Bill Ackman explains all you need to know about the basics of finance and investing

Bill AckmanReutersBillionaire investor Bill Ackman.

Bill Ackman is one of the top investors in the world, and he’s said that he’s aiming to have “one of the greatest investment track records of all time.”

As the CEO of Pershing Square Capital Management, the hedge fund he founded, he oversees $US19 billion in assets.

But before he became one of the elite, he learned the basics of investing in his early 20s.

He gave a Big Think presentation in late 2012 aimed at young professionals just starting out, as well as those who are more experienced but lack a financial background.

We’ve pulled some of the highlights from Ackman’s 40-minute, computer-animated lecture “Everything You Need to Know About Finance and Investing in Under an Hour.”

Ackman takes viewers through the founding of a lemonade stand to teach the basics, explaining how investors pay for equity, a word interchangeable with “stock.” In the example, the owner starts with $US750, with $US250 of that coming from a loan.

Ackman presentation 1

YouTube/Big Think

Here’s an income statement tracking the healthy growth of the lemonade business. By year five, the company has seven stands, supported by an increased margin on products, and makes a profit of $US2,311 (earnings before tax).

Income statement

YouTube/Big Think

A business owner can take money from a lender, who profits from interest on his loan, or an equity investor, who buys shares in the company. An equity investor stands to make much more money than a lender due to the level of risk involved — if the company doesn’t make money, neither does the investor. 

Lender v equity

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For instance, an investor makes a small amount of interest from government bonds because the risk is low — the US government is more secure than any corporation. An investor makes a large amount of interest from loans to business owners because the risk is high.

Bonds v investor

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Equity is a “residual claim” because debt must be paid off before investors can profit. Shareholders may make money from company profits called “dividends.”

When a company has grown significantly, its owner can sell it for a typically large sum of money, in exchange for control of the business and a shot at future profits.

Selling

YouTube/Big Think

Instead of growing a business further, an owner can pay himself dividends to put cash in his pocket rather than in the company.

Self dividend

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At a moment of strong growth, the business owner can either share profits with a private investor or go public.

Alternatives to selling

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When a business files for an initial public offering (IPO), its owners offer a portion of it to the general public, which raises cash, and the company gets listed on an exchange. It requires being transparent and, in the US, reporting to the Securities and Exchange Commission.

Going public

YouTube/Big Think

Ackman’s nine tips for successful investing are about minimising risk.

Keys to investing

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Similarly, he recommends that you only begin investing when you pay off debt and set aside an emergency fund.

When to invest

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And when you do become an investor, Ackman says success requires developing a resistance to the human tendency of following the herd’s reactions to short-term market fluctuations.

Withstand volatility

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If you don’t have the time or desire to invest in individual stocks, you can invest in mutual funds, large pools of funds managed by a professional investor.

Mutual funds

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You can also outsource your investing to a money manager.

Money manager

YouTube/Big Think

Ackman says his presentation is just a brief introduction to the world of finance. For a next step, he recommends Benjamin Graham’s classic “The Intelligent Investor”), which Ackman says changed his life dramatically after he read it in his early 20s.

Intelligent investor

YouTube/Big Think

Check out the full video below:

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