[MUSIC] Hi again. Here, I want to show you with this short video another common mistake which is made in financial markets. It's the confusion between low and cheap, and high and expensive. Let me illustrate this with the following charts. The blue line on this chart is the world index for equities. It's called the MSEI, World Equity Index. You see that it has been rising from a base, it's rebase to a 100 on January 2004, and you see that it's been rising steadily up until summer of 2007 on the whole by 60%. Okay, now take a look at the red line. The red line is depicted on the right hand scale. Basically this line is telling you a very important concept on the stock market, i.e, to measure how expensive it is. And basically it's the ratio of the index divided by the earnings of the company which form the index. So it's what we call a price-earnings multiple. So with this ratio we are measuring whether the stock market is expensive or not. The higher the ratio, the more expensive the stock market, why? Because you're paying a multiple, a higher multiple of the underlying earnings of the company. So for instance, you see January 2004, the red line stands, look on the right hand scales, at roughly 17, 17 times. We say you pay 17 times earnings, the stock market. Okay. See the stock market has been rising up until 2006. Summer before there's a slight correction. And you see that the red line has actually been falling. So the stock market here was more expensive before it rallied then after it rallied, after it increased by just on the 40%. The stock market after this rise is actually cheaper than before it rose. This is something to know, and it's something that people are not aware. Normally, they say, okay, if the stock market has risen by 40% it should be more expensive. Right? Well not necessarily, and this just brings this point home. Now, see even further, after the mid 2006, it had a correction then it resumed the rally. And it went up to 60% just before we know what happened then, as we'd see that with the following chart. There was a severe crisis. But, you see that the ratio of price to earnings. The PE multiple is actually lower even at the peak of the market in 2007. It stands at just 14 times. So a stock market can be cheaper at the peak then at the bottom. Or if you prefer a stock market can be more expensive in the bottom than at the peak. So to get the full picture, you cannot just look at the price index and how it moves and the higher it goes the more expensive it becomes. You need to put that in perspective. So, this is a quiz to you now. Why is the stock market cheaper after a 60% rise, increases by 60%, and we say it is cheaper, why? So the answer is, why is it cheaper, the stock market after it rose by 60%? Well, simply because earnings rose even more. So if they rose by even more than 60%, the ratio P divided by E, the ratio of price divided by earnings, has actually fallen. This is why the stock market can be cheaper after increasing by 60%. Okay, so but we have to know that if evaluation does not give you the full picture. Indeed, if we look at what happen next, you'll see that the stock market actually crash and went from 160, here, we based to a hundred in January, 2004. It went to just 70 just in a matter of two years. This is the great recession. This is a subprime crisis. And actually, it illustrates the fact that the stock market did not come down because it was too expensive, as we just saw previously, but because there was a problem of excessive leverage. People wanted to take too much benefit of this rally. So they increase leverage and there was a problem in the real estate as we find out later on with the subprime crisis. So indeed, valuation does not say everything. A stock market can adjust abruptedly as it did here even if it's cheap, okay? Fine, now in conclusion of these two videos the mistakes, some common mistakes which you will not make [LAUGH] following this course is adding percentages. And you will be probably be very careful when you want to select a company, if you want to select the company you want to invest in. And you're going to also be careful about treating the currency decision separately. And finally, and last but not the least, this is very important. Just realize that a stock market or an individual security can increase and can actually become cheaper as it increases. Or conversely, it can fall and it can become more expensive as it falls if earnings drop by more than the stock drops then the stock actually becomes more expensive at the bottom. [MUSIC]