 How's it guys? It's MJ and in this video what I want to do is talk about the environmental influences and specifically what you know the various main investor classes how they interact with it. So I want to start off with households or private individuals and if we have time I'm going to go into the other ones being you know financial intermediaries, corporate businesses, foreign investors and so forth. But if I get time otherwise I'll just make separate videos for them. So I'm looking at households these are videos around the fellowship exam for finance. Remember they are raw, they are unedited, they are unscripted. I'm going to be giving a lot of my opinion so feel free to query what I say in the comment section below. Without further ado let's get into the material and very much I mean we have the syllabus objective which asks us to demonstrate knowledge of the influence from main investors classes over the commercial and economic environment. And I want to start off with households. Now what are some qualities of households? Well they're quite small in sense of their financial influence so small financial influence but there are many of them so they might be individually quite small but they are many of them. And what's interesting is when you look at households or private individuals I know this is one thing that we get drilled into while we study actual science is to be careful when giving financial advice specifically to your friends and family because before you can tell someone oh what share to invest in or what to do with their money you need to be a financial advisor and the reason why you need to be a financial advisor is because you need to consider all the various factors that influence someone and their financial position. I mean across all the investor classes we're going to see that each category will vary with regards to say time horizon. Are you investing for the short term or for the long term? What is your appetite for risk? And I mean you can also have a capacity for risk. And it's quite interesting that not often are these two balanced you might find someone is very eager to take on a risk but might not actually have the capacity to take on risk or someone will have a large capacity for risk but then be risk adverse. So it's quite interesting how those two aren't always in tangent. Also the tax position is very important remember I have made a whole video explaining why tax is stupid so go check out that video. But now what we're going to also be looking at is well what this means is that some assets or some investments will be more risky to some people and be less risky to other people. Because when you look at say a household this may be use a different color. When you look at a household there's there's all these very different considerations that you need to make. So when a household comes to make an investment they're you know they're focusing on what are their liabilities. Do they have some children? Do these children need an education? How old are the children? That's gonna you know say how many more years of education you need to be funding for? Do you have a bond on your house? All those type of things. So what are the current liabilities? Also what is their liquidity position? You know do they have a lot of money on hand? Have they tied up all their money in say their house? What is their liquid position and how will that affect their choices? Also uncertainty around future cash flows? So this can very much go down to what type of job they have. Do you have a very stable job where you're going in from 95 you're getting a very nice salary at the end of every month or are you more of say a consultant or an entrepreneur who gets a lot of money one month, no money in the next month and you know cash flows are a little bit more uncertain. That's gonna influence your decisions. Again your tax position, what tax bracket you're in, how well you understand investment. So level of investment expertise. I know a lot of people will say finance it's way too complicated for me. I'm rather gonna just give all my money to a financial intermediary like an asset manager and they can look after it. They can invest for me because I actually don't know what's going on. I mean and that's likely because the stock market and bonds and all these types of things are intimidating at first. Also we also want to look at what is their stability of their current assets. So if someone has got all their money in say a house, how will that stability be to someone who's got all their money in the say the stock market in very volatile shares. Another thing is the characteristics of the investment and risk characteristics of assets available. So what I mean by that is someone might want exposure to the property market but they might not be able to afford a brand new house or a part of the house or there might not be any financial instruments to give them exposure to property. So we need to consider what assets are actually available before giving someone financial advice and then what we've spoken about their appetite for risk can also be thought of as their attitude to risk. Because I mean when you look at an individual, let's use another color. You've got an individual that individual might have dependence. Little babies or little kids and these kids add a lot of uncertainty, their big liability as far as you know an education and all these various expenses that need to be made for them. Now there's two things that people generally do. They either buy insurance products such as health insurance, life insurance and all those various things and you know save towards education annuities and all that type of stuff. All they get something known as like a nest egg where they self insure. So sometimes you see in the movies people they put a bunch of money in a jar and then if anything bad happens they use that nest egg to pay off whatever bad event has happened. So depending on what they're doing or what their insurance products are and what the other assets are and the entire financial position, you need to consider that before you can give someone advice on what shares or something to buy. I mean a lot of people have got a large proportion of their wealth in their own property. So some people they will have a say a five million rent house and their total wealth will be say seven million and that means I mean a five million house versus seven million total. A large proportion of that is in the property which means that property prices go down. They lose a lot of their wealth. Also property is not very liquid. So if there is a problem there in a little bit of a sticky situation. Another interesting thing with regards to households in which the notes talks a bit about and I disagree with is it says that households desire diversification. Okay. And what the notes say I mean it makes a lot of reasonable sense but it's not empirically backed. I mean there's not actually enough evidence to support what the notes are saying. What the notes are saying is that households want diversification because of the fact that they've got so much money in property. They do want to say diversify in shares and equity and bonds and all those other things. And diversification makes a lot of theoretical sense because it brings down the theoretical uncertainty, the theoretical volatility. So it is reasonable but it's not empirical. I used to call it empirical, empirical. What do I mean by it's not empirical? Well, this leads to one of the biggest unsolved problems in finance and that is something known as the equity home bias puzzle. So let me write it down here. The equity home bias puzzle. Okay. And what this equity home bias puzzle basically says is it says that the evidence contradicts the statement. Okay. When they look at the populations of the various countries, they see that people's investments habits tend to invest in their home country. Okay. So they find that say something like 90% of an individual's wealth is in their own country. And that's a little bit crazy. That that is I mean, let's say South Africa. Let's let's talk about South Africa. So yeah, South Africa. I know a lot of friends and family. When they talk about diversification, they're thinking of, okay, I'll have my own property. I'll have shares in the Johannesburg stock exchange and I'll maybe buy bonds that the South African government issues. And it's all local. Very few of them have any international assets. Okay. And very few of them who do, they only put in a very small percentage. I think my brother puts a little bit, you know, he's got a master's in finance. So he's smart. You know, so he's diversified outside. But the majority of people, they tend to buy local assets, which is really weird because specifically in say a country like South Africa. And I mean, a lot of countries today, this this risk is getting bigger is the political risk. Okay, the political risk, you know, all say the currency, I mean, South African currency has been very volatile this year. And by having local assets, we are exposing ourselves to currency and political risk, and we're not diversifying that away, which is really weird. Why, why aren't we buying international shares? And this is something that we need to think about when we start considering the economic environment. And that is that even if things get really bad, it seems that the households are still going to buy local, local investments. Now, one of the questions or one of the the proposed solutions to this is that they say that capital is immobile. And I know again, that is something that happens in South Africa, and maybe a few other countries also have it, is they have capital flight restrictions, which means you cannot take out a certain amount of, of currency out of the country. I think it's limited to a few million rents every year, that you are not allowed to take out. So if you are a billion in South Africa, you make a billion rent, you can't take all of it to the Bahamas and set up a, you know, a lifestyle living on the beach there, the government will prevent you from doing that. However, I mean, the capital restrictions, like I said, are quite high. I mean, I think it's two million or five million, I know, somewhere around there. I mean, that's a lot of money. I mean, that means that every year you can take, you know, less than that, and purchase, say, a little bit of equity in the American stock market and the British stock market and Australian stock market and Japanese stock market. You know, we have the potential to do that. And especially how advanced financial intermediaries are today, there are these products available, yet people don't seem to take them. And I mean, another interesting thing with capital immobility is when you start looking at things like Bitcoin and these various cryptocurrencies, which seem to provide a loophole or a way around leg legislation and regulation that prohibits capital flight, because what you can do is buy a whole bunch of Bitcoin in your home country, fly to another country and exchange your Bitcoin for that local currency, and you can move millions or even more money this way. And this is why Bitcoin's value, I mean, seems to keep going up is we see this is happening a lot in China. People are using Bitcoin to get around the capital restrictions in that country. But at the end of the day, I mean, what we just need to remember is that households are a player in the economic environment. And though individually, each person is small, there is a lot of them. And a lot of them, they can cause quite a lot of interesting things to happen. I mean, one of the big things is bubbles. So what happens here is it becomes a fashionable to invest and say private equity startups or something like that. And people you know, herd mentality and all those various things, they want to get in on the action. And we might see a lot of people buying into these assets that overvalues them. So one way you can make money in the stock market or in the asset world is if you have a good understanding of what households want, what are households buying? And what is that doing to the price? Does that make the let's say households all want government bonds? They say that's the flavor of the month. If you know that and you have the data that shows households are buying, you know, an obscene amount of government bonds, then you know that the government bond value is going to be overpriced, and that you should either short that bond or not enter it into a long position and rather look at other assets. Because remember, households do not have the, you know, investment expertise. There is a lot of irrational behavior behind them. And like I mentioned, there is this thing known as herd mentality. And, you know, it's quite interesting. I mean, when you go into the whole household, what they're doing and what, what, you know, assets they're enjoying and all that type of stuff. And I mean, one way you can find that out is by doing a survey. Although I know some people do get uncomfortable when disclosing what assets they have and what the investment habits are. But at the end of the day, what we're going to be seeing is that whoever has the most data can actually make money in the stock market. And the reason why data is so important is because sometimes the theory will say things like diversification is good. It's what households want. But the data, the empirical evidence will suggest otherwise. And that may be open some opportunities, or it might, you know, help you with managing your very own risk. But overall, I think that's what I want to talk to you guys about on households. If I think of anything else, I will throw it down in the comment section below. But let me know what your thoughts are. And I'll see you next time when we're talking about financial intermediaries. I think let me rather make a better video, sorry, another video so that this one is not too long. But yeah, otherwise, guys, thanks so much for watching. Hit subscribe, I will be releasing these videos daily. So yeah, stay in contact. Cheers.