All You Need To Know About Finance and Investment in Less Than an Hour
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Bill Ackman is a top investor in the world and has stated that he aims to have one of “the greatest investment records of all times.” He is the founder and CEO of Pershing square Capital Management, which oversees assets totalling $19 billion.
He was just 20 years old when he started investing and mastered the fundamentals of it.
The Big Think video was created for young professionals who just started out in the field, and those with more experience but a lack of financial knowledge.
Ackman walks viewers through how a lemonade stand was founded to show the basics. He also explains how equity is paid for by investors, which can be interchangeable with stock. The example shows that the owner begins with $750 and $250 comes from a loan.
Pershing Square Capital Management is the founder and CEO. In 2003 the hedge-fund was founded and acquired large shares in companies like Kraft Foods (JC Penney), General Growth Properties (General Growth Properties), Fortune Bands (Future Bands) and Kraft Foods. Ackman supports “activist investing,” which is the use of stock shares in publicly traded companies to affect management decisions in favor of shareholder interests.
Hi, I’m Bill Ackman. I’m the CEO of Pershing Square Capital Management and I’m here today to talk to you about everything you need to know about finance and investing and I’m going to get it done in an hour and you’ll be ready to go.
How to start and grow a business
So let’s begin. We’re going to go into business together. We’re going to start a company and we’re going to start a lemonade stand and now I don’t have any money today, so I’m going to have to raise money from investors to launch the business. What’s the best way to accomplish this? So I am going to create a corporation. This is where you file paperwork with the State. Once you have a name, you can start to create a company. We’ll call it Bill’s Lemonade Stand and we’re going to raise money from outside investors. We need a little money to get started, so we’re going to start our business with 1,000 shares of stock. We just made up that number and we’re going to sell 500 shares more for a $1 each to an investor. 500 dollars will be paid by the investor. We’re going to put up the name and the idea. We’re going to have 1,000 shares. There will be 500 shares. A third of his business will be his for $500.
How much is your business worth right now? Well it’s worth $1,500. The bank has $500 and $1,000, which is why I created the company. So now I need more than 500 dollars. What are my options? I am going to borrow money. I’m going to borrow from a friend and he’s going to lend me $250 and we’re going to pay him 10% interest a year for that loan.
It is not enough to just buy more stock. We need to borrow money. Well by borrowing money we keep more of the stock for ourselves, so if the business is successful we’re going to end up with a bigger percentage of the profits.
So now we’re going to take a look at what the business looks like on a piece of paper. We’re going to look at something called a balance sheet and a balance sheet tells you where the company stands, what your assets are, what your liabilities are and what your net worth or shareholder equity is. If you take your assets, in this case we’ve raised $500. We also have what is called goodwill because we’ve said the business—in exchange for the $500 the person who put up the money only got a third of the business. We own the remaining two-thirds. This money was used to start our company. It is worth $1,000 in goodwill. We borrowed $250. We’re going to owe $250. It’s a risk. So we have $500 in cash from selling stock, $250 from raising debt and we owe a $250 loan and we have a corporation that has, and you’ll see on the chart, shareholders’ equity of $1,500, so that’s our starting point.
Now let’s keep moving. We need to know what to do in order to launch our company. It is necessary to have a lemonade booth. That’s going to cost us about $300. It is called a “fixed asset”. It isn’t like water, lemons or sugar. Instead of buying something and building it yourself. It wears out over time, but it’s a fixed asset. The inventory is then essential. How do you make lemonade from scratch? It is necessary to have sugar. Water is what you need. Lemons are what you need…
The full transcript is available at https://bigthink.com/videos/learn-to-invest-and-start-a-business-in-under-an-hour