[MUSIC] Hi, everyone. Well, if learning is about avoiding making mistakes, let me illustrate with this short video a few common mistakes I've encountered in this world of finance. So, these mistakes include adding percentages, and you will see what I mean in a minute. Or not treating the currency as a separate asset class, so not taking it as a separate decision. And finally, and more importantly, last but not least, the fact that we make very often a confusion between low and cheap, and high and expensive. Okay, let me start with the first mistake, and this, I will put in the form of a quiz and the quiz is as follows. Let's assume that in Year 1 you lose 50% on your investment. And in Year 2, you make plus 50% on the same investment. Now, quiz to you. At the end of Year 2, are you back to square 1? Are you on the same foot, on the same level, in terms of your capital? So, I give you 30 seconds to think about this. So, in the same spirit, let's assume that you have the following path of returns year after year. So, Year 1 you lose 10%. Year 2, even worse, you lose 45%. Year 3 you gain 20 and Year 4 you gain 35. Now, question to you. Same spirit, same kind of reasoning as this. If you've answered correctly the previous quiz, you should also be correctly answering this one. Year 5, what is the needed return, for you to get back to the same level I insist here, in terms of level of your investment as when you started, so prior to Year 1. So, you see that adding 10 minus 10 minus 45 plus 20 plus 35 is 0, so, there's the first temptation to say hey, we're back to square one. Adding all these percentages makes zero, so I'm back to my initial investment. So, I just would like you to check if this is correct. Okay so, you get the answer to quiz number 2 if you have correctly answered quiz number 1. And the idea here is very simple. If you lose 50%, assume you have $1,000, which you invest in a given stock, okay. And you lose 50%. So, your investment goes from 1,000 to 500. Then to get back from 500 to 1,000, you don't have to, unfortunately, increase by 50% but by 100. So, minus 50 plus 50 is not 0. It's actually much less than that. But, minus 50 plus 100 gives you back, brings you back to your initial investment. So beware, [LAUGH] you don't add percentages. Percentages are not apples which you can add. They're different animals. Okay, mistake number two, I've called that mind the currency gap. Okay, and I will illustrate this with a couple of charts on Japan. Why Japan? Because in Japan there's a frequent call which is made. It has been and still is a country which relies extensively on its exports. So a frequent call that we can find buying Japanese equities is to buy them, when we expect the yen to weaken, because if the yen weakens it will cheapen the exports. So, the country will be able to export more and hence, companies which are export oriented will benefit on the stock market, okay? So, let's assume that you're in early January 2013 and you expect the yen to weaken. So, you're on the lookout for a company which relies heavily on its exports. And you find these, okay? Japanese automakers, the obvious call, okay. So, first decision you have to make is, which you can put a basket and choose the six if you don't know which one to choose. Or, alternatively, you can have a look at these different brands and maybe, wow, there is one actually where there's no name. You have the sign. You know the sign, right? That red kind of triangle. It's Mitsubishi. You think, wow, interesting. The company has gone through some problems, defect. They had to bring back their cars for checking and all that but that's the past. We are at January 2013 and so you want to bet on this firm, okay. So, you buy the stock. You go and Google and you find out Yahoo Finance and you find that you should buy this company, Mitsubishi Corp. Okay, so, you buy it and this is your return. Up until May 2013 you make just under 20%. Okay, so, you're a happy man or a happy woman. So, you're a happy investor. Right, but that was a mistake actually. Mistake number one here you picked the wrong stock, you can see this on this chart. Actually, you should've picked Mitsubishi Motors not Mitsubishi Corp. For Mitsubishi Corp is a conglomerate. It's an industrial conglomerate which is actually, virtually everything including finance, energy, food, you name it, they're in, but not automotive. It's a separate company. And you see that actually Mitsubishi Motors, well, in over just five months, you would have doubled your investment. You would've from 100, you see that chart here, the red line, it's rebased. Both lines are rebased to 100. The red line goes to 200 by May 2013. Okay, bad luck. So, you made just under 20% and well, if you had picked the right stock, you would have doubled your money. Okay, but still, I mean, you are a happy investor, right? Because if you go up until, say you've made a decision to go up until the end of 2013, and we see that the end of December you basically have the same kind of return just under 20%. You are happy. Well, actually there's one thing which is you need to know here is that you bought the stock and the stock is labelled in yen. But say you're a European investor or your currency of reference is the euro, you're French or Italian, German, whatever. Okay, so, you bought the stock in yen and you're counting it in your account in euros. So, [LAUGH] what you need to know is that the yen will move against the euro and that was precisely your bet, right? The bet was that the yen would weaken. And if it weaken, it weakens against the dollar, against the euro. So, quiz to you here. Look at this chart. This is the evolution of the yen versus the euro of the year 2013. Now, question to you, has it weakened or not? This is a quiz to you. So, now you know, that this is yen per euro, so if the number increases, it actually means that you need more yen to purchase one euro. So initially, in January 2015, you needed 115 yen to buy one euro, and at the end of the year, you need just over 140 yens to buy one euro, so the yen has weakened. So, this is why actually the call for buying export driven companies was a good one. But in the end [COUGH] the picture is not so rosy. Why? Because if you look at the chart, you see Mitsubishi Corp rebased to 100. It has increased just under 20% on the left hand scale. We see the yen has weakened, so basically, the line you want to look at is the red line. Because it depicts the performance of Mitsubishi Corp in euros. And that's on the left hand scale. And you see it's gone from 100 to 95. So actually, what you've made just under 20% on the stock but you've lost more than that on the currency. So, in the end, you lost basically, you made a loss. So, the correct decision is to buy the stock and hedge the currency and we'll see that, when we talk about currencies you need to treat them as a separate asset class. By the way, in the end it made no difference if you bought Mitsubishi Corp or if you bought the right stock, Mitsubishi Motors, as you can see from this slide. You see that the latter of Mitsubishi Motors went for a staggering rally up until May and then the stock collapsed. Why did it collapse? Well, it goes back to all the problems they had with their cars. They had to repair them or take them away from the market and mend the cars. And basically, in 2014, following all these technical problems, they took the decision to withdraw from the US market, and the stock was heavily penalized on the stock market. So, in the next video, we'll see another frequent mistake which is made in financial markets. [MUSIC]
