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How Stock INVESTING works (not trading or speculating) - YouTube
Channel: Richard Hopkins
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- I'm going to tell you exactly
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how investing in stocks works,
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so that by the end of this video,
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you're going to have a
very solid foundation,
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which means that you're gonna be able
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to get started much faster,
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and you're gonna become
successful at it much sooner.
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I'm also gonna tell you
the one very common mistake
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that new investors make, so
that you're gonna be able
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to bypass this costly mistake altogether.
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So let's get right into it.
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(funky music)
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Hey everyone, I'm Richard Hopkins
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and welcome to another video.
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If you're new here
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and you want to learn how to
invest in stocks successfully
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and reach financial freedom sooner,
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then start now by hitting
the subscribe button
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and ringing that bell, so
you don't miss anything.
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So the question we're answering today
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is how does investing in stocks work?
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So this is actually a pretty big question,
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and I wanna make sure you fully understand
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what I'm about to explain to you,
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because if you don't,
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then you're gonna end up
using the stock market
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as some kind of gambling machine,
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you're gonna end up losing
money and it's going to hurt.
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And it might even be so painful
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that it causes you to just avoid
the stock market altogether
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for the rest of your life.
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And I don't want that for you
because investing in stocks
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is such a great way to build wealth.
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So listen up, a share of stock represents
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a fractional ownership
interest in a company.
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This means that when you
buy a share of stock,
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you become part owner of that company.
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For example, if I bought
one share of Apple,
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I would be part owner of Apple.
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Now my percentage of ownership
will be very minimal,
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as you'll see in the example in a moment,
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but I would be an owner, nonetheless.
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Tim Cook, the CEO of Apple,
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would technically be my employee.
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All of the shares of a company
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are collectively known as it's stock.
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Another way to put this is that stock
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is equal to all of the shares
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that the ownership of the
company has been divided into.
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As a side note here,
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mostly people will use
the word stock and shares
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sort of interchangeably, like
I just bought Apple stock,
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or I just bought shares of Apple.
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When they're saying this,
they're meaning the same thing.
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Let's go back to the Apple stock example.
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As of July, 2020,
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Apple has 4.334 billion
shares outstanding.
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This means if you went out and
bought 1,000 shares of Apple,
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you would now own precisely 0.000023073%
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of the company, Apple,
it's pretty cool, right?
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So another quick side note here for you
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is when you're buying shares,
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you're buying them from someone
else who owns those shares
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and who is making the
decision to sell them.
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Buying shares does not
mean you're giving money
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to a company or something like that.
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Although, sometimes companies may decide
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to issue more shares as
a way of raising money,
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in which case the number
of shares outstanding
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would increase.
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But for the most part, when
you're buying and selling shares
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the party on the other
side of that transaction
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is gonna be another investor/shareholder.
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I don't wanna cram too much
information in this video,
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so if you wanna learn more
about what I just said,
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go check out this other
video I made called,
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"Where Does The Money Go
When You Buy A Stock?"
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So, as we were saying,
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Apple has 4.334 billion
shares outstanding.
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And I wanna make the important
point to you right now
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that if you were to purchase
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all of those 4.334 billion shares,
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then you would own 100% of Apple.
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And listen up, because this is important,
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to buy all of those shares right now,
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it would cost you $1.58 trillion.
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This number is also
known as the market cap,
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which is short for market capitalization.
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It's equal to the number
of shares outstanding
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multiplied by the price per share.
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Market cap is just a fancy way
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of saying essentially the price tag
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that the market is putting on the company.
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So when you see market cap,
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think price tag on the entire company.
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By the way, if you've received any value
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from this video so far,
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please smash the Like button
for the YouTube algorithm.
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It really helps out, and
I really appreciate it.
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I'm also gonna be reading
every single comment
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and responding to as many as I can.
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So if you have any questions,
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please put it in the comments below
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because I will be reading them.
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So the goal of the successful investor
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should be to accumulate shares,
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or in other words, ownership in companies
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that have good long-term prospects
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and also to buy those shares
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at sensible prices to what they're worth.
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I'm going to let you
in on a little secret.
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Just because a stock trades
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for a particular price on the stock market
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does not mean that that's what it's worth.
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Warren buffet likes to say,
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"Price is what you pay,
value is what you get."
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Even buying shares of the
most incredible company
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can be a bad investment if
you pay too much for it.
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Think of that one again,
this time in terms of
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as if you were buying the corner store.
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It might be a great investment
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if you pay a really great price for it,
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but it could also be a terrible investment
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if you pay way too much for it, right?
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Works the exact same way for stocks.
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What successful investors do
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is they calculate the intrinsic
value of a company first
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by making a rational prediction
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of the future cash it will generate
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and then they look on the stock market
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to see whether or not the
price it's trading for
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is favorable or not.
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As you've just learned,
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because stock shares represent
ownership in a company,
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it means that those shares
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have a calculable intrinsic value.
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So here's where the
interesting part comes in,
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and it's also why the
stock market is so awesome.
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The price that shares of stock
trade for in the stock market
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is not fully efficient,
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meaning that sometimes
what is being offered for
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is not equal to its real value.
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It is mostly efficient
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because the price is
gonna be partially based
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on its intrinsic value.
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However, stock prices
are also partially priced
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and valued by many investors
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who in reality are
actually just speculators,
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more like fine arts, increasing in price
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mostly just because
they've gone up so far.
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This is what can cause
stock market bubbles.
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If you've heard of bubbles
before, this is how it happens.
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Fear of missing out buying,
and irrational buying,
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people only looking at the price momentum,
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driving the prices higher and higher.
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The prices of stocks can often be driven
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to such ridiculous prices
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that have no real basis
in reality whatsoever.
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I'm gonna put this another way for you,
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stock prices are determined
by all the participants,
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investors and the speculators alike,
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doing the buying and selling.
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They're partially valued
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as if they're cash generating assets,
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but they're also partially valued
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as if they're Pokemon cards,
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or baseball trading cards,
or Picasso paintings.
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To learn more about this,
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check out this other video I made,
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"Mr. Market, The Intelligent
Investor's Best Friend."
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The fact that the stock market
isn't perfectly efficient
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leads to sometimes stock
prices being overpriced
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relative to their value.
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But it also means that sometimes
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stock prices are underpriced
relative to their value.
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That's where the opportunity is.
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Warren Buffet and all
intelligent investors
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practice something called value investing,
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which simply means acquiring
more than you're paying for.
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Value investors look for,
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or wait for the stock buying opportunities
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where they're buying stocks
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at a discount to what they're worth.
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Speculators, on the other hand,
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are treating shares of stock
as if they're pieces of paper
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to be traded back and forth
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rather than as ownership in companies.
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These are the people that don't get it.
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And honestly, it's actually the majority
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of individual investors
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and you don't wanna be like them.
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You're gonna be playing
a total losers game
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if you're valuing stocks as
if they were baseball cards,
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because it means you're
gonna have to guess
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how large masses of people
are going to behave.
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A speculator is
essentially trying to guess
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what the price is gonna be in the future
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by predicting what other
people's behavior is gonna be.
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Yes, even speculators are
inevitably going be right
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from time to time,
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but don't mistake a lucky guest as skill.
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Warren Buffett says this,
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"If you're an investor,
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you're looking on what
the asset is going to do.
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If you're a speculator,
you're commonly focusing
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on what the price of the
object is going to do,
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and that's not our game."
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So here's the bottom line.
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You've learned that a share of stock
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represents a fractional
ownership interest in a company.
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You've also learned what market cap is.
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Remember, it's the price tag on a company.
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And you've also learned
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that you need to buy your
stocks at sensible prices
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because paying too much
makes for a bad investment.
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So now you're probably watching this video
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and you're asking the question,
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"Okay, so how do I calculate
the intrinsic value
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of a company,
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so that I know that I'm buying
my stocks at a good price
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compared to what they're worth?"
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And honestly, that would
be another massive video.
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So if you want me to
make that video, I can,
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but please comment below and let me know,
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that way I know how much
interest there really is.
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Or, if there's another
video you'd like to see,
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please comment below and
let me know that too.
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I do read every single
one of these comments.
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So if you haven't
already, like this video,
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subscribe, and ring the bell.
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If you wanna keep learning,
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I made this other video
for you right here.
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So check that one out next
and I'll see you over there.
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