
In this video, I want
to talk a little bit

00:00:02.170 --> 00:00:06.264
about what it means
to be a prime number.

00:00:06.264 --> 00:00:07.680
And what you'll
see in this video,

00:00:07.680 --> 00:00:09.650
or you'll hopefully
see in this video,

00:00:09.650 --> 00:00:11.840
is it's a pretty
straightforward concept.

00:00:11.840 --> 00:00:14.097
But as you progress through
your mathematical careers,

00:00:14.097 --> 00:00:16.680
you'll see that there's actually
fairly sophisticated concepts

00:00:16.680 --> 00:00:20.030
that can be built on top of
the idea of a prime number.

00:00:20.030 --> 00:00:22.277
And that includes the
idea of cryptography.

00:00:22.277 --> 00:00:24.610
And maybe some of the encryption
that your computer uses

00:00:24.610 --> 00:00:26.879
right now could be
based on prime numbers.

00:00:26.879 --> 00:00:28.545
If you don't know
what encryption means,

00:00:28.545 --> 00:00:30.450
you don't have to worry
about it right now.

00:00:30.450 --> 00:00:34.410
You just need to know the prime
numbers are pretty important.

00:00:34.410 --> 00:00:36.092
So I'll give you a definition.

00:00:36.092 --> 00:00:38.050
And the definition might
be a little confusing,

00:00:38.050 --> 00:00:39.600
but when we see
it with examples,

00:00:39.600 --> 00:00:42.680
it should hopefully be
pretty straightforward.

00:00:42.680 --> 00:00:48.790
So a number is prime if
it is a natural number--

00:00:48.790 --> 00:00:51.740
and a natural number, once
again, just as an example,

00:00:51.740 --> 00:00:55.130
these are like the numbers 1, 2,
3, so essentially the counting

00:00:55.130 --> 00:00:57.020
numbers starting
at 1, or you could

00:00:57.020 --> 00:00:58.450
say the positive integers.

00:00:58.450 --> 00:01:11.740
It is a natural number divisible
by exactly two numbers,

00:01:11.740 --> 00:01:13.240
or two other natural numbers.

00:01:13.240 --> 00:01:14.698
Actually I shouldn't
say two other,

00:01:14.698 --> 00:01:17.630
I should say two
natural numbers.

00:01:17.630 --> 00:01:19.870
So it's not two other
natural numbers--

00:01:19.870 --> 00:01:24.190
divisible by exactly
two natural numbers.

00:01:24.190 --> 00:01:31.130
One of those numbers is itself,
and the other one is one.

00:01:31.130 --> 00:01:33.380
Those are the two numbers
that it is divisible by.

00:01:33.380 --> 00:01:34.740
And that's why I didn't
want to say exactly

00:01:34.740 --> 00:01:37.120
two other natural numbers,
because one of the numbers

00:01:37.120 --> 00:01:38.866
is itself.

00:01:38.866 --> 00:01:40.490
And if this doesn't
make sense for you,

00:01:40.490 --> 00:01:42.030
let's just do some
examples here,

00:01:42.030 --> 00:01:44.640
and let's figure out if some
numbers are prime or not.

00:01:44.640 --> 00:01:49.200
So let's start with the smallest
natural number-- the number 1.

00:01:49.200 --> 00:01:52.430
So you might say, look,
1 is divisible by 1

00:01:52.430 --> 00:01:54.220
and it is divisible by itself.

00:01:54.220 --> 00:01:56.860
You might say, hey,
1 is a prime number.

00:01:56.860 --> 00:01:58.550
But remember, part
of our definition--

00:01:58.550 --> 00:02:02.620
it needs to be divisible by
exactly two natural numbers.

00:02:02.620 --> 00:02:06.640
1 is divisible by only one
natural number-- only by 1.

00:02:06.640 --> 00:02:09.259
So 1, although it might be
a little counter intuitive

00:02:09.259 --> 00:02:15.590
is not prime.

00:02:15.590 --> 00:02:16.680
Let's move on to 2.

00:02:19.490 --> 00:02:25.890
So 2 is divisible by
1 and by 2 and not

00:02:25.890 --> 00:02:27.940
by any other natural numbers.

00:02:27.940 --> 00:02:30.150
So it seems to meet
our constraint.

00:02:30.150 --> 00:02:33.950
It's divisible by exactly
two natural numbers-- itself,

00:02:33.950 --> 00:02:36.240
that's 2 right there, and 1.

00:02:36.240 --> 00:02:37.685
So 2 is prime.

00:02:40.610 --> 00:02:42.580
And I'll circle
the prime numbers.

00:02:42.580 --> 00:02:43.289
I'll circle them.

00:02:43.289 --> 00:02:45.329
Well actually, let me do
it in a different color,

00:02:45.329 --> 00:02:47.320
since I already used
that color for the-- I'll

00:02:47.320 --> 00:02:48.220
just circle them.

00:02:48.220 --> 00:02:51.500
I'll circle the
numbers that are prime.

00:02:51.500 --> 00:02:53.630
And 2 is interesting
because it is

00:02:53.630 --> 00:02:56.180
the only even number
that is prime.

00:02:56.180 --> 00:02:58.060
If you think about it,
any other even number

00:02:58.060 --> 00:03:00.480
is also going to be
divisible by 2, above

00:03:00.480 --> 00:03:01.860
and beyond 1 and itself.

00:03:01.860 --> 00:03:03.030
So it won't be prime.

00:03:03.030 --> 00:03:05.470
We'll think about that
more in future videos.

00:03:05.470 --> 00:03:07.480
Let's try out 3.

00:03:07.480 --> 00:03:10.582
Well, 3 is definitely
divisible by 1 and 3.

00:03:10.582 --> 00:03:12.790
And it's really not divisible
by anything in between.

00:03:12.790 --> 00:03:19.000
It's not divisible by 2, so
3 is also a prime number.

00:03:19.000 --> 00:03:20.700
Let's try 4.

00:03:20.700 --> 00:03:22.860
I'll switch to
another color here.

00:03:22.860 --> 00:03:24.080
Let's try 4.

00:03:24.080 --> 00:03:27.960
Well, 4 is definitely
divisible by 1 and 4.

00:03:27.960 --> 00:03:30.030
But it's also divisible by 2.

00:03:30.030 --> 00:03:31.200
2 times 2 is 4.

00:03:31.200 --> 00:03:33.490
It's also divisible by 2.

00:03:33.490 --> 00:03:38.730
So it's divisible by three
natural numbers-- 1, 2, and 4.

00:03:38.730 --> 00:03:42.680
So it does not meet our
constraints for being prime.

00:03:42.680 --> 00:03:46.720
Let's try out 5.

00:03:46.720 --> 00:03:49.270
So 5 is definitely
divisible by 1.

00:03:49.270 --> 00:03:50.740
It's not divisible by 2.

00:03:50.740 --> 00:03:51.900
It's not divisible by 3.

00:03:51.900 --> 00:03:56.149
It's not exactly divisible by 4.

00:03:56.149 --> 00:03:58.690
You could divide them into it,
but you would get a remainder.

00:03:58.690 --> 00:04:01.860
But it is exactly
divisible by 5, obviously.

00:04:01.860 --> 00:04:06.350
So once again, it's divisible
by exactly two natural numbers--

00:04:06.350 --> 00:04:08.280
1 and 5.

00:04:08.280 --> 00:04:11.586
So, once again, 5 is prime.

00:04:11.586 --> 00:04:12.960
Let's keep going,
just so that we

00:04:12.960 --> 00:04:15.340
see if there's any
kind of a pattern here.

00:04:15.340 --> 00:04:17.390
And then maybe I'll
try a really hard one

00:04:17.390 --> 00:04:19.130
that tends to trip people up.

00:04:19.130 --> 00:04:23.350
So let's try the number.

00:04:23.350 --> 00:04:24.300
6.

00:04:24.300 --> 00:04:26.470
It is divisible by 1.

00:04:26.470 --> 00:04:28.940
It is divisible by 2.

00:04:28.940 --> 00:04:30.270
It is divisible by 3.

00:04:30.270 --> 00:04:33.190
Not 4 or 5, but it
is divisible by 6.

00:04:33.190 --> 00:04:36.290
So it has four natural
number factors.

00:04:36.290 --> 00:04:38.010
I guess you could
say it that way.

00:04:38.010 --> 00:04:39.940
And so it does not have
exactly two numbers

00:04:39.940 --> 00:04:41.450
that it is divisible by.

00:04:41.450 --> 00:04:44.610
It has four, so it is not prime.

00:04:44.610 --> 00:04:47.480
Let's move on to 7.

00:04:47.480 --> 00:04:54.330
7 is divisible by 1, not 2,
not 3, not 4, not 5, not 6.

00:04:54.330 --> 00:04:56.160
But it's also divisible by 7.

00:04:56.160 --> 00:04:59.020
So 7 is prime.

00:04:59.020 --> 00:05:00.640
I think you get the
general idea here.

00:05:00.640 --> 00:05:03.560
How many natural
numbers-- numbers

00:05:03.560 --> 00:05:07.090
like 1, 2, 3, 4, 5, the numbers
that you learned when you were

00:05:07.090 --> 00:05:10.490
two years old, not including 0,
not including negative numbers,

00:05:10.490 --> 00:05:13.340
not including fractions and
irrational numbers and decimals

00:05:13.340 --> 00:05:17.250
and all the rest, just regular
counting positive numbers.

00:05:17.250 --> 00:05:19.270
If you have only two
of them, if you're only

00:05:19.270 --> 00:05:23.140
divisible by yourself and
one, then you are prime.

00:05:23.140 --> 00:05:24.640
And the way I think
about it-- if we

00:05:24.640 --> 00:05:26.540
don't think about the
special case of 1,

00:05:26.540 --> 00:05:30.440
prime numbers are kind of these
building blocks of numbers.

00:05:30.440 --> 00:05:31.899
You can't break
them down anymore

00:05:31.899 --> 00:05:34.190
they're almost like the
atoms-- if you think about what

00:05:34.190 --> 00:05:35.606
an atom is, or
what people thought

00:05:35.606 --> 00:05:36.990
atoms were when
they first-- they

00:05:36.990 --> 00:05:38.860
thought it was kind of the
thing that you couldn't divide

00:05:38.860 --> 00:05:39.190
anymore.

00:05:39.190 --> 00:05:40.850
We now know that you
could divide atoms

00:05:40.850 --> 00:05:42.308
and, actually, if
you do, you might

00:05:42.308 --> 00:05:43.540
create a nuclear explosion.

00:05:43.540 --> 00:05:46.790
But it's the same idea
behind prime numbers.

00:05:46.790 --> 00:05:49.750
In theory-- and in prime
numbers, it's not theory,

00:05:49.750 --> 00:05:51.380
we know you can't
break them down

00:05:51.380 --> 00:05:56.370
into products of
smaller natural numbers.

00:05:56.370 --> 00:06:00.320
Things like 6-- you could
say, hey, 6 is 2 times 3.

00:06:00.320 --> 00:06:01.280
You can break it down.

00:06:01.280 --> 00:06:05.290
And notice we can break it down
as a product of prime numbers.

00:06:05.290 --> 00:06:07.740
We've kind of broken
it down into its parts.

00:06:07.740 --> 00:06:09.930
7, you can't break
it down anymore.

00:06:09.930 --> 00:06:13.346
All you can say is that
7 is equal to 1 times 7,

00:06:13.346 --> 00:06:15.720
and in that case, you really
haven't broken it down much.

00:06:15.720 --> 00:06:17.690
You just have the 7 there again.

00:06:17.690 --> 00:06:19.440
6 you can actually
break it down.

00:06:19.440 --> 00:06:22.302
4 you can actually break
it down as 2 times 2.

00:06:22.302 --> 00:06:24.760
Now with that out of the way,
let's think about some larger

00:06:24.760 --> 00:06:28.910
numbers, and think about whether
those larger numbers are prime.

00:06:28.910 --> 00:06:33.870
So let's try 16.

00:06:33.870 --> 00:06:37.750
So clearly, any number is
divisible by 1 and itself.

00:06:37.750 --> 00:06:39.700
Any number, any natural
number you put up here

00:06:39.700 --> 00:06:41.242
is going to be
divisible by 1 and 16.

00:06:41.242 --> 00:06:42.866
So you're always
going to start with 2.

00:06:42.866 --> 00:06:45.150
So if you can find anything
else that goes into this,

00:06:45.150 --> 00:06:47.060
then you know you're not prime.

00:06:47.060 --> 00:06:52.620
And 16, you could have 2 times
8, you could have 4 times 4.

00:06:52.620 --> 00:06:54.620
So it's got a ton
of factors here

00:06:54.620 --> 00:06:56.720
above and beyond
just the 1 and 16.

00:06:56.720 --> 00:06:59.410
So 16 is not prime.

00:06:59.410 --> 00:07:02.340
What about 17?

00:07:02.340 --> 00:07:05.500
1 and 17 will
definitely go into 17.

00:07:05.500 --> 00:07:06.700
2 doesn't go into 17.

00:07:06.700 --> 00:07:07.530
3 doesn't go.

00:07:07.530 --> 00:07:10.650
4, 5, 6, 7, 8, 9 10, 11--
none of those numbers,

00:07:10.650 --> 00:07:15.360
nothing between 1
and 17 goes into 17.

00:07:15.360 --> 00:07:20.130
So 17 is prime.

00:07:20.130 --> 00:07:22.920
And now I'll give
you a hard one.

00:07:22.920 --> 00:07:25.350
This one can trick
a lot of people.

00:07:25.350 --> 00:07:27.610
What about 51?

00:07:27.610 --> 00:07:29.555
Is 51 prime?

00:07:33.022 --> 00:07:34.480
And if you're
interested, maybe you

00:07:34.480 --> 00:07:36.390
could pause the
video here and try

00:07:36.390 --> 00:07:40.060
to figure out for yourself
if 51 is a prime number.

00:07:40.060 --> 00:07:44.520
If you can find anything
other than 1 or 51

00:07:44.520 --> 00:07:46.740
that is divisible into 51.

00:07:46.740 --> 00:07:49.130
It seems like, wow, this is
kind of a strange number.

00:07:49.130 --> 00:07:51.430
You might be tempted
to think it's prime.

00:07:51.430 --> 00:07:54.720
But I'm now going to give you
the answer-- it is not prime,

00:07:54.720 --> 00:07:59.030
because it is also
divisible by 3 and 17.

00:07:59.030 --> 00:08:02.420
3 times 17 is 51.

00:08:02.420 --> 00:08:04.045
So hopefully that
gives you a good idea

00:08:04.045 --> 00:08:05.590
of what prime numbers
are all about.

00:08:05.590 --> 00:08:08.260
And hopefully we can
give you some practice

00:08:08.260 --> 00:08:11.738
on that in future videos or
maybe some of our exercises.


Hedge fund strategies: Merger arbitrage 1

WEBVTT
Kind: captions
Language: en

00:00:00.740 --> 00:00:03.900
Let's say there's
some company A here.

00:00:03.900 --> 00:00:06.760
And let's think about what
its stock might be doing.

00:00:06.760 --> 00:00:08.920
Let's say this is just
over the course of the day.

00:00:08.920 --> 00:00:11.740
Let's say its stock is just
trading right over here.

00:00:11.740 --> 00:00:14.780
So as we go through the day,
it's price naturally changes.

00:00:14.780 --> 00:00:17.950
But then right over here-- let's
say this is within the day,

00:00:17.950 --> 00:00:21.710
maybe this is happening
at 10AM Eastern

00:00:21.710 --> 00:00:33.910
Time-- an announcement comes
out that B intends to acquire A.

00:00:33.910 --> 00:00:37.330
I don't know, let's
say that right now A

00:00:37.330 --> 00:00:41.860
is trading at $5 a share,
but a press release comes out

00:00:41.860 --> 00:00:45.790
that B intends to
acquire A at $10 a share.

00:00:52.270 --> 00:00:53.710
So you can imagine--
And they say

00:00:53.710 --> 00:00:55.312
they're going to
do it with cash.

00:00:55.312 --> 00:00:57.020
And we'll talk in
future videos about how

00:00:57.020 --> 00:00:58.450
it becomes a little bit
more involved if they're

00:00:58.450 --> 00:01:00.241
going to be doing it
with their own shares,

00:01:00.241 --> 00:01:02.240
but they intend to
do it with cash.

00:01:02.240 --> 00:01:05.640
So if they're able to
acquire A, everyone

00:01:05.640 --> 00:01:09.790
who owns a share of company
A will get $10 for it,

00:01:09.790 --> 00:01:11.700
and those shares
will go to company

00:01:11.700 --> 00:01:14.790
B. Company B will own
company A all of a sudden.

00:01:14.790 --> 00:01:17.110
So what do you
think would happen

00:01:17.110 --> 00:01:19.630
to the stock of company A?

00:01:19.630 --> 00:01:23.320
We know that B intends to
buy it for $10 a share.

00:01:23.320 --> 00:01:25.320
Well, you could imagine
if everyone thought

00:01:25.320 --> 00:01:27.370
that this is definitely
going to happen,

00:01:27.370 --> 00:01:31.190
that anyone who holds the
stock is going to get $10.

00:01:31.190 --> 00:01:35.050
You could imagine that the stock
would just gap up immediately

00:01:35.050 --> 00:01:37.910
to something close
to $10 a share.

00:01:40.426 --> 00:01:42.050
And then not even
trade much around it,

00:01:42.050 --> 00:01:44.180
because they know what
they're going to get for it.

00:01:44.180 --> 00:01:48.010
So this is if you knew that
this merger or this acquisition

00:01:48.010 --> 00:01:50.510
was going to happen.

00:01:50.510 --> 00:01:52.270
The reality is, is
that you don't always

00:01:52.270 --> 00:01:53.800
know just from
this press release

00:01:53.800 --> 00:01:56.670
that B definitely
will acquire A. Maybe

00:01:56.670 --> 00:01:59.370
they have to get approval
from government bodies

00:01:59.370 --> 00:02:01.640
to make sure that they aren't
getting a monopoly here.

00:02:01.640 --> 00:02:04.387
Maybe they still have to get
the funding from some bank,

00:02:04.387 --> 00:02:05.970
they still have to
get a loan in order

00:02:05.970 --> 00:02:07.930
to be able to do this deal.

00:02:07.930 --> 00:02:09.180
Maybe something else happens.

00:02:09.180 --> 00:02:11.487
Maybe there's another bidder
who wants to acquire A

00:02:11.487 --> 00:02:12.820
and they're willing to pay more.

00:02:12.820 --> 00:02:14.900
So you don't know
exactly what's going

00:02:14.900 --> 00:02:16.200
to happen in this situation.

00:02:16.200 --> 00:02:18.880
So you don't know for sure
this is going to happen.

00:02:18.880 --> 00:02:21.940
So what does normally
happen is that instead

00:02:21.940 --> 00:02:25.190
of going all the way up, it
goes someplace in-between.

00:02:25.190 --> 00:02:27.400
So the reality, instead
of jumping from $5 to $10,

00:02:27.400 --> 00:02:31.200
it might jump from, I
don't know, $5 to $8,

00:02:31.200 --> 00:02:33.500
and maybe it trades around here.

00:02:33.500 --> 00:02:36.060
You might say, well,
why does it trade at $8?

00:02:36.060 --> 00:02:37.900
And it would trade
at $8-- so notice,

00:02:37.900 --> 00:02:42.661
if there was 100% chance it
would trade all the way to $10,

00:02:42.661 --> 00:02:44.910
right, because that's what
stock A would be worth now,

00:02:44.910 --> 00:02:46.690
because B is going to pay that.

00:02:46.690 --> 00:02:51.120
But if it trades at $8
essentially the market

00:02:51.120 --> 00:02:55.270
is saying that we're
going to give you 3/5.

00:02:55.270 --> 00:02:57.420
From $5 to $8 is $3.

00:02:57.420 --> 00:03:00.580
So it's giving you 3/5
of the total jump that it

00:03:00.580 --> 00:03:02.262
could have if it
was 100% chance.

00:03:02.262 --> 00:03:04.220
Or another way to say it
is, is that the market

00:03:04.220 --> 00:03:08.070
is saying that there
is a 60% percent

00:03:08.070 --> 00:03:10.720
chance that this
merger will go through.

00:03:10.720 --> 00:03:13.260
Anyone who thinks that
there's more than a 60%

00:03:13.260 --> 00:03:15.590
chance-- if they do this
over a bunch of securities,

00:03:15.590 --> 00:03:18.960
so that all the probabilities
kind of work out eventually--

00:03:18.960 --> 00:03:20.750
they should buy this security.

00:03:20.750 --> 00:03:23.790
Because they could buy
at $8, and they think

00:03:23.790 --> 00:03:26.730
it really should be worth $10.

00:03:26.730 --> 00:03:29.970
Anyone who thinks that, no way
that this acquisition is going

00:03:29.970 --> 00:03:33.590
to happen, B isn't going
to get the financing

00:03:33.590 --> 00:03:35.340
or the regulatory
authorities aren't going

00:03:35.340 --> 00:03:37.945
to allow B to do this, then
they should short the stock

00:03:37.945 --> 00:03:38.820
when it goes up here.

00:03:38.820 --> 00:03:41.280
Because if the
acquisition falls through,

00:03:41.280 --> 00:03:43.300
then the stock is going
to go back down here.

00:03:43.300 --> 00:03:45.750
It's going to go back
down to the $5 range

00:03:45.750 --> 00:03:47.100
before the announcement.

00:03:47.100 --> 00:03:49.950
And so people, and
especially hedge funds,

00:03:49.950 --> 00:03:53.170
who act in this way
based on their thinking

00:03:53.170 --> 00:03:55.080
that the merger is
more likely to occur

00:03:55.080 --> 00:03:57.410
or less likely to occur--
based on their research,

00:03:57.410 --> 00:03:59.260
or maybe they have some
quantitative models,

00:03:59.260 --> 00:04:01.630
or maybe they have some
information other people don't

00:04:01.630 --> 00:04:04.740
have that might be legal
or might be otherwise--

00:04:04.740 --> 00:04:06.520
they would place these bets.

00:04:06.520 --> 00:04:09.000
The people who think that
the merger will happen,

00:04:09.000 --> 00:04:12.092
will buy expecting
it to go to $10.

00:04:12.092 --> 00:04:14.050
The people who think it
won't, they will short,

00:04:14.050 --> 00:04:16.040
expecting it to go to $5.

00:04:16.040 --> 00:04:19.160
And this strategy of playing
the probabilities of a merger

00:04:19.160 --> 00:04:22.320
happening, this is
called merger arbitrage.

00:04:22.320 --> 00:04:26.360
Merger arb, sometimes
called for short.

00:04:26.360 --> 00:04:28.320
And it's arbitrage
because someone

00:04:28.320 --> 00:04:31.810
who feels like they know the
merger is going to happen,

00:04:31.810 --> 00:04:34.840
they can buy something
for $8 and then sell.

00:04:34.840 --> 00:04:36.490
Or they could buy
something for $8

00:04:36.490 --> 00:04:38.220
that is going to be worth $10.

00:04:38.220 --> 00:04:40.400
They can sell it for
$10 at some future date

00:04:40.400 --> 00:04:42.120
when B acquires a company.

00:04:42.120 --> 00:04:44.970
Or, if they know the merger
isn't going to happen,

00:04:44.970 --> 00:04:48.800
they can short it for $8
and then buy it back for $5.

00:04:48.800 --> 00:04:53.009
Once again, kind of doing
an arbitrage on a price

00:04:53.009 --> 00:04:53.550
differential.

00:04:53.550 --> 00:04:55.060
They think something
that's worth $5

00:04:55.060 --> 00:04:56.667
is trading at $8
on the down side.

00:04:56.667 --> 00:04:59.000
On the upside, they think
something that's trading at $8

00:04:59.000 --> 00:05:01.080
is worth $10.


Hedge fund strategies: Long short 1

WEBVTT
Kind: captions
Language: en

00:00:00.630 --> 00:00:03.510
Let's say I've been researching
some stocks to potentially

00:00:03.510 --> 00:00:06.350
invest in, and I feel
pretty good at my ability

00:00:06.350 --> 00:00:09.510
to predict how good a
company's going to do relative

00:00:09.510 --> 00:00:12.600
to people's expectations, or
the market's expectations.

00:00:12.600 --> 00:00:16.770
And in particular, I focus
on companies A and B.

00:00:16.770 --> 00:00:18.420
And in the case of
company A, I think

00:00:18.420 --> 00:00:20.801
it's going to do a lot worse
than the market expects

00:00:20.801 --> 00:00:21.300
it to do.

00:00:21.300 --> 00:00:25.120
So I'm tempted to short it.

00:00:25.120 --> 00:00:27.080
And in the case of
company B, I think

00:00:27.080 --> 00:00:30.010
it's going to do much better
than the market expects.

00:00:30.010 --> 00:00:33.270
So I'm tempted to
buy it, or go long.

00:00:33.270 --> 00:00:35.640
But there's one thing
about this process that

00:00:35.640 --> 00:00:37.830
gets me a little
bit uncomfortable.

00:00:37.830 --> 00:00:41.082
I have confidence in my ability
to pick out companies that

00:00:41.082 --> 00:00:42.540
are going to
outperform the market,

00:00:42.540 --> 00:00:44.280
or are going to
under-perform the market,

00:00:44.280 --> 00:00:46.050
but I have no
confidence in my ability

00:00:46.050 --> 00:00:47.570
to predict to the market.

00:00:47.570 --> 00:00:51.046
So in general-- let me draw
a little chart of the market,

00:00:51.046 --> 00:00:52.546
this is the market
price, maybe this

00:00:52.546 --> 00:00:55.220
is the S&P 500 or the
NASDAQ-- and I've just

00:00:55.220 --> 00:00:58.340
found that it's as good as
random, as opposed to me trying

00:00:58.340 --> 00:01:00.060
to pick out bottoms
of the markets,

00:01:00.060 --> 00:01:02.460
or tops of the markets,
and all the rest.

00:01:02.460 --> 00:01:05.099
And so my fear is, what
happens if I buy company B,

00:01:05.099 --> 00:01:08.150
based on my sound research,
and then the market goes down?

00:01:08.150 --> 00:01:10.105
Then company B will
probably still go down.

00:01:10.105 --> 00:01:11.980
Maybe it won't go down
as much as the market,

00:01:11.980 --> 00:01:14.380
but it will still go
down, and I'll lose money.

00:01:14.380 --> 00:01:18.100
Or what if I short company
A and the market goes up?

00:01:18.100 --> 00:01:22.730
Maybe company A won't go a won't
go up as much as the market,

00:01:22.730 --> 00:01:25.150
but I'll still lose money
on my short position, which

00:01:25.150 --> 00:01:29.830
is essentially a bet that the
stock is going to go down.

00:01:29.830 --> 00:01:33.150
So is there some
arrangement I can do,

00:01:33.150 --> 00:01:35.520
some combination of
buying company B,

00:01:35.520 --> 00:01:38.250
and selling or
shorting company A,

00:01:38.250 --> 00:01:42.430
that will essentially hedge
out a lot of this market risk?

00:01:42.430 --> 00:01:44.670
And as you can
imagine, there is.

00:01:44.670 --> 00:01:47.930
And I won't go into all of the
statistics of it, and beta,

00:01:47.930 --> 00:01:50.220
and you can really try to
statistically hedge out

00:01:50.220 --> 00:01:51.270
the market risk.

00:01:51.270 --> 00:01:53.916
But the general idea
is, if you really

00:01:53.916 --> 00:01:55.790
think this is going to
outperform the market,

00:01:55.790 --> 00:01:57.862
or definitely
outperform company A,

00:01:57.862 --> 00:01:59.570
and if you think A
going to under-perform

00:01:59.570 --> 00:02:01.600
the market, or definitely
under-perform relative

00:02:01.600 --> 00:02:06.170
to company B, you can
buy a similar amount of B

00:02:06.170 --> 00:02:09.820
as you will short company
A. So in this case,

00:02:09.820 --> 00:02:10.860
let's just do one share.

00:02:10.860 --> 00:02:12.860
You can obviously do
multiples of this.

00:02:12.860 --> 00:02:17.080
You buy one, let me
write it over here.

00:02:17.080 --> 00:02:21.750
So you buy one
share of company B,

00:02:21.750 --> 00:02:25.604
and you sell, or you short,
one share of company A.

00:02:25.604 --> 00:02:27.020
You borrow the
share, you sell it,

00:02:27.020 --> 00:02:28.790
you'll have to buy
it at a future date.

00:02:28.790 --> 00:02:33.190
So you short, I
shouldn't say one share,

00:02:33.190 --> 00:02:37.360
you short two shares of
company A. And the reason

00:02:37.360 --> 00:02:40.420
why I'm saying two shares of
company A instead of one share,

00:02:40.420 --> 00:02:45.390
is because A is only $5 per
share, and B is $10 per share.

00:02:45.390 --> 00:02:47.240
So I want to do roughly
the same amount.

00:02:47.240 --> 00:02:49.980
And once again, you can do
fancier statistics on it

00:02:49.980 --> 00:02:52.412
to tweak it, so you can
see how much they actually

00:02:52.412 --> 00:02:53.870
move with the
market, but we're not

00:02:53.870 --> 00:02:55.411
going to worry about
that right here.

00:02:55.411 --> 00:02:58.420
So for simplicity,
what we've done here

00:02:58.420 --> 00:03:01.500
is we've taken a long position,
let me write it over here.

00:03:01.500 --> 00:03:06.252
We've taken a long
position in B,

00:03:06.252 --> 00:03:09.420
and we have a $10 long
position, and we've

00:03:09.420 --> 00:03:13.930
taken a short position
in A, and it is also

00:03:13.930 --> 00:03:15.680
a $10 short position.

00:03:15.680 --> 00:03:18.390
Once again, because
A is $5 per share--

00:03:18.390 --> 00:03:23.330
so we took two shares of A-- it
makes the same dollar amount.

00:03:23.330 --> 00:03:26.330
Now, and maybe I'll save
this for the next video,

00:03:26.330 --> 00:03:29.410
I want you to think about what
happens if the market moves

00:03:29.410 --> 00:03:34.330
up or down, but B outperforms
A, or A outperforms B.


Hedge fund strategies: Long short 2

WEBVTT
Kind: captions
Language: en

00:00:00.610 --> 00:00:03.930
In my attempt to have a
portfolio whose performance

00:00:03.930 --> 00:00:07.410
should depend only on my ability
to identify good companies,

00:00:07.410 --> 00:00:11.620
and to identify bad companies,
and not be held sway

00:00:11.620 --> 00:00:13.880
by whatever the
market might do, I

00:00:13.880 --> 00:00:15.909
have bought a
share of company B,

00:00:15.909 --> 00:00:17.575
thinking that it's a
pretty good company

00:00:17.575 --> 00:00:19.680
and will do better
than expected.

00:00:19.680 --> 00:00:22.007
And I have shorted two
shares of company A.

00:00:22.007 --> 00:00:24.090
And I've shorted two of
them, because they're only

00:00:24.090 --> 00:00:28.420
at $5 a share, and I wanted to
short the same dollar amount.

00:00:28.420 --> 00:00:31.430
So now I want to think about,
assuming that I was right,

00:00:31.430 --> 00:00:33.980
that company B will do
better than company A

00:00:33.980 --> 00:00:37.810
relative to each other, how my
investment will do if the stock

00:00:37.810 --> 00:00:41.404
market moves up, or if the
stock market moves down.

00:00:41.404 --> 00:00:42.820
So let's imagine
a situation where

00:00:42.820 --> 00:00:44.090
the stock market moves up.

00:00:44.090 --> 00:00:46.950
In that situation, you could
imagine both of these stocks

00:00:46.950 --> 00:00:47.850
will go up.

00:00:47.850 --> 00:00:51.820
So let's say company B
goes up in percentage terms

00:00:51.820 --> 00:00:58.450
more than company A. So let's
say that company B gets to $15.

00:00:58.450 --> 00:01:00.740
So it gets to $15 a share.

00:01:00.740 --> 00:01:03.180
So it is up 50%.

00:01:03.180 --> 00:01:06.620
And let's say that company
A only goes up by 20%,

00:01:06.620 --> 00:01:08.480
so it goes to $6 a share.

00:01:17.390 --> 00:01:19.260
So in that situation,
what happened?

00:01:19.260 --> 00:01:23.780
I clearly make a lot of money on
company B, on my long position,

00:01:23.780 --> 00:01:28.390
when the stock market
goes up. $10 became $15.

00:01:28.390 --> 00:01:32.040
So I made $5 there.

00:01:32.040 --> 00:01:35.120
And I clearly lost money
on my short position,

00:01:35.120 --> 00:01:38.470
because I sold it
at $5, and now I'm

00:01:38.470 --> 00:01:40.640
going to have to
buy it back at $6

00:01:40.640 --> 00:01:43.990
if I want to cover
my short position.

00:01:43.990 --> 00:01:46.840
So this $10 position-- remember,
I have two shares of them--

00:01:46.840 --> 00:01:52.640
are now worth $12, 2 times $6.

00:01:52.640 --> 00:01:57.880
And since this is a short
position, I will lose $2.

00:01:57.880 --> 00:02:01.160
But because the company that
I thought would do better

00:02:01.160 --> 00:02:03.950
did do better, it
went up by 50%,

00:02:03.950 --> 00:02:07.780
while this only went up by 20%
percent, I still make money.

00:02:07.780 --> 00:02:10.922
I still make a $3 profit.

00:02:10.922 --> 00:02:13.130
Now let's think about what
happens if the whole stock

00:02:13.130 --> 00:02:15.320
market goes down.

00:02:15.320 --> 00:02:18.680
And I'm going to assume
that I'm good at picking

00:02:18.680 --> 00:02:19.717
the right companies.

00:02:19.717 --> 00:02:21.550
So I'm going to assume
that my thesis holds,

00:02:21.550 --> 00:02:24.370
that B does better
relative to A.

00:02:24.370 --> 00:02:27.890
So let's say in this negative
scenario, B goes down by 20%.

00:02:34.310 --> 00:02:36.180
So it gets to $8 a share.

00:02:41.390 --> 00:02:46.359
So this is the market up, this
is the market up scenario.

00:02:46.359 --> 00:02:48.150
Now let's imagine the
market down scenario.

00:02:52.090 --> 00:03:00.070
So now my position in
B goes from $10 $8.

00:03:00.070 --> 00:03:06.340
So I lose $2 on
my long position.

00:03:06.340 --> 00:03:08.850
But when the market
went down, I was right,

00:03:08.850 --> 00:03:10.670
A is not that
great of a company.

00:03:10.670 --> 00:03:11.890
So it goes down more.

00:03:11.890 --> 00:03:16.290
Let's imagine that
it goes down by 50%.

00:03:16.290 --> 00:03:26.830
So A goes down by 50% all
the way to $2.50 per share.

00:03:26.830 --> 00:03:30.370
So my position in A, the
short position that was $10,

00:03:30.370 --> 00:03:36.040
it is now a $5 short position,
two shares at $2.50 per share.

00:03:36.040 --> 00:03:37.260
So this is a short position.

00:03:37.260 --> 00:03:40.430
I sold the stock, I
borrowed and sold it $10.

00:03:40.430 --> 00:03:41.930
Now I can buy it back at $5.

00:03:41.930 --> 00:03:47.750
I make $5 on the short position
when the market goes down.

00:03:47.750 --> 00:03:50.470
So even though I lost some
money on my long position

00:03:50.470 --> 00:03:53.350
when the market goes down,
I more than make up for it

00:03:53.350 --> 00:03:54.800
on my short position.

00:03:54.800 --> 00:03:57.720
So even in the down market,
assuming my stock picking

00:03:57.720 --> 00:04:02.110
is good, I have still made $3.

00:04:02.110 --> 00:04:05.200
And so what we've set up
here is a long short hedge.

00:04:05.200 --> 00:04:07.020
And what's cool
about it is, it's

00:04:07.020 --> 00:04:09.790
only dependent on the
investor's ability

00:04:09.790 --> 00:04:12.960
to differentiate between
companies that are more or less

00:04:12.960 --> 00:04:15.710
likely to do well relative
to other companies.

00:04:15.710 --> 00:04:18.899
And it's not as dependent
on someone's ability

00:04:18.899 --> 00:04:22.310
to pick which direction the
market itself will be going.

00:04:22.310 --> 00:04:24.819
And so when people talk
about long-short hedge funds,

00:04:24.819 --> 00:04:26.860
they're talking about
hedge funds are essentially

00:04:26.860 --> 00:04:27.410
doing this.

00:04:27.410 --> 00:04:31.030
They're trying to hedge
out the market risk.