19. Investment Banks

All right. Today, we want to talk about
investment banking, which is different from commercial
banking. And today we have a guest, Jon
Fougner, who took this course almost 10 years ago and has
been working in investment banking since. I'll introduce him in a few
minutes, but I wanted to start with just the elements of
investment banking, and then I wanted to talk about changes
in it that came about after the financial crisis of
2007 through 2009. OK. The topic is investment
banking. And that is a term, a
20th-century term, that first became big and important, I'd
say, in the 1930s, but preceded that by some years. And it refers to a business of
helping other businesses create securities. If someone wants to issue
stock, they go to an investment banker
to help them. Or if you want issue
bonds, you go to an investment banker. It can be a corporation
that goes to the — for-profit, it can be a
non-profit corporation, it can be a government.

I suppose even an individual,
who is incorporated, can go to an investment bank. That's the investment
banking business. Now it's different — it shares something with the
consulting business, because investment bankers serve
often as consultants. A company will come to an
investment banker with a problem, and they want to raise
money by issuing new shares, for example, to
solve that problem. But if it's a good investment
bank, they will do more than just issue shares for them.

They'll talk about their whole
corporate strategy. So, in that sense an investment
bank looks like a consulting firm, but they don't
do pure consulting. That makes the distinction. Maybe, they're in many ways a
favored consultant, because they bring money. You can talk to a consultant,
who will bring you no money, and another consultant,
who has his hands on money somewhere. And that helps a lot. The advice and the money
together help a lot. So, investment bankers are
different from traders, because usually they deal with
creating something — about making a corporation or
a government — making it work, enabling them to
do something that they want to do. And then, being realistic about
it, and coming up with the money to do it. And so, that's how investment
banking differs from consulting
[correction: trading]. And it differs from commercial
banking in that a pure investment bank does not
accept deposits.

You can't go to your investment
bank and say, I'd like to open a savings
account. They don't do it. I'm talking about a pure
investment bank. But let me just give you
something about this business. I'm going to come in a moment
to pointing out that most investment banking businesses
are not pure investment banks. But let's talk about what a
pure investment bank does. It does underwriting
of securities. That means — suppose you're a company and
you want to issue shares. You need someone to go to bat
for you, someone who knows the kind of people, who might
buy your shares, and can vouch for you. So in some sense, it's
a reputation thing. The investment bank has contacts
among people who make big investments, and they manage
the issuance of your new shares, and that's called
an underwriting.

If it's the first time you're
issuing shares, it's called an IPO, or ''initial public
offering.'' So, you're a private company, it's just you
and a few friends own the company, but now you want to go
public, you would generally go to an investment bank,
and talk to them about how to do it. And the investment bank would
solve that problem for you by doing an underwriting. So, traditionally there's two
kinds of underwriting — Also, there's also something
called a ''seasoned offering,'' and that means, for
a company that has already gone public, and it already has
shares traded, so that the shares are seasoned, but you
want to issue more shares.

So, you can go to an
investment bank to do that, as well. OK. There's two kinds of deals. There's a ''bought deal,''
and then there's a ''best efforts.'' With a bought
deal, the investment bank buys your shares. They go in and say, you know, we
know that we can market for your shares. We will buy them ourselves and
resell them on the market. A best efforts offering is one,
where the investment bank doesn't buy it and doesn't
promise anything. They say, we'll make
our best efforts to place this offering. So, those are the basic
things that they do.

The methods that they use are
regulated by the Securities and Exchange Commission
in order to make — the SEC in the United States,
and regulated similarly in other countries. So, that's the basic investment
banking business. So, if you're thinking of where
to place yourself, I think investment banking suits
very well people who are — it's not good for
autistic people. If you're autistic,
be a trader. Then, you just get on the phone,
and you buy and sell all day, and you can be rude,
and you can have coffee stains on your shirt, and you don't
have to know anything about classical music. OK? But investment bankers
are a different — I see Jon is laughing. Tell me, what you know
what classical music.

I assume that was a part of
your training at Goldman. He says no. It's a whole different
industry. So, if you go to the symphony
and look around, you'll see lots of investment
bankers there. But you won't see any traders. You nod on that
[POINTING AT JON FOUGNER], maybe. We talked about moral hazard. I think that an important part
of what investment banks do is, solve a moral hazard
problem, and that problem is, that companies, who issue
shares, don't have a reputation. And so, what do I care, I'll
issue shares, right before we're going to go bankrupt. We know inside that we're going
to go bankrupt, so hey, let's just see, if we can milk
this company, before the public knows it, and
issue shares. That's a moral hazard. And the investment bank
is in business to prevent that moral hazard. They do the due diligence, they
check you out, and then after that, people are
more trusting of you.

So, I think investment banking
is built around trust, it's establishing trust. So, that's how it differs from
a lot of — that's why it's important that these people be
cultivated and impressive. They tend to be well-spoken. I can ask Jon, whether he agrees
on all this, but it's my impression, you can tell when
the investment bankers walk in the room. They dress differently,
they look differently. I don't know what it is. It's something about reputation
— it's what it's built around. The investment banking
industry — let me just — since I'm talking about the
nature of investment banking and since we have a Goldman
Sachs representative here. I put on your reading list a
book as an optional reading by Charles Ellis called The
Partnership, and it's a history of Goldman Sachs. Goldman Sachs was an investment
bank until just very recently, and we'll
talk about that. They're still in the investment
banking business, but now they're officially
a commercial bank.

It's an old, venerable firm, and
Goldman Sachs emerged in the early 21st century, as,
I think, the most highly respected and esteemed
investment bank in the world. Amazingly successful, and
amazingly well-respected. Ellis wrote a book just
a few years — Ellis is on the Yale
Corporation. He's a distinguished businessmen
and author himself, and he wrote a book
about Goldman Sachs, which is largely admiring. Like, how did this happen? How did this phenomenon of
Goldman Sachs come about? And I suggested — I didn't assign — I suggested, you read one
chapter, which was called Principles. And it says something about
Goldman Sachs, and it refers to, in that chapter, the
chairman of Goldman Sachs, John Whitehead, in the 1970s
wrote down a list of principles that guide
Goldman Sachs.

And Ellis seems admiring
of these principles. Not everyone would agree. It's a matter of taste,
I guess, if anything. Whitehead is now — I just looked it up — he's 88 years old, and is
retired from Goldman, must have retired some years ago. What kind of an organization? Ellis says, that the thing
that struck him about the organization is loyalty. But that's not alone, that
people feel a strong loyalty toward their company. That's not on Whitehead's
list. So, Whitehead's list.
What is his first principle of Goldman Sachs? "Our client's interests always
come first." These sound a little bit like bromides. I'm sorry, but I read them
thinking, it is the most successful investment bank in
the world, so maybe there's something beyond — I think, there is something
beyond platitudes here. Second, "our assets are
people, capital, and reputation." That's a coincident
with what I said.

"Uncompromising determination to
achieve excellence." Well, everybody says that, so maybe
we'll discount that. "We stress creativity and
imagination." Well, those are sort of bromides, maybe. Then, Whitehead issued
some guidelines — this is also in that
chapter later — for Goldman Sachs employees, and
these seem to be a little bit more candid. ''The boss usually decides, not
the assistant treasurer. Do you know the boss?'' That's
something I've learned from my own interaction with people — the boss really does decide,
and Goldman Sachs goes for the top. And maybe this is obnoxious, I
don't know — they don't want to talk with underlings. ''You never learn anything when
you're talking.'' That means, be a good listener. ''The respect of one person
is worth more than the acquaintance with 100.''
''There's nothing worse than an unhappy client.'' The
one thing that — I don't if it's on Whitehead's
list — but I think it says something
about investment banking, and that Ellis says, is that
they shun publicity.

They don't want to be in the
newspaper, they want to be known by the president. They want to be known by
a few prominent people. They're kind of social
climbers, in a way. But it's all built around some
basic principles of service, and they want to be talking to
the top guy, and they don't want to be in the newspaper. I'm going to quote
Ellis on this. Now I'm quoting Charlie Ellis. I call him Charlie. I know him. He's a friend of mine. "Making money, always and no
exceptions, was a principle of Goldman Sachs.

Nothing was ever done
for prestige. In fact, the most prestigious
clients were often charged the most. Absolute loyalty to the
firm and to the partnership was expected. Personal anonymity was
almost a core value. The real culture of Goldman
Sachs was a unique blend of drive for making money and the
characteristics of family, in ways that the Chinese, Arabs,
and old Europeans would well understand.'' So, I'm giving you a flavor of
what an investment bank is.

You might be repelled by it. You know, is making money
so important? And if you are repelled by it,
you probably don't want to work for Goldman Sachs. On the other hand, they're
kind of respecting some economic principles, right? Working for a firm like this,
you can make huge amounts of money, and then at the
end, you can give it all away to charity. And that's the new capitalism,
right? So, what's wrong with that? What are you going to
do with all this? If you make $100 million, what
are you going to do with it? You're going to give
it away, right? I mentioned at the beginning, I
mentioned Andrew Carnegie's book, The Gospel of Wealth. Maybe that's, what this
is all about. On the other hand, some of them
don't give it away, and some of them live lavishly. Different people have different
impressions of this business — but I want to make sure I have
time for our guest and I'm sort of running out of time. I wanted to talk about what has
happened in the crisis.

There's so much to say
about this topic. Maybe, I should talk first
about the first crisis. In 1933, the US Congress passed
the Glass-Stegall Act, which forced investment
banks — it prevented investment banks
from doing commercial banking, or commercial banks from doing
investment banking. It split them in two, and it
said you have to decide, are you a commercial back, or are
you an investment bank? The Glass-Steagall Act was the
act that created the FDIC, the Federal Deposit Insurance
Corporation, the first successful national deposit
insurance act in the world.

And part of it — it makes sense
— if you're going to insure the commercial banks, you
better watch what they're doing and prevent them from
doing dangerous business. So, the dangerous business was
investment banking, and they forced companies to decide. So, J.P. Morgan, which was doing
both investment banking and commercial banking in
1933 had to decide. What is it? Investment banking or
commercial banking? So, they picked commercial
banking, and that means, they fired all their investment
bankers. So, these guys regrouped and
they formed an investment bank, called Morgan Stanley. Stanley was a Yale graduate and
Morgan was, I think — not J.P. Morgan, it was
his grandson. Morgan died around 1911. And so, those were two
separate ones. J.P. Morgan, commercial bank. Morgan Stanley, investment
bank.

But since then, we've repealed
the Glass-Steagall Act, and that occurred with the
Gramm-Leach Act [correction: Gramm-Leach-Bliley Act] of — what was that — 1999. Well, Gramm-Leach[-Bliley] repealed Glass-Steagall, and
now these businesses, they generally do the same
business, both commercial and — yes, Gramm-Leach[-Bliley] was 1999. Since then, as you recall, we've
had a financial crisis. And in that financial crisis,
Glass-Steagall got brought up again, because it seemed that
the crisis was related to a number of shenanigans that
firms were undertaking. And the government had to bail
out commercial banks. We talked about this, and
it's very controversial. So, the question is, did these
banks get in trouble, because we repealed Glass-Steagall? A lot of people came
on saying that.

These banks were doing all kinds
of screwy things that were dangerous, and we're
insuring them, so it can't be. So, a lot of people said,
we have to go back. There was some inherent wisdom
in Glass-Steagall that we've lost. And this was debated. Now incidentally — I didn't mention this — Glass-Steagall was somehow
confined to the United States. Outside of the United States, I
don't know if there was any country, but as far as I know
the U.S. was the only one that did it. So, outside of the United
States they had what was called universal banking. And these banks outside of
the U.S. were doing both investment banking and
commercial banking. They sailed right through the
whole century without being divided up. So, the reason why we got
Gramm-Leach[-Bliley] was, that people started to
say, you know, we're at a competitive disadvantage. We Americans are at a
competitive disadvantage to Europe, because we can't do
both, and they have more freedom than we.

And so eventually, in 1999, we
said, they could do both, so that the U.S. also became a
universal banking country. But then problems arose. And the problems were — Paul Volcker, who was chairman
of the Federal Reserve Board in the late '70s, early '80s
proposed something called the Volcker Rule. And the Volcker Rule was
not a full return to Glass-Steagall, but — and this is now in the
Dodd-Frank Act.

It's Section 619. It doesn't say Volcker Rule
there, but that's what it is, and it prohibits proprietary
trading at commercial banks. And it also says, that
commercial banks can't own hedge funds or private
equity [addition: private equity funds]. So, that was the Volcker
Rule that was put in. There was also another rule
added, which is analogous to the Dodd-Frank Act [correction:
analogous to the Volcker Rule], also. And this is in the Dodd-Frank
Act of 2010. There was a senator. Her name was Blanche Lincoln, a
Democrat from Arkansas, who proposed the Lincoln Rule — unrelated to Abraham Lincoln,
as far as I know.

And the Lincoln Rule was — or Lincoln Amendment, and that
is Section 716 of Dodd-Frank. It says that — it doesn't prohibit banks
dealing in swaps, but it said swap dealers are barred
access to Fed window, discount window. And so effectively, it prevents
banks from dealing in swaps anymore. As a result of this, Goldman
Sachs has got to shut down — or it appears that — the Volcker Rule says
banks have until October 2011 to comply. So, it means that Goldman Sachs
has to shut down — Goldman Sachs had to become a
commercial bank, too, so it's no longer — it's an official commercial
bank now.

And because of the Volcker Rule,
it appears that it has to shut down its proprietary
trading, which was a huge part of its profits. And Goldman Sachs will never be
the same again, apparently. But it's not clear,
what will happen. It depends all on how Dodd-Frank
is enforced. I think, that the people that
are in the banking industry are going to try to claim, that
some of the activity that was done by their proprietary
traders — that is, people who were trading
the market on — true investment banking
shouldn't involve the investment banker buying and
selling securities trying to make a profit. That's not underwriting
of securities, that's proprietary trading. The Volcker Rule says, that you
pretty much can't do it anymore, unless you're a pure
investment bank, but if you're a commercial bank, you can't
do it anymore, and they're kind of forced to become
a commercial bank.

But they're going to try to
steer around these rules, and I think that maybe they can. They'll re-define something
that looks something like proprietary trading, and
then continue to do what they're doing. We'll have to see. These things are long
and arduous. You know, one thing that strikes
me about finance is, that it's so rules-based. There are so many laws, there
are so many lawyers, that nobody can grasp the magnitude
of the regulations that these people live under. And you see these landmark
bills, but none of us understands them, because the
real content of them is involved in hundreds of pages of
legal documents, that never cease to amaze me with
their complexity. Let me tell you something about
shadow banking, which is relevant here.

The term ''shadow banking,'' I
think of that as coming from a term that I first heard from
people at Pimco just within the last five years or so. Or maybe it goes back
further than that. It refers to a new kind of
semi-banking system. What are shadow banks? These are companies that are
acting like commercial banks, but they're technically not. So, they're not regulated
as commercial banks. And in many cases,
the investment banks were shadow banks.

I'll give you an example of
Lehman Brothers, which was a pure investment bank. It's now bankrupt, it's gone. It was a pure investment bank,
so it wasn't regulated as a commercial bank. This was before the Volcker
rule, before Dodd-Frank, and they went bankrupt in 2008, and
it was the worst moment in the financial crisis. Why did they go bankrupt? Well, there's a reading on your
reading list by Professor Gary Gorton here at Yale, who
argues that Lehman, like many other investment banks, was
financing a lot of proprietary investments by issuing repos,
or by dealing in repos. What is a repo? That's short for repurchase
agreement. The banking crisis, that we saw
in 2008, was substantially a run on the repo.

So, here's what happened,
according to Gorton and others who agree with him. Investment banks, like Lehman
Brothers, were not regulated like commercial banks, and as
long as they didn't accept deposits, they didn't
have to be regulated as commercial banks. So, they could do what they
want, and they were considered underwriters, so fine,
do whatever you want. Well, not quite, but they
weren't heavily regulated, the way commercial banks were. And what Lehman Brother started
to do is, to make heavy investments in subprime
securities and other securities by effectively
borrowing through the repo market. What is the repo market? It's a market, in which a
company effectively borrows money by effectively selling
some securities it owns with an agreement to repurchase the
security at a later date. They're short-term loans, and
in fact, collateralized by some security that they own. What it was, it was almost
the same as a deposit. They were short-term loans
that someone could withdraw at any time. The someone wouldn't be some
mother and father with their small savings account. It would be some bigger,
probably institutional investor. But these were acting like
banks, like commercial banks, because there could be a run
on these banks the same way there's a run on the
commercial banks.

If anyone starts fearing that
Lehman Brothers is going to fail, they all want to take
their money out, which means, they don't renew their repos. And so Lehman Brothers failed,
when the housing market declined, the value of its
subprime securities declined. People, who were lending it
money through repos, got wind of this, and they stopped
wanting to do it, so it was like a run on Lehman Brothers. And Lehman Brothers could
not be saved, if it weren't for a bailout. The government had already
bailed out Bear Sterns, and it had helped Merrill Lynch, which
was failing as well, and they decided not to bail
everybody out, so they let Lehman Brothers fail.

So now, the reaction to that is,
that we can't let shadow banking go unregulated,
and Dodd-Frank is part of that reaction. So now, investment banking
is substantially altered by these laws. And still, of course, it's a
very important business. The United States has
traditionally been the most important country in investment
banking, but it continues that Europe and Asia
are also important, very important participants in
investment banking. Growing, I think. The financial crisis has put
something of a damper on the business for a while, but
I think, it seems to be coming back. The latest news is, that the
investment banking business is starting to look more stable
and prosperous. So, what I want to do
now is invite — let me just do a brief
introduction. So, Jon Fougner took this class,
I think it was 2002, and then, he served as my
research assistant for a book I was writing, called The New
Financial Order, so I got to know him better. The important thing for this
lecture is, that you worked for Goldman Sachs, and got to
know people there, and now he's working for Facebook.

You've heard of this
company, right? I thought it would be
interesting to have him back to give his impressions of what
life was like after ECON 252, of what Goldman
Sachs was like — at least the old
Goldman Sachs. And I think, it's interesting
to hear about Facebook, too, because it's a different kind of
culture, and I'm interested in culture. It's more of a tech business. I'm interested to hear, if they
have anything like the Goldman Sachs principles,
or they enunciate them the same way. So, I'll bring Jon up, and
I'll let him continue. JON FOUGNER: Very well. Thank you Professor Shiller. And Professor Shiller has
promised, that I'll be well-spoken, and well-dressed,
and a bunch of other things, good, bad, or otherwise.

I'm not sure, if I'll live up to
any of those expectations, but hopefully I can
share a little bit about this business. How many of you are considering
going into investment banking? Maybe about 30%, or so. OK. And how many of you
are on Facebook? OK. And how many of you are considering working at Facebook? OK, so maybe we'll add
a few more to that by the end of this. The goal for the next half hour
is really to help you think about, whether banking
might be the right next step for you after college, and for
those of you who say yes, to share a few tips on
how to think about getting into the business. I'll give a little bit of my
background, kind of a context for my reflections on the
industry, so you can take them with a grain of salt, share some
anecdotes from banking during the debt boom, and then
also give a few tips, or steps that you could take today, if
you're interested in it. So, a little bit on
my background. Junior summer, I went to work
for a large investment bank, as Professor Shiller mentioned,
and I really enjoyed the work, knew that
I wanted to go back to it.

But I had never lived abroad,
because, as you all know, your junior year here at Yale,
there's a lot going on with extracurriculars, and so many
people don't go abroad. I went to see Charles Hill — now how many folks are familiar
with Charles Hill? Fabulous negotiator. And I said, Professor Hill, how
can I negotiate to go back to this job a year later,
so I can do a Fulbright in the meantime? So, he taught me all this
jiu-jitsu, and it ended up working out, and I did a year in
Norway, and then came back full time to banking.

Now, as you probably know,
a lot of analysts go into banking, they do it for two
years, maybe do private equity, hedge fund, maybe do
an MBA afterwards, and something like 15% might stay
on, get promoted, and become career-track bankers. When I was working on Wall
Street, this was the peak of the most recent private
equity boom and the associated debt boom. And so, recruiting to private
equity had reached such a fever pitch, that literally 16
months before the start date for these jobs, analysts were
getting calls from recruiters, doing interviews, and
actually making commitments to joining companies. And I knew, I was interested in
tech, and so I became very close to signing with a
technology private equity fund, that I admire still very
much to this day, but I actually decided that I wanted
to work in tech itself, and so the last three and a half years,
as you mentioned, I've been working at Facebook
working on our social advertisement strategy.

So, a little bit about inside
the banking role. It may sound a little bit
funny to talk about the investment banking division of
an investment bank, but that's what we'll do for the
next 15 minutes. And by that, I really mean, just
the part of the business that Professor Shiller
mentioned, giving advice to CEOs and CFOs about financing,
and mergers and acquisitions. So if you see this logo– and that makes you smile — I see a few smiles, maybe
a couple grimaces — if it makes you smile,
it's a good sign that banking may be for you. You think about two,
three, four — PROFESSOR ROBERT SHILLER: They
don't understand that. That's an Excel logo. JON FOUGNER: That's
an Excel logo.

PROFESSOR ROBERT SHILLER:
What are you driving at? JON FOUGNER: That's an Excel
logo, and these are Excel models, and they go on and on. PROFESSOR ROBERT SHILLER:
You mean, they're going to be a nerd. Is that what you're saying? JON FOUGNER: Yes, if by that
you mean you want to feel comfortable with the technical
aspect of the role, yes, absolutely. Especially at the junior
level, where — you mentioned some of the
relationship aspects of banking, but at the junior
level, really your core responsibility is building
out these models. So, if you think about working
on that until 4 in the morning maybe two nights in a row, maybe
20 nights in a row, and that's exciting to you,
that's a good sign. So, how many of you have gone
online to Open Yale to see Stephen Schwarzman's talk
from this class from three years ago? One, two. Two enterprising users
of the internet. I would strongly encourage
everyone to do that.

One of the things, that he
talks about is that in banking, there's not a ton of
flexibility for getting the numbers wrong. As the analyst, you really
need to nail the details. And primarily, what we're
talking about there, is building operating transaction
and valuation models that describe your clients,
and other companies, and their industry. And then, the information from
those models, along with research you find by hook and by
crook on the internet, from your colleague, wherever you
can, kind of comes together into presentations, polished
pitch books to help win a piece of business. So, that could be an IPO, a
merger advisory, as you mentioned, and once you've won
that piece of business, then you as the analyst really are
the organizing principal for getting this deal across
the finish line. Dealing with the accountants,
working with the lawyers, other bankers, even competitors
who might also be working on the deal, and then,
of course, your client, and whichever counter-party
your client is selling to or buying from.

So, it's a fair amount
of responsibility. Typical investment banking deal
team, the core team is pretty lean. Maybe one each of an analyst,
associate VP, and MD, and if you decide to and are given the
opportunity to continue working in investment banking
on a career basis, then you will gain a little bit more
control over your week to week and month to month schedule
as you become more senior. But even at a senior level,
investment banking is really considered an always on-call
client service profession. Now, one of the advantages of
this very lean deal team is, that there's plenty of
responsibility to go around. So, if you raise your hand and
say, yes, I can take on some of this work, that might by
default fall to some of my associates, and you do it
without making mistakes, you're going to be able to get
more and more responsibility, learn more and more
on the job.

One of my favorite projects
that I worked on was a proposed venture capital
transaction, where we were looking at investing in eight
different operating companies, and because the team was that
lean, I was actually able to basically take on leading the
due diligence on these eight different companies. PROFESSOR ROBERT SHILLER: Before
you go ahead, why do the managing directors
have zero grey hairs? JON FOUGNER: Well,
I'm just assuming it's all gone by then. That's a median, the mean might
be a little bit higher. High variance. So, I would — Was that the nerdy comment
you were looking for? So, I might encourage you to
think about these roles as an investment in your career,
where what you put in, of course, is long hours — maybe
100 hours a week for a couple of years — and what you get out, is a
number of things, including a skill set that's really valued
and respected, not just in finance, but around the business
world, exposures to CFOs and how they think about
problems.

If you decide to continue on as a career banker,
participation and success that you'll help create
for your company. And then, of course, a network
of very smart, eager peers, like the folks in this room,
who then fan out across the finance industry. So, as I mentioned, I was in
banking during the debt boom, and there was such a peak in
transaction that people started calling it Merger
Mondays, this expectation that before the bell at the beginning
of the week, there'd be a $20 billion, or $30
billion, $40 billion transaction that would
be announced. And there was so much enthusiasm
for this sort of transaction that even financial
institutions, which, conventional wisdom told
us, couldn't be LBO'ed [clarification: LBO stands for
leveraged buyout], because their balance sheets were
already so levered, actually became considered targets
for leveraged buyouts.

And arguably the peak of this
was, when Blackstone themselves, one of the fathers
of the buyout industry, filed an S1, and in fact became a
publicly traded company, which they are to this day. Your final task as a banking
analyst is to create a deal toy, when you successfully
created a transaction. Now, this particular one used
to have water in it and glittering fish, and at the
time I thought it was very pretty, but I would just invite
you maybe, when you create your deals toys, don't
picture your client swimming with the fishes. Not the best idea. And then, this is a safe for a
bank, which, of course, is logical, safes are in a bank.

But this is actually an
especially fun toy, because you pull this handle here,
and then actually this one opens up. That was my idea of fun when I
was a banker, so you again should take it with
a grain of salt. This is a snow globe — you
shake it upside down, which is a lot of fun, as well. But again, just in terms of the
metaphor, and I have only myself blame — maybe I
was sleep deprived — I guess, maybe don't show your
client's capital structure literally under water, when
you design your deal toys. PROFESSOR ROBERT SHILLER: Are
you saying that investment bankers have a childish side? You say, deal toys. I was presenting them as
going to the symphony. What are you presenting
them as? JON FOUGNER: I can't claim, I
ever made it to the symphony, when I was an analyst, but a
number of my colleagues were on the boards, involved
philanthropically with those organizations.

But yes, I think that we have
this creative energy and creative spirit. I think, there's a lot of
creativity in finance that, as Stephen Schwarzman mentioned
in his talk, at the senior levels, when you're dreaming how
to combine companies, how to finance companies, how to
deal with new regulation, as you mentioned. But at the analyst level,
maybe not quite as much. So maybe, there is that creative
spark, that's just trying to find its way out, one mischievous way or another. But anyway, this was the landscape, when I left banking. That was September 2007. And then six months after that,
as Professor Shiller mentioned, Bear Sterns sold in
a fire sale to J.P. Morgan, and then six months after that,
September 2008, we saw Merrill Lynch narrowly avert
liquidation, become the asset management brand of
Bank of America, which it still is today. That same week, Lehman Brothers
collapsed under the weight of those mortgages,
suffered a bank run, and was not bailed out, was liquidated,
some of their investment banking and capital
markets assets sold to Barclays in bankruptcy.

A week after that, what a lot of
people thought would never happen, did happen, and Goldman
Sachs and Morgan Stanley went to the Federal
Reserve, and asked to become commercial banks, which
technically they still are today, as Professor
Shiller mentioned. Now, that having been said, if
you take Charles Gasparino's account of this era, this
was the end of an era for Wall Street. That having been said,
investment banking continued at firms all around the world,
some of these diversified conglomerates, and also at a
burgeoning slate of so-called independent advisory shops. So, these are folks like
Evercore, Lazard, Greenhill. And if you're interested in
learning about finance, investment banking is not the
only way to get into it. There are also, for example,
the so-called alternative asset managers, private
equity hedge funds. Folks like KKR, Carlyle,
Bridgewater, who I believe still recruits here on campus. And then, out where I live in
California, you have the heart of the venture capital industry,
especially around the information technology
industry.

So, folks like Kleiner,
Sequoia, Benchmark. They may not be recruiting on
campus, and they may not even be open to hiring
undergraduates, but some of their competitors are. So, if that's interesting to
you, maybe we'll just touch on a few steps that you
can take today. Obviously, you're already doing
plenty of this, without anyone having to remind you. Things like taking the right
classes, doing well in them, researching the firms you
want to apply to. Just three that I'll touch on. Taking advantage of the
incredible resource you have in the professors here today,
which you really don't want to take for granted. Learning a little bit about
yourself — and I know that sounds touchy-feely, but
I'll give a couple specifics around that. And then, of course, there's no
substitute for trying this hands-on to see whether
it suits you.

So, this is pretty much exactly
as I remember John Geanakoplos — genius mad scientist. You can
find him on Open Yale now, and if you have not yet taken his
class, and it's offered next year, I would strongly recommend
that you do so. David Swensen, I understand
you've had the distinct pleasure of hearing from
already, the most successful endowment manager ever, the
reason that we get to have nice things here at Yale. And I just keep coming back time
and again to Pioneering Portfolio Management, the
bedrock of core investing principles that he articulates
in that book. Even if you never become an
institutional investor and are only thinking as a retail
investor, it's still incredibly useful stuff. And he does teach a
senior seminar. And then, in addition to this
class, as you probably know, Professor Shiller has a graduate
seminar, which I think you have promised
to let students apply to, to get into to.

PROFESSOR ROBERT SHILLER:
Yes, I had about eight last semester. JON FOUGNER: OK. And how did they do? PROFESSOR ROBERT SHILLER: That's
an embarrassing thing. They did pretty well, against
our graduate students. I won't rank them. Embarrassing to our
graduate students. JON FOUGNER: But flattering
to all of you. As Professor Shiller mentioned,
I got to work a little bit on The New Financial
Order as an undergraduate, and I just
still consider it such a rewarding experience, because
the tenets that you talk about in this book, around how finance
can be a technology for societal innovation,
everything from the micro level of personal income
insurance to encouraging people to take more risks early
on in their careers, to the macro level of GDP insurance
are some really visionary ideas.

I, of course, remain dismayed
that some of them have not been put into practice yet,
but that really is an opportunity for all of you who
are interested in Finance for Idealists to think about that as
a potential career option. Other useful courses, of course,
anything with math, probabilities, stats,
econometrics, Excel modeling, especially using the three
financial statements, computer science, computer programming
is going to serve you well, not just in investment banking,
which we're talking about this morning, but also
in those other aspects of financial services
like trading. Now, kind of switching
gears a little bit. How many you have either
done Myers-Briggs or Strengths Finder? A few. Maybe 20 — maybe 30% or so. So, these are tools that I think
have become a little bit more popular in recent years,
which are basically psychological inventories
where you spend an hour answering multiple choice
questions, then they literally spit out a profile of how
you like to work. Obviously, there's no right or
wrong answers, they're really just preferences. It's a pretty modest investment
of your time — maybe an hour each — to gain insight not just into
what you're good at, but also to helping you articulate to
potential employers really what you can bring
to the table.

And then, of course, where the
rubber meets the road, is actually applying for that
internship or that job, and getting your foot in the door. Career Services on campus are
a fabulous resource, but because of that they are very
scarce resource, because almost everyone is using them. So, if you want to find jobs
that don't get 200 other Yale resumes coming in their front
door, you want to look a little further afield. So, you've got things like lists
of investment management firms, from Institutional
Investors, American Banker, Hedge Fund Research.

There are plenty
of these lists. And I'd say, don't be shy
about cold calling, cold emailing — just kind of be persistent. We touched on professors here. I am incredibly grateful to
Professor Shiller, Ray Fair, David Swensen, folks who have
helped me in my career, even at this extremely early stage
in my career, and it was really just because I asked. And I would encourage you to
do the same thing, because once you've left campus,
it gets a lot harder to get that help. And then the alumni
directory — how many folks have been using
the alumni directory to reach out for jobs? Maybe 15%. I'd encourage you to do so, and
all I would add to that is, think about what you share
in common with the people you're reaching out to, think
about whether you can reciprocate the help that you're
asking for, even if that might not be obvious now,
because they're established in their career and you're
just starting out.

I had a student in this class
reach out to me three weeks ago interested in advice, and
I was happy to share that. And actually, he ended up being
really helpful, helping me understand in where you all
are in your decision making process and your career
right now. So, there are always ways that
you can help, and you'll find a much more welcome hand if
you're about to do that. And then lastly, recruiters. These large, so-called ''two
and 20'' funds, the alternative asset managers,
typically use third party recruiters to find the talent
that they want to interview. And they are typically targeting
current banking analysts and associates, but
there's nothing to say that, if you have a strong finance and
technical background as an undergraduate, that you couldn't
actually get on their radar and try to use them
for a placement.

The only caveat I would add to
that is, that you want to be really clear and confident when
you speak to them about what is that you're
looking for. Because if you go in there
waffling, asking them to sort of be your mentor and your
career coach, they're really not going to get that sense
of confidence for you, and they're not going to want to
put you in front of one of their clients, who are the
asset management firms. PROFESSOR ROBERT SHILLER:
We're having questions in just a minute. JON FOUGNER: Oh, great. Yes. [SIDE CONVERSATION] PROFESSOR ROBERT SHILLER: We're
going to open it up for questions in a minute, but
go ahead and interpose. STUDENT: It could probably also
come at the end, I was just wondering, who
is Keith Ferrazzi? JON FOUGNER: How many folks
are familiar with Keith Ferrazzi in the room? Some people are — their
arms are getting tired. Maybe 20%. So, Keith was the youngest
ever Fortune 500 CMO. And he's a fellow Yalie, New
York Times best-selling author, written a lot about the
role that relationships play in business.

And you hear this word
networking, which, I think, all of us now get sort of a sort
of unctuous feel around. It seems very, sort of,
superficial and self-serving, and what he's really helped
elucidate is, how the basic tenets of psychology — and in this respect, he reminds
me of Professor Shiller — applying the basic
tenets of psychology to how you actually build real,
meaningful business relationships, and breaking down
this artificial barrier between relationships
and business. Because business is
relationships. As Professor Shiller mentioned,
one of the things that investment bankers try to
do is, establish senior level relationships, because it's
ultimately individuals, not entire companies, who are
making decisions. So, just to share a couple of
anecdotes about my transition from banking, after banking, as
I said, I knew I wanted to work in tech, and I very
fortuitously got a phone call from a lifelong friend of mine
around that time, who was an engineer who had started
working at Facebook.

And what he convinced me was,
that I could help him and his colleagues change how
people communicate. I was pretty sort of anxious
about this, pretty intimidated by the prospect of being
a business guy doing engineering. And what he told me, and I
ultimately think this proved true, is that you don't have to
be an engineer in Silicon Valley to have an impact, you
just have to be able to think rigorously like an
engineer does. I think the training, that
you're doing here at Yale, and then the potential training at
investment banking, both have the potential to serve you
well in that respect. So, what we're trying to do at
Facebook is get people the power to share and make the
world more open and connected. Pretty simple, in principle. And our strategy for doing this
is mapping out what we call the social graph.

Now, we didn't create this. This exists out in the world,
all we're trying to do is draw a mathematical representation
of it, and that's basically who likes whom, and
who likes what? And then, we push information
as efficiently as possible along the edges of
that ground. So, this is kind of where I
spend most of my day, not just over here in FarmVille, but also
over here in ads-land.

And what my role is called is
''local inbound product marketing.'' So, to kind of
parse that out, what we mean is basically, I go and talk to
local businesses, restaurants, plumbers, understand what their
pain points are, what other advertising products they
use, what they're trying to accomplish as a local
business owner, and then basically synthesize that with
data analysis, and ultimately present it to the engineers as
a case for what we should build next.

So, these are questions like,
what do the ads that you see on Facebook look like? How should they interact with
the rest of the product? How can we target them to
make them more relevant? A whole bunch more. The real guiding precept here
is that, it's basically what Henry Ford said, right? He didn't want to build the
faster horse, even if that's what his clients might have
asked for, he wanted to build something that was dramatically
more useful, and for him that was a car, and for
us it's something that we call social advertising. I am happy to chat a little
bit more about that during questions, if folks
are interested. So finally, just to kind of
compare these two roles, and how one might have prepared me
for the other, I think the three things from banking that
have served me best working on internet products are: One, this
cross function of process management, which is a
ubiquitous part of the business world.

Two, building polished
presentations, this one notwithstanding. And three, being resourceful
about tracking down data points to help make the
right decisions. On the other hand, there's some
parts of the job that were totally new. Thinking from the mindset of the
CMO, the chief marketing officer, rather than the CFO,
the chief financial officer, just the pace of the
environment, banking is fast-paced, but the rate at
which products evolve in the internet is dramatically
faster. And the fundamental job itself,
which is basically creating new products, building
the business case for them, validating that case with
data, trying to actually mock them up — and I assure
you, I'm not good in Photoshop — and then actually use those
mocks and that case to inspire engineers and product managers
to want to build them.

So, it's an environment that
is much more ambiguous. The yardsticks for whether or
not you're going in the right direction, especially in
the short term, are not nearly as clear. But if that's actually something
that's appealing to you, then I strongly encourage
you to check out jobs around Silicon Valley, and especially
at Facebook. So, you can actually go to
facebook.com/careers — quick plug — to check out about the
internships and the full time jobs that we have available. So, Professor Shiller, did you
want to use the rest of the time for questions. PROFESSOR ROBERT SHILLER:
Well, yes. I'm opening it up to all
of you for questions. OK, you have a question
back there. STUDENT: Before you did your
junior summer in investment banking, how did you even
know you wanted to — JON FOUGNER: I caught some of
that, and then the screen caught some of it, so just bear
with us for one second, and then I'll be
right with you.

You said, before I did my junior
summer, what did I do? STUDENT: Before you did
your junior summer. Or how did you figure out that
investment banking was the field you wanted to be in? JON FOUGNER: Well, you know, I
knew that some of the stuff on the right hand column of the
ROI chart was stuff I was interested in. I was interested in the
technical side of the work, working on math, basically,
but also interested in the relationship side of it, the
strategic side, thinking about basically how you help
these companies vet the company decisions. And during the first week of
training, one of the partners of the firm came in — and we use this term partner
kind of as a term of art, because, as the professor
mentioned, it's no longer a partnership — but he came in and said, when
our clients want to do really important things,
they come to us.

And when they want to think
about important things, they come to fill-in-the-blank
name of top tier consulting company. And that kind of action, and
actually physically seeing the results that you create in
the world was really appealing to me. And I hadn't done Strengths
Finder yet at the time, but I did it subsequently, and found,
not surprisingly, that that's where my psychological
reward structure was kind of geared towards. PROFESSOR ROBERT SHILLER: Yes? STUDENT: So, Peter Thiel, who
was the first investor in Facebook, and is currently on
their board, is now offering 20 people under the age of 20
each $100,000 to drop out of school for two years and start
their own companies.

And since you actually work for
Facebook, I was wondering what you thought of that. JON FOUGNER: Yes, I think
that's fascinating. And obviously, I don't work
with Peter Thiel. Look, I think, whatever
we can do to promote innovation is great. Now, if you're sitting here in
this room and you're saying, well, do I want to take this
risk of sacrificing this signaling device of this college
degree, and also potentially sacrificing some
structured classroom experience, in order to rapidly
accelerate, how quickly I got into entrepreneurship, I don't know. That's a personal decision that
is for you to make, and I don't really have any
opinion on it. Ultimately, for me it'll come
down to, do these companies actually end up doing really
cool things and building really cool stuff? PROFESSOR ROBERT SHILLER: And
I'd add, it isn't as risky as you might think, because Yale
will take you back, if it fails in a couple of years.

JON FOUGNER: One of our very
early employees was a Yalie, who had had an undergraduate
experience somewhat like you're describing, where, I
think, he had actually taken some time off to work
on startups. I think he came back, finished
his degree, and is now a partner at Benchmark, one
of the firms that I had on that slide. PROFESSOR ROBERT SHILLER: Well,
while they're thinking, can I ask you — I emphasized the core values
at Goldman Sachs, and it strikes me that Facebook
is totally different. Maybe I'm wrong. Can you tell me, what are the
core values at Facebook? If I were to read that list
that I just gave you from Goldman Sachs, how would it
sound to the Facebook people? JON FOUGNER: Yes, so I think
there are similarities and differences. I think, each of us has a core
constituency, who we wake up thinking about them, go to bed
thinking about them, probably dream about them, and know that
whether or not we serve that constituency will determine
the success or failure of the company. And at Goldman that
was the clients. And at Facebook, our number one
focus is the users and the user experience.

And we care a lot about our
partners, we care a lot about our advertisers, we care a
lot about everyone in the ecosystem, but ultimately
we know we have to serve the user as well. So, each company, I think, has
almost a maniacal focus on serving one core constituency,
albeit they're different. Now, in terms of the day-to-day
experience, I do think they're quite different. I think that what
I'm doing now is quite a bit more creative. PROFESSOR ROBERT SHILLER: You're
not doing spreadsheets.

JON FOUGNER: A little
bit, but — PROFESSOR ROBERT SHILLER:
You're doing it, still. JON FOUGNER: Yes, not as much. And I really love the creative
side of the work. If you think back to Steven
Schwarzman's lecture, where he mentions that there's no
flexibility for getting the numbers wrong, I mean certainly
we feel the same way, all the analysis needs to
be correct, but there's almost an ominous tone, when he says
that, whereas the way that we operate is knowing that we have
to move really fast in order to continue to innovate,
continue to stay relevant. And so, that means that
sometimes you make mistakes, and it's no secret that we've
made mistakes, and some of them have been big mistakes.

And we just try to minimize
the number of times that happens, try to fix them as soon
as they do happen, and just be honest about them, and
admit them when we make them. PROFESSOR ROBERT SHILLER: Can I
ask a question of the class? You set the example. How many in this class are
engineering majors? Not many. Like 5% maybe. What about science majors? That looks like 10%. See, you're kind of in an
engineering company, right? I mean, I don't know exactly
what Facebook is, but is there some kind of division here? Why aren't there more engineers
in this class? JON FOUGNER: That sounds like
a question for the class.

PROFESSOR ROBERT SHILLER:
Well, I can't ask them, because they're not here. JON FOUGNER: All the engineers,
who are not in the room, why are you
not in the room? PROFESSOR ROBERT SHILLER: But
I mean, is there a big cultural difference? I mean, are engineers
prejudiced against us finance people? You're there, so — JON FOUGNER: Look, I think
that product design and software engineering is at the
heart of the company, but as I mentioned, I was pretty
intimidated going in and saying, huh, I'm going to
be a business guy here. Am I not really going to be
able to have an impact? And I think the things that are
important for the business people are: One, to remember
what the core mission of the company is, which for us is
really all about the users. Two, to have a sense of
what is feasible. So, you don't actually have to
know how to write the code, or even necessarily how to mock up
the product, but if you're making recommendations that we
should build things that are simply technologically not
feasible, you're going to waste people's time and lose
credibility pretty quickly.

And then, three, I think, when
you do the analysis, engineers are going to want to see as
rigorous analysis as possible, quantitative analysis when
that's relevant, when that's possible, and to the extent that
you can bring that to the table, I think that's helpful. If you think about the business
world at large, one of the things, that's just
going to be increasingly important, is the ability to
design, conduct, and interpret statistically significant,
valid experiments. And this sounds like a pretty
straightforward thing, that you might learn by maybe
second or third year of college, and yet you get out
into the business world, and you'll find that many of your
colleagues, whether they're coming from MBAs or other
backgrounds, may not actually have that background. So, being able to bring that
sort of rigor to the table, whether it's at a consumer
internet company or an industrial company, anything
else, I think is very helpful.

PROFESSOR ROBERT SHILLER: You
know, I'm thinking, maybe I should change the name of
this course to Financial Engineering. That would bring
in the others. Because to me, engineering and
finance have a certain connection. They're both designing
devices. I think, we have another
question. STUDENT: Have you thought of
going back to graduate school, and how do you see that playing
into a career like investment banking? JON FOUGNER: Yes, I have thought
about going back to graduate school. I think that all of us want
to be lifelong learners throughout our career. There's a number of ways
you can do that. Graduate school is
one of them. Another is, going into
industries where you're just confident that everyone you're
working with is really smart, and they're going to push you
hard, and not settle for mediocrity, so you just know
you're going to learn by that pressure and that osmosis. And then, I think, there's
some kind of simple, structured things that
you can do, as well. I threw a slide up of a couple
that you can do in the comfort of your own living room
— the Meyers-Briggs and Strengths Finder.

But then also, you can leverage
having a workplace to do things like peer
coaching, career coaching, executive coaching. So, I kind of take a somewhat
agnostic point of view as to which of these tools I'm going
to use at any given time. I just know, that I constantly
want to be challenging myself and constantly want to
be learning more. PROFESSOR ROBERT SHILLER: OK. STUDENT: I've heard a lot
about issues with click-through rates on various
social networking sites, so if you could talk about, what you
think the putative value of Facebook should be, and whether
the current valuation is appropriate. JON FOUGNER: Yes, so, I'm happy
to share a little bit about click-through rates. I'll probably defer on the
question of how much the company should be valued at. Is everyone familiar with what
a click-through rate is? No, not everyone. OK. So, this is just
a simple ratio. Let's say, you show an ad some
number of times to users on the internet.

It's the ratio of the number
of times the user clicks on that ad to the total number
of times you showed it. So, if you show an ad 100 times,
and you get one click, you have a 1% click-through
rate. And if you think about, well,
why are people advertising? In marketing there's kind of
this concept of this marketing funnel, which is a little bit
silly, but it actually conveys a useful concept. Up here is everyone in the
world, and then here is the people we can actually make
aware of our product. And then here is the people who
we can actually make have an affinity for our product. And here is the people who we
can actually make consider purchasing our product. And then people who actually buy
it, and then repeat, loyal customers who buy it
more and more. So, we get to a narrower
and narrower pool. And what marketers are
constantly trying to do is, push people through this funnel,
so they can actually start with someone, who may not
know about the product at all, and then actually
get them to buy it again and again.

So, marketers use a variety
of different tools. Online advertising is one, but
that represents maybe 15% of the market, but it's a
relatively new one, and there's plenty of others that go
back decades or centuries. Things like television,
radio, print. These different media play
different roles in getting people through this
marketing funnel. And if you think about, where
online advertising originally grew up, it was really
towards the very bottom of this funnel. Of, OK, I am looking for a blue
iPod at the best price, that I can either order online
or that it's within five miles of my home. So, I search that on a search
engine, I see a list of vendors, and in that case, it's
really important whether I click through, because
that's basically the determinant of whether or not
we get them through the next stage in the marketing funnel. If you think about Facebook
advertising, that is one of the roles that it can play, but
it can also actually play throughout this entire marketing
funnel, where we have a reach of 500 million
people, and then you can target within that.

And then you can use things like
social context, telling you that your friend might
really love a product, to help build your affinity for it, on
through this whole funnel. So, for some of it,
click-through rate is relevant, for other of it,
click-through rate really isn't relevant, and you need to
think about other sorts of measurement. Things like companies
like Nielsen do. Like polling people and asking
them, OK, you saw this media, did it increase your likelihood to buy this product? Or did it make you aware of the
message, that the brand is trying to convey, that you
weren't aware of before? I think, it's one of a number
of metrics that go into assessing the health of the
business as a whole.

PROFESSOR ROBERT SHILLER: I
think we're essentially out of time, but let me just say,
click-through rates and marketing sound profit-oriented,
but it seems to me they have a social
purpose — one thing is that capitalism is
being transformed by this kind of thing, because it gets
people to buy things that they really need. It's like your Strengths
Finder or Needs Finder. And I have to applaud Facebook
and other companies. Finally, I'm going to invite you
back in another 10 years. This was great. JON FOUGNER: Thanks.

As found on YouTube

Google: 90-second Investment Analysis

We’re gonna analyze Alphabet (let’s just
call it Google for this video) as an investment, and we’re gonna do it all in 90 seconds… You wanna keep up with stocks but you don’t
have time to read a lengthy report on every company that interests you. You’re busy. I get it. I respect that. So I took the most important considerations
from my research and packed it into 90 seconds. Use this to decide if it’s worth your time
to research further, to keep up with stocks you already own, or to just check in on some
of the largest companies in the world.

Fair warning: I’m obviously gonna go fast. Let’s put up a clock. And let’s do this! Google owns and operates the two largest search
engines and the largest email service provider in the world as well as many other products
and services at the forefront of technology and innovation. It derives most of its revenue from its online
advertising services. As of this taping, it currently has a market
capitalization of over $750B, with a price per share trading near $1,100. To own or not to own, that is the question. For me, there are two big reasons you might
want to consider owning Google: [1] They are super healthy.

The company’s net worth is over $160B. With
over $100B in cash and short-term investments! Compare all that to its debt of only $5B.
So they’re more than covered. [2] They always seem to be at the forefront
of innovation. Of course, that may not always be the case,
but with their extensive work in self-driving cars, artificial intelligence, and a long
list of other exciting technologies, many of which they don’t share with us, they
have a lot of potential catalysts for even more significant future growth. Oh and the founders Larry and Sergey although
still active each pay themselves only $1 each per year, and that’s just adorable… But here are a couple reasons to not own Google: Google doesn’t pay any dividends, which
is common for its industry, but you should always keep that in mind. It’s PE is 45 compared to other internet
stocks averaging 30 and the S&P 500 around 18. And based on its projected earnings growth,
a discounted cash flow calculation suggests that the stock is pretty overvalued.

Clearly, the market is pricing in growth. The concern then would be: if there is a bear
market before one of those potential catalysts I mentioned actually takes off, Google would
likely fall faster than the rest of the market. But if that innovation happens first, I think
the opposite would be true. … so what do you say: buy or no? Do you think one of those catalysts can take
off in a significant way before any sort of major market correction? I look forward to continuing this discussion
in the comments. If you found this helpful and would like to
see more, don’t forget to let me know by hitting that like button. Definitely subscribe and click the bell so
that you can keep up with all the companies we cover as we continue to help you build
your rapidly-growing, highly-diversified net worth. I’ll see you in the next one. Take care!.

As found on YouTube

Investing For Your Future 1: Basic Concepts and Investment Products

well good morning everyone this is Michael gutter with from the university of florida and i'm here representing the personal finance team in the military family learning project welcome today we want to thank you all for joining us just so you do know a few days after the presentation will send an evaluation and links to an archive and resources and again we appreciate your feedback as always going forward to receive these emails please enter your email address in the chat box before we start recording which i think most of you already did of course let me be the first then to welcome you to today's web conference and again this follow us and learn a little bit more you can stay with us on social media so check out more information on the military family learning networks on extension org military families or our blog site of course we hope they'll chime in and add comments we also have a Facebook and Twitter page and we encourage you to also follow us on there and hopefully chime in and join the conversation which would certainly be great great today in particular we're going to be focusing on investing for your future part one basic concepts and investment products we're going to focus on finding ways to discover money to invest an explanation of how to calculate net worth review of compound interest using the rule of 72 discussion of the risk word relationship and risk tolerance an explanation of basic investment terminology an explanation of stocks bonds and of course understanding different parts a reminder this is part of a two-part series our second part mutual funds and tax deferred investments will be presented on March the 14th and you can certainly join us for that web conference and we hope you do we are have a very excited today to be joined by dr.

Barber O'Neill barber Neela holds the rank of Professor to in the school of environmental and biological sciences at Rutgers University and is a Rutgers cooperative extension specialist and financial resource management previously she was an FCS educator in Sussex County and has taught over 1100 classes to over 24,000 adult learners she also provides national leadership for the Cooperative Extension Program small steps to health and wealth she's written over 1,500 consumer newspaper articles in over 130 articles for academic journals she is a CFP practitioner a chartered retirement planning counselor accredited financial counselor certified housing counselor certified financial educator and certified in family consumer sciences needless to say as you can imagine we are all in excellent hands dr. O'Neill reserved or PhD and family financial management from Virginia Tech and holds a master's degree in consumer economics from Cornell and a BS in home economics from the state of university of new york at on Iona on e onata so she's an award-winning presenter and we're very excited to have you and I could not get that name right to save my life dr.

O'Neill before I came over to thank you but before I do turn it over to dr. O'Neill let me just comment an ad and will remind you all of this please make a note of two passwords that are going to be required to obtain the CEUs for this presentation they're going to be given during the presentation information worked for where to send these passwords will actually be given at the end and I want you to note that this will be a new email address that will be used in 2013 so reminder we're switching up the system a little bit differently this year so do make a note will be giving two passwords during the presentation and please make sure you note those at this time it's my honor to turn it over to dr. O'Neill and dr. O'Neill the floor is yours main okay thank you very much Michael and welcome to everybody to the webinar today this webinar is actually based on some work that I've been doing with library professionals both in on New York City at the New York Public Library one of the biggest libraries in the world and also a library system in South Jersey and with those programs what we've really tried to do is not turn librarians into financial planners but to make them aware of resources that are out there in their libraries and online that can help their patrons with personal finance so my objective today is to kind of do the same with our viewing audience I think many of you probably are aware of these concepts you probably taught them in many of your briefings for years so it'll be a good review but I think where we could really add value to your work too a is to introduce you to some online resources and curricula that are available online that you can use with service members so let's begin and as michael has mentioned we have a presence in social media and a blog so we do encourage you to follow us and we've already mentioned the CEU information so our objectives today are to kind of introduce you to basic investing concepts and terminology this is a basic investing course and that's kind of how we build it we're going to start out in this webinar talking about stocks and bonds and then we'll build on that and talk about mutual funds later on in the second webinar I'm going to talk about investment fraud because that's a key topic and unfortunately many service members are victims of fraud and then also as I mentioned throughout the webinar but particularly at the end we'll be talking about some investor education and protection resources that are useful in your work so just as a way of introduction investing of course is part of the overall financial planning process and if you look at this pyramid we've got wealth protection on the bottom and that's typically where we think of cash management people paying their bills on time monitoring their income and expenses perhaps and establishing a good cash reserve and typically financial advisors recommend at least three to six months expenses there are many people today going around saying that people should have even more the reality unfortunately is that less than half of all Americans need at least the three months standard so people may need to work on that before they really get going when investing to build that nice base so that if something happens in their lives they don't have to pull money out of an investment but they would have some savings that they could use for emergencies and then as we go up the pyramid we've got wealth accumulation and that's what are investing fits in so that's where people start to look forward set some financial goals and put some money aside move that money perhaps from save things environment obviously keeping some for emergencies and savings but taking on extra money and moving it into investments and of course the medium that many service members use is the thrift savings plan with payroll deduction and of course retirement planning and children's education planning are very important goals for a lot of families and then finally at the top of the pyramid we've got wealth distribution and of course that's the whole estate planning process where people draft documents like wills and trusts that direct where their assets with gum so just kind of an overview there so you can see where investments kind of fall into the picture usually with this next slide if I do this in an audience face-to-face with a group um I would have people talk about characteristics of savings and investments so we can try that here with the chat box on give it a try a try and see if let's start out with saving first for those of you who would like to participate what are some characteristics of savings products the saving process if you will you know we're just coming off America's Saves Week and military Saves Week so what's kind of unique to savings that might be something that an audience would pay I talked about anybody have anything there I don't know if I don't see anything in the chat box I say somebody typing yeah okay so we've got very conservative and safe choices and of course the liquidity is key to people can get their money out quickly without loss of their invested principal so that's an important characteristic and of course another one probably particularly in today's environment would be very low returns you know something maybe less than one percent on many of the savings products that are out there so if you got low risk you've got low return on transaction costs to access minimal perhaps yeah minimal costs you know you're not paying conditions or that sort of thing so we've got some good characteristics there let's move on to investing and what would be some characteristics of an investment products yeah Jerry I'm seeing your thing about savings yes unfortunately very low returns these days yeah I saw an article in The Wall Street Journal an advertisement actually three quarters of a page reading to advertise 1.011 percent I mean that's kind of the environment that we're in these days okay so on the investing side I see Lee's typing a long term yeah typically people are putting money aside long term typically I tell people unless the goal is more than five years away you probably don't want to be in an investment product like stock because a typical market cycle can often last a 45 year period on yeah real rate of return after inflation so you've got that potential because we can't guarantee that people are going to get any particular rate of return but we know historically that investments tend to pay higher rates of return than cash assets and give you the potential to grow your money and to hedge inflation Jerry saying potential for greater return but also chance of loss of principal absolutely on so you know it's kind of a risk/reward type of thing you're taking on more risk with the potential for a higher reward true expected real rate of return um okay and then let's look at the the middle of this Venn diagram what would be some things that saving and investing have in common so that would be the overlap area where it says both what would be some things that would be characteristics of both saving and investing give people a minute to type there yeah you're going to have some principal you know whether you're putting money into a savings product or an investment product yeah probably the big one is you're not spending because both saving and investing our kind of future oriented actions and obviously if you're doing some saving or investing you're not spending that money today and yes it does require some discretionary income so this is an activity you may want to do in in your briefings because it does get people talking about the two topics of staving and investing also if people have any misconceptions it gives you an opportunity to kind of clarify where people might have some misconceptions about either one of those and it also sets the stage for going into an in-depth treatment of investing okay moving on to the next slide just to kind of summarize the the Venn diagram activity savings is typically money that's held in short-term cash assets so we're talking about things like money market mutual funds money market deposit account passbook accounts things of that sort money used for emergencies and specific purchases and again these would be short-term purchases people want to do things in a relatively short period of time maybe within a year or so and then low risk low reward as we mentioned and then on the investment side money used to increase network achieve long-term financial goals and again higher risk but the higher potential for a good rate of return and a hedge of inflation on these slides unfortunately we're not going to be able to pop them up on during the webinar but this slides will be made available to you and I've tried to put into them as many resource links as I possibly can again these were some of the links that we shared with librarians when we did the programs so this is one from a thin web that just talks about saving versus investing so if you want to give people additional information or check them out yourself you've got these resource links also we're not able to show the investing videos but I did want you to make be aware that there are two really good video that are out there that introduce the concept of saving versus investing the first one is from common craft and I don't know if any of you have seen any of their videos they're very well done mate they use what's called a whiteboard technique where they literally have a whiteboard much like you would have in a classroom and through a combination of putting little pieces of paper you know kind of graphic images on the whiteboard and also scribbling on the whiteboard they're able to convey a message so what they do in this common craft first video they are on YouTube is they introduce saving versus investing and compare it to taking a trip and you go the long slow route which obviously is a metaphor for savings or do you go over the mountain very quickly with the potential to get there a lot quicker but also talks about the fact that you go over the mount and you could run into obstacles and of course very much like investing you could run into some challenges so it's a good video both of these videos are about two minutes long so they're just really quick to maybe show at a briefing sometime if you're using a PowerPoint presentation the second one from ING is actually done by somebody with a British accent and again comparing saving and investing and what they do is they compared to a tortoise and a hare so instead of having the fast route the slow route you've got the fast um you've got the fast hair and you've got the slow tortoise and again pointing out that you can get to a financial goal faster with investing but again noting that you'll take some risks along the way so these are both really good videos to introduce the concept of investing to people okay so why do people invest I for many people but unfortunately not all people you know we'd like to think that everybody is investing for specific goals but we've been doing a lot of research at Rutgers for years with our financial fitness quiz and we find that people aren't necessary early on writing down and even calculating what it costs to achieve their financial goals but some people do so obviously that that's an important thing because if you can drive your goals with a visualization of what you want to do with the money it's very motivational so whether it's a new car or down payment on a house or education for a child any of those financial goals and then of course to increase current income and the process is particularly important for people who retired who no longer have a paycheck and need to draw down from their assets and building wealth again just having come off America saves we were talking about building wealth and not yet it all starts with savings and then eventually ramping up from savings to investments and for financial security and peace of mind nobody wants to be one paycheck or you know a month or so away from financial disaster people want to know that they have some money to tide them over in times of financial stress and then for us to have money available in later life or retirement so these are all some of the key reasons why people invest their money and then as I mentioned before and this is an illustration that comes out of personal finance so any of you who have taken the AFC courses would have seen this in the garment and for book just to point out as I mentioned before that investing probably shouldn't be done unless you've got a good five year period because the economy goes through cycles and we've got um periods of expansion and then eventually we reach a peak and we go through a contraction and then we reach a broth or a low point and then eventually expanding again and of course in the current environment our expansion has been exceedingly slow and you know our domestic product growth has been very slow and it's just taking a while to get through this market cycle so the link that you have there is to a worksheet we have on our web at Rutgers and it's a goal-setting worksheet and what it allows people to do is just put a price on their goal to put a time frame on their goal and to just simply divide the time frame number of months for example into the price or the cost of the goal and figure out what you need to save on a monthly basis and it has three sections to it it's got a section for short-term goals intermediate or medium-term goals and long-term goals so again it's just a really good tool to get people thinking about not just in vague terms what they want to do with their money but very specifically and I don't know that all of you that when I do presentations with groups I like people to debrief it and people are very often proud to share their goal and it gets a gets good discussion going and then of course you can refer to those goals later on in your presentation and again people like to have a personal investment in a webinar or a briefing just knowing that their goals are being talked about okay so a little bit about goal-setting there and then another key on topic of course is taxable versus tax deferred investing and particularly when people are looking long-term particularly for retirement with variable various savings plans that are out there on that are tax-deferred I encourage people to do that and I know many of you are doing that with the TSP and what this graphic again from Garmin and Forbes books shows is that as you go further app out in time from ten years all the way out to 30 years the gap between the return on a taxable and a tax-deferred investment just widens because you've got all those years where you were able to keep all of your investment return you didn't have to pay taxes on some of it and again compound interest interest on interest it's just kind of snowballs over time so the link for the calculator on the bottom is an online calculator that people can plug in with various dollar amount and their various investment returns to kind of see what the difference would be so they can just make it more personal to their own situation put in dollar amounts that they might be planning to invest and be able to see the difference on a personal basis so that's what that's all about there and then just to summarize again I way the difference between tax exempt and tactic birds that we talk first about taxable versus tax deferred here we've got tax exempt vs tax deferred so exams or free means that you will not be paying taxes on the money that you earn so a good example there is US savings bonds which of course are a federal debt and they're exempt from state tax and then you've got municipal bonds which are a state or local debt and they're exempt from federal tax and that's due to something called the principle of reciprocal immunity which basically says the state's won't tax a federal debt and the federal government will tax the state yet and then another example of tax-exempt would be Roth IRAs which people fund with after-tax dollars and assuming they need the qualifications age 59 and a half and having an account open for five years they can receive the earnings on their roth IRA tax-free and then in first xfered as we've mentioned is where you postpone the taxes so you eventually pay them and you can wait as long as age 70 and a half before you're required to take the money out but eventually you will have to pay some taxes too and of course that would be your traditional IRAs 401 KS for 3 b's and of course the thrift savings plan for service members okay so um this is probably a good break point to just check in with michael and see if we've had any comments or questions related to anything we've covered so far I see that Molly's been posting all the link which has been great ya know I I mean I think people have been following along we haven't had a great deal of individual questions although now we have a few coming in but I did just want to point out that there's some additional calculators that are being shared Molly shared a few a nice goal setting worksheet a taxable versus tax-advantaged savings calculator and then on the IFAs page from the fyc s here at the University of Florida we have several calculators also that may be of help one about how delaying your savings can create an impact and also helping you to map out your savings from this create a plan aspect of it thinking about what our monthly savings would need to be so do check out some of those resources they may prove to be useful tools and available from some reputable sources okay so we go model okay great um categories of investments now that we're getting into the topic um there's two ways that you can purchase investments or two investments Giles if you will you can be an owner or you can be a loner so if you're owning an investment if it's what they call an equity investment where you have some ownership you own something you own a piece of a company even with one share of stock you were owning proportionately of course all that stock you have one share or if it's a stock funds you have a piece indirectly of all of those stocks that are in the usual fund you might own real estate or a real estate investment trusts maybe some collectibles or commodities of course would be a very aggressive investment strategy or you could be a loner so with a loner ship or fixed income investment your lending money so you could be lending to the federal government state or local government or even a corporation so you do that with bonds or bond mutual funds or in the case of certificates of deposit your money is being loaned to a local financial institution a bank or credit union for example and then of course there are some investment prerequisites on before people really get into investing they should have an adequate emergency fund as women before you want to have adequate insurance to you don't want to again have to pull money out of an investment because there was a risk in your life that wasn't adequately covered preferably a low or no consumer debt balance because if you've got eighteen percent credits you kind of it's like equal to an 18-percent investment if you can pay off that eighteen percent APR so you want to get dick taken care of as much as possible and of course have some goals to invest for as we mentioned before and then another thing that's really important is what I refer to as an investor's mindset in other words you have to psychologically be willing to accept the risk that is part and parcel of investing so in other words you need to accept the risk of possibly losing some of that principle and feel comfortable enough with that and again what we know from history is that people who invest for the long term tend to be rewarded and there's less volatility in their returns as their time frame gets extended but again people need to be aware of that psychological resistance if you will some people really freaked out when they lose money and they need to really be educated that it is normal for the value of most investments to fluctuate and they have to be willing to accept that okay network many of us probably teach this as part of our programs assets minus debts and it's not uncommon for young people I know among my college students at Rutgers to have a negative net worth because at a very young age 21 perhaps they probably have borrowed more money in student loans than on the value of their assets and you may find that with some of your young service members to that their network might be a negative number but certainly encouraging people to work on that and anything they can do to put money aside for the future and pay off existing debt is certainly going to result in improvement of their net worth so here's an example here simple calculation and 250 thousand dollars of assets 125 thousand dollars the depths it would be a hundred and twenty-five thousand dollar net worth and the two links there are at our Rutgers website the first one is a printed worksheet so paper and pencil basically and then the second one is an Excel spreadsheets where all the formulas are plugged in so what we have theirs is placeholders so we might have like a b c d and then people would actually right in what the names of those various assets or debts that they have our and again all the math is already plugged in there they just need to put in a description of the asset and depth and the dollar amount and then the spreadsheet will do the rest for them and do their calculation and again encourage people to do net worth calculations maybe once a year kind of around the same time every year this is a good time for a lot of people to do network calculations because it's tax time the weather is pretty lousy and lots of parts of the country it's a good indoor activity to do when you've got your financial records readily available and then this just shows an example of what a simple Network worksheet might look like where various assets are listed and of course you would put their value and then the same thing for the dead sides and then subtracting the depths from the assets to get the net worth one big question that a lot of people have is where do I find money to invest so we have a whole unit in investing for your future which is cooperative extension's basic investing home study course and i'll talk more about how you can access that and different characteristics of that course later on but for now you see the website there and these are just some strategies that are listed in unit 3 of that course finding your lattes you know your doesn't have to be starbucks coffee but whatever those small things are that add up to a pretty big sum at the end of a month finding a way to reduce spending on those items of course having money set aside automatic pay yourself first I getting some employer matching free money this time of course thinking about tax refunds encouraging people to save all or part of their tax refund using that form 8888 too attached to their tax return to have money placed into some kind of savings or investment product loose change making loan payments to yourself so if you're about to pay off a car loan for example repositioning that money to an investment product possibly getting some extra income from some after work activities perhaps moonlighting selling items might be a way to find money people using ebay or having a garage sale and then don't forget checking for unclaimed money servicemembers move around a lot that needs a lot of security deposits I literally found unclaimed money for one of my nephews and it was through and he was a service member and it was an unclaimed security deposit so you never know when you might find some unclaimed money that could be a source of investment principal okay and this slide just kind of shows this going to come up kind of slowly here on what twenty dollars a week can add up to and there's different rates of return obviously ten percent is little ambitious but it is close to the historical return on stocks over periods of time but you can see that money adds up even with a five percent return somebody putting aside twenty dollars a week it's going to have a six-figure sum after 40 years and each year when the Employee Benefit Research Institute does their retirement confidence survey they asked people could you save twenty dollars a week or an additional 20 week dollars a week if you're already saving and a large number every year say yes they could so it just becomes a question of you say you can do it but will you do it okay this is one of those passwords that michael was referring to later so just write it down you will need this word later on and they're like Michael mentioned before there's going to be two passwords so this is the first of the two and they're just kind of random things that we're using as a password okay so you all right chance to write that down another key concept that I'm sure many of you teaching your briefings and again I just want to give you some online resources to kind of work with that concept is rule of 72 again if you want to encourage people to invest for their future you want to show them how money can grow so with the rule of 72 you either have to know or assume an interest rate or no or assume a time period and then you can solve for the unknown variable so for example if we wanted to know the time period we could divide the interest rate in 272 so in the example there if we had an interest rate of six percent divide down into 72 we know that money is going to double in 12 years and by the way this rule works for any sum of money so it could be a hundred dollars it could be a hundred thousand dollars it's not the dollar amount but it's the relationship between the numbers that just seems to work out mathematically and then in the second example if you want to calculate the interest rate you would divide that by the number of years so for example let's say we wanted to double our money in 10 years we would divide 10 into 72 and we need an interest rate of 7.2 percent so the first link I just kind of describes the rule of 72 give some example like I did and then the second link on money chimp if you're not familiar with money chimp it's a really good financial calculator website and they have a rule of 72 calculator so again it can just help people to visually work out some examples and use the calculator to do that this is another way to illustrate rule of 72 I use this in my class at Rutgers again it comes from the garment and Ford personal finance book so it might look a little familiar to some of you it just shows rule of 72 with this bar graph so you can see with four percent rate of return it would take 18 years to double my money when I he mention this to my students again if you want to promote investing because there has been some anecdotal evidence and even some empirical evidence that young adults are pretty skittish about the stock market they've seen their parents lose a lot of money and of course they came of age in the financial crisis and so I asked my students okay how long is it going to take if you double your money and you have a one percent rate of return and again do the math one in 272 it's going to take 72 years and then I say okay what about half of one percent because some products are payment rate of return right now and then you do the math there it's a hundred and forty-four years and then of course they'll say to me well doctor I know I'm not going to live that long and I say that's point you've got to have some money and investments because particularly right now the rates of return on cash assets are historical Oh now obviously you need some money in cash for emergencies but if you want some growth on you've got to have some money in investments so this is just a good way to kind of make that point to an audience of particular young adults and then we move into another graphic from Garmin and fourth book which is the risk-reward trade off and I've been kind of hinting in that all along that you will have a higher rate of return but a higher risk level if you move up this pyramid so as we go from cash assets which form the base and we go up the ladder to high quality bonds and then maybe some junk bonds and of course we get into stocks and then eventually up to speculative stocks and commodities and futures we're taking on more risk so again this is kind of a risk-reward trade off people just need to know that this exists and to be willing to accept that as i mentioned psychologically or they're going to be a pretty stressed out investor and then of course risk is a chance of loss and there is no perfect investment we all wish there was it would be good great if we could have an investment that was risk-free and tax free and paid us you know ten twelve fifteen percent that would be wonderful but it doesn't exist if it did and I know about it I'd probably be on a Caribbean island right now enjoying myself and the Sun but there is no perfect investment all investments has some type of risk and as you can see on the slide these risks can be caused by a number of things on inflation economic changes political changes or uncertainty and that could be at home we've certainly had a lot of political uncertainty in this country but if you're investing abroad other countries could have uncertainty as well businesses sometimes sale and interest rates change so all of these things can affect investments and FINRA has a really good fact sheet that just get into detail about the different types of investment grips and we'll talk about a few of them here a business risk or business failure risk this is where you've got one company that is not profitable and we can all think of companies that have failed in recent years in fact if you google business failures or companies that have failed or companies that went bankrupt bankrupt companies any of those keywords will get you a whole list of companies that have failed in recent years on some companies like Enron you're thinking about mismanagement of funds others perhaps have just lost their business model over the years for example Blockbuster Video when video streaming came on board so we've gotten any examples there market risk is the risk of just being in the market and following the cycles so if you're a stock investor or you are a stock fund investor market has a good day your investment is going to be affected and likewise if market trends go down you'll probably be experiencing a downturn as well interest rate risk this is the inverse relationship between interest rates and bond prices so this is going to affect people in fixed income investments if they sell prior to maturity assuming there is a maturity if you're in a bond con there is no maturity but if you're an individual bonds of course there would be so many people are nervous about this risk right now because our interest rates are so low that if it you know eventually there's really not much lower they can go they're eventually going to turn upward which of course is going to reduce the risk reduce the price of fixed income securities and then we've got inflation risk so your investment may not keep up with inflation and you lose purchasing power and certainly we're seeing that with cash assets these days and then currency risk if you're investing in something overseas there is going to be the risk of how does that currency relate to the US dollar and then of course we mentioned political instability as well so again there are a number of risks not every investment has every type of risk some are particularly associated with one type investment or the other but they are part and parcel of investing so what do we do about that well we try to offset the risk we can't completely eliminate investment risk but we can try to offset it mitigated if you will so it's not as risky as it might be so one of the things that we can do is we can diversify and we've all heard the phrase don't put your eggs in one basket so we have several baskets some people wonder well what's a basket a basket would be kind of like an asset class so stocks would be a basket bonds cash real estate you know your major asset classes and there is a publication from SEC that goes into asset allocation and then another article from industry pedia was a lengthy effort as well and then another thing people can do is Jala cost average and really encourage your service members to do that and they will be doing it automatically if they set up on a regular investment in the TSP because they will be investing a regular amount whatever portion of their paycheck they decide to voluntarily contribute to that plan and then of course their regular interval would be their pay period so you've got it regular amount at a regular interval people can also do dollar cost averaging on their own for example if they had a mutual fund they could fill out the application and direct the mutual fund may be to take fifty dollars out on the first of every month and of course they'd have to provide their routing number and bank account number to be able to do that but again that could be set up automatically as well and what happens is that over time people will lower their average share costs and then the other thing that dollar cost averaging does is it takes the emotions out of investing because you've got it set up for dramatically it doesn't matter what is happening in the markets you're going to make your automatic investment unschedule so that's a good thing and you actually will buy more shares for your money when the market is on a down day so it's kind of like a one-day sale at macys you'll get more for your money on that particular day and there's a calculator there from American Century that people can just plug in some numbers and calculate your average share costs with a dollar cost averaging strategy and then here's an example worked out on this line here where you've got four different months january happens to be the market hi April happens to be below the share prices of course will be trending downward in this example you can see that the number of shares purchased is trending upward and when we add the number of shares together we can calculate the average cost per share twenty-five dollars and sixty-eight cents so people are getting kind of a weighted average of the prices that they're purchasing their shares at over this time period and then asset allocation is on the percentage of people's portfolio that they put into the various asset classes that we talked about before so you might have fifty percent of your portfolio in stocks and maybe thirty percent in bonds and twenty percent in cash assets and a number of research studies have found that it's a very important factor in the overall performance of an investment portfolio and people sometimes wonder well how much should i put in stocks or bonds and cash there is one guideline out there it's not set in stone but it is one that some people will suggest is that you take 110 minus your age and that would be the percentage in stock so if somebody is 30 for example 110 minus 30 would obviously be 80 that would be a pretty aggressive portfolio you'd have to look at risk tolerance to so again it's just a guideline but typically people will be more aggressive when they're younger and become a little bit more conservative as they get closer to retirement age if somebody is conservative though they might want to make their guideline 100 100 minus their age and then have even less put on stock in the portfolio so it is an individual thing but again it gives some kind of percentage and you can see from the pie charts there on the slide that obviously our stock investor the dark blue has three three quarters of the portfolio in stock versus only a third for our very conservative investor and this slide also from garmin and forbes book so you might have seen this one too is just showing a weighted average for the overall return on the portfolio the numbers are a little bit high on the cash assets but again it was what was available to me and I just really want to point out the process not exactly the return which you know be kind of hard pressed to find cash assets paying four point five percent today but just look at the math there it's kind of I explain this to my students is it's kind of like they're the grade in my class where the final exam is worth so much and different assignments or with so much so you calculate a weighted average and that's kind of what you would be doing with asset allocation and then this next slide also shows again graphically how you might have different asset allocations for conservative aggressive and then very aggressive portfolios and again kind of showing a range of how much you might have in stocks bonds and cash equivalents and then we'll finish up asset allocation and then stop and take a few more questions if there are any these are some calculators that are online so as you introduce the concept to service members if you have an ipod ipad or a computer handy you could without some of these calculators and be able to show them exactly what that might look at look like with various dollar amounts and again make it more personal for the person who might be attending your briefing on asset allocation and then finally on you really can't talk about asset allocation without talking about portfolio rebalancing and that's where you get back to your original asset class weights or percentages so the ways that you can do this are either selling assets in your overweighted class so let's say the stock park that has done particularly well you started out with seventy percent of your portfolio in stocks and now it's at eighty you want to get back down to that 70 you can do that by selling assets of course you probably would want to do that with taxable accounts because you're going to be triggering capital gains but within tax-deferred accounts that's not so much of a problem and then of course another way is just just to direct your new money into the underweighted class so if your stocks have become overweighted your bonds and your cash assets would have become underweighted so you put additional money into those underweighted asset classes and bring it back to balance that way so there's an article from industy pedia that describes that whole strategy of how to do that michael at this point good great point here on any comments or questions coming in I see lots of web links from Molly that's great putting up all the web links um I think a lot of people have some great or are taking lots and lots of notes this is a lot of wonderful information there too you know I wanted to talk to you too I mean you've been sharing some great ideas in terms of some of the basic content as well and and how do some of these issues come up as you're working with families and classes and such like that how do some of these topics come up or is it usually just for a class two people raise questions so I was I just wanting ten maybe stop and pause and think a little bit about how some of this is sir you know comes up in some of the practice if you will okay are you asking me or to ask participants all the above I'd like to hear from them to you know what they think but certain maybe to start the process we could certainly have you know you get your thoughts on that and then I encourage everybody else to chime in and think about how some of these things have come up what types of questions you've had so far you know from from just clients and families you work with so let's take a second and think about that and of course dr.

O'Neill lifts hear from you too well I'll answer first what people are typing I think there's no substitute for getting really familiar with the retirement plan of your audience you know if you're talking about investing and particularly the TSP so I always make a point to do that if I'm talking about a topic that has participant interaction with for example tomorrow I'm going into New York City to do a unit for the librarians on insurance so I made it a point to learn about all their health insurance policies so that when I'm talking about things like HMOs like it's not just an HMO it's their HMO so I think that's a really good strategy when we're talking about investing to to find out about all the investments that are out there and of course you might want to do some probing to about service members personal investments things that they're doing outside of the TSP but then it also of course mentioning the TSP I don't know that I see anything else there Oh define cash qualms yeah I see defined cash equivalents on that would be things like bank or credit union accounts they called statement savings or share accounts money markets money market deposit accounts money market mutual funds t-bills probably would fall into that category as well very short term assets okay why don't we move on and we'll stop we'll stop for another break a little bit later if you haven't seen towns on this resource this is a really good thing to have in your toolbox as well as a investment firm called Callan associates they put together this it looks like a quilt almost every year they update it so you get the past 20 years of investment returns and all of these squares with different colors are asset classes and they have it broken down pretty specifically I mean they've got value and they've got growth and they've got international and domestic and everything and really what you want to just say is a take home message from this is that there is never going to be a perfect asset class some years certain asset classes are going to do better than others if you look at that first row there in nineteen ninety five to nineteen ninety eight that was large company US stocks that's when we had that really big heyday where you you and unfortunately we may have lost dr.

O'Neill for just a moment let me just let let me just double check here and see where things are of course but I'm sure she'll be back in here I did just want to draw attention to a few things that have been coming up here of course as we were looking at some of these now Molly of course was mentioning that in the blog site will have all of these links posted available so do check out blogs extension org slash military families and of course I really appreciated Kent's comment to which a dr.

O'Neill would love hearing when she comes back which was just just the idea that you had commented on that a lot of people are you know have anxiety you know fear and I was curious Kent when you mentioned that issue about the fear that I was curious what what is it that people fear is and so as you work with servicemen and women one of the things I wanted to ask to was just a little bit in terms of what are some of the fears that they have is it just the fear of losing money the fear of the complexity of what's happening so I know it may seem like a simple question but you know the strategies we might take would a change depending upon that I see it looks like dr.

O'Neill is back in here so I'll leave you all to mull over that question in terms of what some of the fears our people have and dr. O'Neill I will gladly turn it back over to you ma'am you you you you absolutely I think that's great and Jerry I really appreciate your comments as well in response to our conversation here you know looking at the notion of starting conversations with clients letting them talk turns oh and is that dr.

O'Neill I'm back I don't know what happened there on the screen just went crazy but um can you hear me now we can hear you great man mom will you myself and turn it back to you okay um as I mentioned but you didn't hear me is you can't really talk about investing without talking about risk tolerance so this is the risk tolerance quiz that we have on the Rutgers website it was developed by John Grable and Ruth Lytton been empirically tested for over a decade and found to be a very reliable indicator of people's risk tolerance so I encourage you to check that out personally and to use it with your clients as well basic investment principles I'm some of the things that you really just want to get across to people that you work with is that even a small amount of money if you can invest it regularly it will grow impressively over time so I like to use the formula time plus money equals magic thick and of course that magic is compound interest also as I've been kind of alluding to volatility comes with the territory but not all investments are equally volatile for example you could have stock and you can have a blue chip stock that has been a company that's been around for a long period of time has had steady earnings is a leader in its industry and then you could have some startup small-cap stock that has an unproven track record so you're going to have a whole lot different types of volatility even though they're both types of stock if you will and again the investors mindset is so important as well and we've talked about the the trade-off between risk and return so this is another illustration this came from tiaa-cref that what I often will do when classes is just pop up something like this and say okay what's the take home message from this so I'm going to I'm going to do that right now I'm going to ask in the chat box if somebody wants to give me the take home message you've got four for different ages across the top 30 40 50 60 which chris actual results may vary so what's the message start early start young ok start early start young um start now be consistent um all good things uh yeah you got to take advantage of time and particularly when you're young and you have time on your side I always tell my students at Rutgers they have two things going for them they have time and they have human capital which is their ability to earn an income ok um investment volatility investment values will fluctuate and the way that you would be able to tell the volatility of an investment is with a statistic known as beta and the beta for the overall market is one so if it's a number greater than 1 you're going to be more volatile than average docks less than 1 would be less volatile so it's just a good thing and you can look this up in any investment resource so in the case of stocks you could look it up in value line for example it would give you the beta of an investment okay let's talk a little bit about common stock common stock of course is the share of ownership and a company and as I mentioned before even if you have one share of stock you are technically a part owner and you get to elect the directors of the company and vote on matters of importance to that company and if you don't go to the shareholder meeting which most people don't you vote with your proxy and most people of course do that online these days and there's two ways to make money with common stock you hope that the value of the stock will increase and you have a capital gain and you may get dividends although not every stock pays dividends this is something that's up to the board of directors of the company so FINRA has a good resource there that talks about investing in stock so that's something you might want to use and then of course when you're investing in stock you want to diversify among various industry sectors again not putting all your eggs in one basket so you want to have companies that produce products that people will use all the time regardless of market conditions like we don't stop eating or we don't stop using prescription drugs just because the economy is in a slump and then you might have so-called sickles that do tend to do better when we have better economic conditions so this slide just shows the various types of sectors that are out there [ __ ] you I think we lost your sound again dr.

O'Neill see here bear with us here sorry about the technical difficulties you you you certainly for a moment here I can certainly talk about some of the different types of sectors though well while we're waiting for dr. O'Neill like you know as we were looking here and dr. ania was commenting on one of the important aspects that we deal with an investment selection is thinking about reducing our risk by making sure we diversify among industry sectors now part of this reason of course has a lot to do with in particular that we think about the lack of correlation among certain industries and as a result the when when our investments are not all highly correlated were able to reduce the impact than of anyone downturn and one security on the effect of the other so it really helps us to think about then spreading our wealth across some of the different industry sectors that aren't all interrelated for example how consumer growth may function with respect to energy how how we might see things such as technology demands and how that focuses with respect to health care and thinking about that in many times while we can connect the dots and see how one might affect the other it's important to realize again that these are not all that we want to try and have as much as little correlation as possible when possible so this is great I wanted to it looks like dr.

O'Neill is back in the business so dr. Emil turn it back over to you man you're doing really well there I don't know what's happening here okay historical perspective just keep in mind that although we can say that common stocks have outperformed all other types of investments over long time periods it's not been a smooth ride so you can just see from decade to decade how stocks have had their ups and downs and certainly many of us can recall the 2000s it wasn't pretty necessarily to be on a stock investor but hopefully we were building up our portfolios with some dollar cost averaging and we'll see those returns on in the future this just shows on year by year the decade of the 2000s and again the ups and downs and we all remember 2008 as being particularly brutal for stock investors so if you want more money are more money more information about stocks there's two good resources there the second one is actually from investing for your future it's unit 4 of our course and it discusses stocks and other equity types of investments to figure out what types of stocks to invest in there are a couple metrics out there that people refer to one is called earnings per share and what you do there is you take the average tax after-tax income of the company / the outstanding shares and of course this information is readily available online or in library reference tools that people might use like value line so in this example here you can see the math figured out if you've got company income of 5 million dollars you've got 10 million shares it would be a 50-cent earnings per share and what you really want to look for as an investor is earnings per share growth you know if it's increasing from year to year that this is a good sign it means that this company's earnings has been improving and is on an upward trend soand us to PD has some good information about earnings per share and then also price earnings ratio which is another metric that people will look at where you take the price per share of the stock and / the EPS or earnings per share so in this example if you had ten dollar per share price 50 cent earning per share you would have a p/e ratio of 20 so what this multiple is really telling you is how much investors are paying for the earning power of a particular company and again you can't use it as prediction going forward like anything else in investing historical data is history but you can learn from it and you can look for trends that's what you want to see is a steady and or increasing p/e ratio and of course you want to compare p/e ratios within a particular industry for example technology firms so some time tested strategies for investing in stone Knox would be on making sure yes Oh could we just go back get several people that did not get a chance to see the second password screen we just flashed by a few slides ago could we go back to that for just a second certainly can there it is okay leave that up for a minute so make sure you get that jotted down everyone and thank you so much dr.

O'Neill sorry to interrupt no problem we'll make sure people get that okay so we were talking about the P ratio I think I just had explained that as investopedia so time-tested strategies for stock investors by what you know or what you get to know so what that means is you're going to need to do some research and get into some publications like Value Line to really explore the earnings of companies or if you don't want to do that you become a mutual fund investor and we'll talk about that in our second webinar on the fourteenth vine whole quality stocks diversified we talked about the Holocaust average another easy thing to do to grow your money is to arrange to have your dividends and capital gains reinvested in additional shares and again as a reduced risk reduction strategy don't invest more than ten percent of your portfolio in your own employer stock because again you're just concentrating too much money in one place switching gears to bonds bonds of course or debts or iou's I mentioned that they could be debts of corporations or government entities so you're loaning your money at Sal ownership investment and it with bonds your major risks are going to be credit risks because obviously that entity that you're lending money to has to have the capacity to pay you your interest and eventually your principal back so you've got to be aware of what the risk is their interest rate risk we talked about that inverse relationship between interest rates and bond prices inflation risk if the rate of return isn't giving you enough of a return to offset the effects of employee in and then another risk that you'll see is call risk so that's where the issuer of the bonds will call it back and you'll no longer have that investment and typically that's done when interest rates have gone down it's kind of like refinancing your mortgage so in this case the issuer of the bond is refinancing its debt and you no longer have that attractive return so when you're a bond investor these are some of the decisions that you need to make you need to decide on your wrist level whether you want to have investment grade bonds which would be the top four grades or well it whether you're willing to take more risk and possibly go with junk bonds which would be lower rated but again when they sell them they don't call them junk bonds they call them high-yield bonds because the only way they're going to entice you to invest in those is to pay you a higher yield but you're taking on more risk because of the lower rating and then you need to decide on the maturity do you want to have a bond that's 10 years or 30 years in the future so typically what you'll want to do is match the maturity to the financial goals that you've set for yourself and then of course looking at taxes do you want a taxable return or a tax-exempt return in municipal bonds so this last link here is representatives tax page and we've got all the tax brackets going back to the late 90s I believe you can look up whenever on tax brackets you're in this slide just talks a little bit more about the ratings for bonds so again investment grade would be the highest for rating so if we look at SP Standard & Poor's it would be triple a double a a and triple B and then similar rating is from Moody's and then once you cross under triple B you're in junk blog range but again there's junk and then there's junk your junk so you can see that you know when you get into the Seas and certainly D for default we're into some pretty high risk investments there so investopedia again has a really good resource on bond ratings Treasury securities on used to be years ago you needed to have ten thousand dollars to buy a Treasury bill but now all of your Treasury securities can be purchased with a hundred dollar minimum in hundred-dollar increments they are considered the safest fixed income investment on you often hear the phrase Full Faith and Credit of the US government because government can always print money of course local state issuers can't do that corporations can do that but the federal government can so what the government does is they have periodic auctions and then also a secondary market where people can purchase Treasury securities and the bills are short-term so that would be up to 12 months notes are medium term debt between two and ten years and then bonds would be Treasury bonds would be 30-year maturities and there's sometimes referred to as long bonds because of that long time frame and the source for information about Treasury securities is treasury direct gov which is the site for all the federal securities including savings bonds they have information about them as well with corporate bonds you're borrowing on well actually you're not borrowing the corporation is borrowing money for you you're you're lending money to a corporation and they're pledging to repay principal and periodic interest so corporate bonds are considered safer than company stocks but of course on a spectrum of risk would be considered more risky than your federal securities because of course corporations can't print money either so when you buy a bond you basically have a face value and with corporate bonds it's typically a thousand dollars so you deposit your face value you invest that and in return you get what's called a coupon rate because back in the day years ago people actually had ponds that they clipped and brought to a bank to get the return on their bonds these days of course transactions are all done electronically but the name coupon still stick so it's kind of a synonym for the interest rate risk so if somebody was getting five point eight percent and thousand dollar bond they would get fifty eight dollars and interest to typically on every six months so there'd be two $29 on payments and then of course eventually that bond would come due on its maturity date this slide from on personal finance to actually this is focus on personal finance this is the text that I use in my class at Rutgers this just shows kind of the strengths and weaknesses if you will or characteristics of different types of investments so I'll just point out some of the places where people are above and below average common stock courses high on growth preferred stock and corporate bonds are high on income government bonds are high on safety mutual funds are kind of average across the board and then real estate's characteristic is the low liquidity so you need to be aware that if you invest in real estate and then how people make money on investments you can make money in one or more of these following waves you can get rent so people who are real estate investors and have tenants of course are receiving rents in return for the use of the real estate or you can rent your money as you would as a fixed income investor so a company or government is renting your money and they pay you interest you can get dividends if a company board of directors pays out to a shareholders if you have stock and then of course a capital gain occurs only when your investment is sold and it will only occur obviously if the investment has increased in value so that's that old phrase buy low and sell high so ARP has a calculator on their website where you can actually look at the returns on your investments and kind of get a sense for what they might be total return is a phrase that's used in investing and what that really talks about is your gain and loss in value plus the investment earnings so when you combine those into one calculation it's it's the measure of profit that you made on an investment or loss before taxes and fees so when you hear that an in advertisement that our total return for the year what they're really talking about is what it investors earn for example from dividends and how did the values what what's the matter oh my back now okay um okay well trouble return again you combine the earnings from the investment with the gain of loss in value so two examples here where you have a dollar a dividend and a five dollar increase in value you would have a six dollar per share total return before expenses and before taxes obviously and then in the second example if you've got your dollar per share dividend but you had a five dollar loss and share value then of course your total return would be a negative from minus four dollars a share so he how has a calculator that shows how to do that and again you would put your own numbers in to figure out your total return what a transition just a little bit too one down our webinar with talking about on investment fraud because um service members can be a target on anybody can be a target but sometimes particular groups tend to be targeted and it's really important to know what would be some red flags of investment frauds so and how to protect yourself against some of them so one thing of course would be any kind of limited time offer particularly if it's a cold call where somebody just calls them out of the blue or online these days as well you could just get an email you can get some kind of scam coming through on email as well and a red flag of course would be a limited time offer a high guaranteed rate of return so you just want to ask a lot of questions get things in writing and always ask yourself why is a complete stranger giving you a hot tip you know what if it's wife a person calling me so FINRA has a lot of good information about how to avoid investment fraud and you want to check that out a couple examples of investment fraud particular types would be pump and dump so again you've got the promoter there particularly on email or chat rooms encouraging people to buy now or you're going to lose out on this spectacular opportunity and of course what these promoters are doing is pumping so that the price goes up sharply and then eventually they dump and sell out at the peak and then of course there once the hype is over the price drops like a rock and people lose money so again SEC has a really good publication about pump and dump schemes and then this pyramid schemes where you've got people who get into the scheme and then they're expected to find other people who become participants and if you're ever in a big audience a great way to illustrate this um very visually is to pick out six people from the audience and then have them pick out six people more so you basically have 42 people standing and then see if you can get to the third round if it's a big audience you might be able to do so but usually by the time you get to level four you don't have enough people so somebody in the audience will say well there's not enough people to get everybody filled in to the next level and then you say well that's the point and you can see that by the time you get to level 11 you need more than the US population and 13 more than the world population so pyramid schemes will peter out when there are no longer any more participants who are funding on the money paid to the prior participants so it's a good illustration of how to do that and then affinity freud's would be where you have a targeted group and service members could be one of those groups on some frauds target people who have a particular profession or an age group or religious group or a racial group and what they try to do there is to get a key leader in that group to kind of be the spokesperson if you will and then of course that key leader is all when duped as well think of all the people who were encouraging people to invest in Bernie Madoff securities who were also duped themselves but they thought that they were spreading a good thing so the key to this scheme of course is trust people tend to live the guard down when one of their own so to speak is promoting a particular investment so again people just need to ask a lot of questions and of course one of the big questions is is it too good to be true and just realize that when you see the word high-yield it often means high risk and again some of those buzzwords that should set off red flags or words like guaranteed limited time offer safe as a ccg risk-free or maybe it's a very unusual exotic product and people sometimes don't want to show their ignorance so they kind of make you know they let on that they might be willing to do something because they don't want to sound like they don't know what they're talking about so again if it sounds too good to be true it probably is and you need to just want to delete or hang up or just not get involved with something like that and there's another good resource link at the bottom of the slide so just in some summary of the content and then we're just going to finish up with some slides about resources investments of course are designed to achieve long-term goals you know if it's something short term or emergencies obviously you want to have that in cash assets your two categories are ownership and loan ership net worth of course is your assets minus your debts you can root use the rule of 72 to estimate how money will double the relationship between investment risk and reward and the fact that all investments have some types of risk the fact that volatility is part of investing and you kind of have to expect that there may be some fluctuation in either the value of the investment the return of the investment or both and that if an investment sounds too good to be true it probably is so some action steps that you all can take or encourage service members that you're interacting with to take is to write down some financial goals use that goal setting worksheet um make sure you put a gate and a cost on the goal so you can make it real specific take a look at all of the investment videos and websites that I've shared in this presentation and that Molly has put into the chat box with the links calculate your net worth if you've never done that before if you haven't done it in a while do an update and take the Rutgers investment risk tolerance quiz that will give you a score that will give you some indication of how you stand psychologically when it comes to investment and that will also give you some direction for the types of investments that you might choose start or even increase your dollar cost averaging investment habits you know kick it up a notch if you're investing three percent of your pay maybe kick it up to four or five percent of your pay so you're putting more money aside for example in the TSP and then determine your current asset allocation if you haven't done so so these are some resources that are out there on the extension of course we have the ask an expert feature and we also have our database too frequently asked questions so you can go to our website and get access to those tools better investing which used to be called the National Association of investors corporation is a group that helps people form investment clubs and provides information and guidance as to how to make stock selection another investment group is American Association of individual investors or aaii they have local chapters and the local chapters have meetings on various investment topics that is another good source of continuing education then of course the monthly publications Kiplinger's Money Magazine for example and then my money gov which is the web portal for 20 federal government agencies that have a of their financial information including investment information some investor protection resources would be the Securities and Exchange Commission on the federal level and state securities regulators on the state level and you can go to the nasaa org website that is the organization for all these state securities administrators and you can link to the one in your particular state if people have questions about a particular financial services advisor they can go to the Central Registration depository and see if there's any disciplinary history on a particular investment sales person FINRA broker check will also provide that type of information and then if people have questions about a particular brokerage firm that goes bankrupt for example that's where Securities investor Protection corporation comes in they're not going to protect you against a bad investments but they will provide protection if a securities firm arm goes under similar to what you might see with FDIC of a bank list your experience problems investing for your future I mentioned that before this is our extension course and it's free of charge we you can download it um you'll probably take an Internet cartridge to print the whole thing out but you could certainly do that we updated annually for tax law changes and any other changes so it's completely up to date you can pick out any number of units there's 11 them all together do it at your own pace and we add monthly investment messages each month so you can go back each month and get an update in fact we just loaded the March update on the other day and then FINRA also have as investor education modules they call it and this is actually information than when people get a FINRA grant as many libraries and United Way organizations have done and they're doing investor education through those grants they encourage the grantees to go to these module tools and use them as the basis for the content that's delivered in those programs so this too has 11 modules and if you print this out it definitely is book so you'll use an inkjet cartridge to print the whole thing out but it's good information obviously unbiased research-based information on investing and finally I'm going to just wrap up we're just about out of time here just encourage you to attend our second webinar which will focus in on mutual funds and tax deferred investment so it will be on thursday the 14th March at the same time eleven o'clock Eastern Time this point I'm going to turn it back to Michael to share any closing comments or any questions that have come in thank you very much Barbara this was a wonderful wonderful presentation I'm sure lots have done that as an is mentioning if you've not yet given us your email address please don't hesitate to do so now I wanted to make sure everyone did that also make sure you have on your calendars for part 2 mutual funds and tax deferred investments Thursday March to 14th at 11am I really hope you'll all be able to join us there as well lastly for those of you who have been patient i want to remind you about the CEU information for this [ __ ] for this particular web conferences send an email to FSA webinars @ gmail.com you need to include both of the CEU passwords given in this presentation as well as your first and last name especially as they are registered with AFC PE your emails must be received by this Friday March the 8th at five p.m.

Eastern time so again make sure you've recorded those passwords from earlier in today's presentation and then make sure you get your email in by this friday afternoon and lastly we will hopefully see all of you and your friends next week at the gate at the second part of this web conference series thank you very much for your time today and if you do have additional questions will gladly take those in the time remaining otherwise I hope you all have a wonderful afternoon and we look forward to talking with you next week you

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