 Hello and welcome to this session. This is Professor Farhad in which we would look at real assets versus financial assets. This topic could be covered in essentials or principles of investment course, undergraduate or graduate level. This information is covered on the CPA exam, BEC section, as well as on the CFA exam. As always, I would like to remind you to connect with me on LinkedIn. If you haven't done so, YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, finance, tax lectures, as well as Excel tutorial. If you like my lectures, please like them, share them. If they benefit you, it means they might benefit other people, subscribe to my YouTube channel and connect with me on Instagram. On my website, farhadlectures.com, you will find additional resources to complement your courses. And especially if you are studying for your CPA, CMA or CFA exam, you will find relevant topics that will help you substantially. So if you are looking to invest in your education and your professional certification, I strongly suggest you check out my website. So let's talk about first real assets. Before we talk about real assets and differentiate between real and financial, what are assets? An asset is something that you have to know in details when you study accounting. As an accounting professor, the first thing we teach is what is an asset? And what is an asset? Simply put, asset or assets are resources. What do resources do? If you have a resource like money, well, you can do anything with money. It helps you achieve your goal. You can start the business with money. Once you start the business and you have money, you can buy inventory. Inventory is a resource because you can sell them. You can buy land. You can buy equipment to produce. So simply put, assets are resources such as cash. And cash is the best asset because you can do anything with it. It's a resource that can help you do anything by land. Land is an asset building. But with cash, you can buy all of those inventory, equipment, knowledge. Knowledge is an important asset and accounting, we call it intangible asset. And this asset is extremely important in our economy today because our economy is dependent on technology. And most of the real assets and technology are intangible. Something that you don't touch. You don't see. We also have other type of assets like investments such as stocks and bonds. And we have all sorts of assets, supplies. Anything that you can use to produce income from is technically an asset. This is what assets are. This is the word assets. We're not, we're not, we are not defining whether it's real or financial. We're going to define that in a moment. Okay. So why are assets important? So, so why do we have to talk about assets? Well, think about it. Your wealth, your wealth is dependent upon how much assets you have. If you have money, if you can start a business, what you need, you need to buy equipment like for example, Tesla, Tesla started with an idea. Ideas are great. I have the greatest idea, but I don't, if I don't have manufacturing facilities, if I don't have a warehouse, if I cannot buy the technology to start my business, then my ideas are not good. So that's why assets are important because the wealth of the society is determined that it's productive capacity, but it's output. So you can take those assets and use them starting with cash. You can start with cash, for example, Tesla. First they need cash. Now we're going to learn about how they get cash first. They need cash with cash they can buy built, they can buy land, they can put a building, manufacturing facility, they can buy equipment, they can produce cars, so on and so forth and the wealth of the society will increase. But how do they come up with cash initially? This is what we're going to be talking mostly about. So we have two types of assets. Now we're going to differentiate between the two types of assets. We have real assets and we have financial assets. And this is the purpose of the session is to make sure you know the difference between real and financial, okay? What are real assets? Let's start with real assets. What you are seeing here on the screen, the cars, the facilities, those are real assets. So real assets are used to produce goods and services. What do you need to produce goods and services? You need equipment. You need inventory. You need supplies. You need a building. You need a warehouse. Okay? So they are used to do so. The real assets, they generate the net income to the economy. So when the company generated their financial statements, financial statement means how much profit they made. Well, how did they make the profit? Well, they produce something or they purchase something, then they resold it or they produce something like in the case of the manufacturing like Tesla, they produce car, then they sell that car. In case of Tesla, actually they are selling it at a loss, but the point is eventually they hope to sell it at again. But the point is, is you need to produce something, sell it, make a profit. So the real assets will help you make that profit, that net income. Okay? And again, what are we talking about here? We're talking about land, building equipment. Knowledge is also considered a real asset, especially in our economy. Again, it's taken a frontline. So every time you think of real assets, don't think of only assets you can touch and see because knowledge is an asset, is a real asset, but you cannot touch. It's called an intangible asset, but it's really under the category of real assets as far as we are concerned, because we're going to talk about the financial assets first. So think of real assets, the picture that you see in front of you. Let's talk about financial assets. What do you think of when you think of financial assets? Think of stocks and bonds. So what are stocks and bonds? Let's talk about financial assets. And we're going to talk much, much more about financial assets because when you invest, you don't invest in real asset. So when you invest in Tesla, you don't buy one of their cars if you want to invest in them. You buy their stocks. You don't buy their equipment. You buy their stocks. So what are stocks and bonds? Well, stocks and bonds are either a piece of paper or a computer entry. Most of the time it's a computer entry, especially Tesla. They will not give you a copy of the stock certificate because they don't issue it anymore because it's a costly for them. So it's basically, it's approved that you own something, but it's not really, it has nothing to, so if you buy stocks and Tesla, you are not really producing at Tesla. You are not directly contributing to productivity, but you are contributing tremendously indirectly. Okay. So what you are doing when you buy stocks and bonds, when you buy financial assets, you have the claim on the real asset or on the income. So if Tesla makes a profit and you invested in Tesla, then you can get share in that profit either if they pay dividend, if they pay cash, which is obviously Tesla doesn't pay dividend because they don't have, they don't have a profit yet, or claim on the real estate. For example, if the company liquidate, if Tesla liquidate and they sell their equipment, you have a claim on the real asset that you will get some money out of it. Okay. So again, think of Tesla stock now, not Tesla equipment. So you are buying Tesla stock. And today I'm doing this recording June 3rd. The Tesla stock is trading almost at $900. Although they are making no real income. So, but that's a different story. We can talk about this later on in the, so how do you invest? Like what is the idea of investing? Well, the idea of investing is think about your education right now. You are making an investment. What is an investment? What's happening is you're sitting in your classroom or in case of the coronavirus these days, you're sitting home listening to this lecture. What you are doing is you are investing in your education. Why? Well, you are investing for the future. You are delaying your consumption because you can do something else with your time. You can do something else with your money. You paid for your course and you are investing time. So rather than paying for the course, you can take this money and do something else with it. Not much these days. If you are still, you know, in quarantine, but the point is you can do something else with it. You can consume it. Also your time, you are investing your time. So all what you're doing is you are choosing between consuming what you have today or investing for the future. So this is the idea of investing. It's a delayed gratification, delayed of consumption and education is the best way to think about it. What you do is you are paying money today. You are spending time for the hope of making more money into the future. So that's what an investment is. You invest today. So today, every time you invest, you start with negative because you don't invest with positive. When you start your investment, you have to pay money. And how do you pay money? You buy stocks and bonds. Excellent. So when you invest, you buy stocks and bonds. You buy stocks and bonds of Tesla. When Tesla issues stocks and bonds, when they sell second bonds, you buy them. Now, what do Tesla do with that money? Now, simply put, you gave your money to Tesla. You gave your money to Tesla. Not when you buy the stock today, when they actually issue stocks. If you buy the stock today, you're buying it from someone else, from someone else in the secondary market. You give the money, your Tesla and Tesla give you a piece of paper called stock. So what do Tesla do with this money? The company will buy plant, equipment, technology, inventory. So the real return of investor is from the real asset. So when you invest, all what you're doing is you're giving them your money, the proceeds, you're giving them the proceeds. And with the proceeds, the proceeds usually invest, you would invest cash. We're talking about large companies. And what they do is they buy those assets that they need. They buy the real asset. So what happened is now you are hoping that the real assets are producing net income, which in turn, if they are producing net income, if they are producing profit, you are going to benefit from this profit. How are you going to benefit in one of two ways? Either the stock of Tesla goes up, which called capital appreciation, or Tesla, you remember you invested and they make a profit, they pay you dividend. Not Tesla doesn't pay dividend now, and we'll talk about dividend later on much more in details. But the point is, you share in that profit. But Tesla stock is going up for the past few years. So the financial asset performance is dependent upon the real asset performance. Although that's the case, although the real asset performance is what matters, we don't study the real asset performance. What do I mean by studying the real asset performance? It means going to the manufacturing facilities at Tesla and determining how efficient is a machine reproducing cars. You can do that. What you do is you're going to look at their finances. You're going to look at their financial performance through financial statements, through cash flow statements and your profit will be dependent on that. So we're going to focus on financial asset as a reflection of the real asset because you cannot really measure the real asset performance, measure it as an investor. You see that performance in the financial statements. That's why we focus on financial assets. And here's a picture of the balance sheet of US household. Just to give you an idea, how much financial assets do we hold? How much real assets do we hold? For example, real assets. And this is March 2017 from the Board of Governors of the Federal Reserve System. It's a snapshot, so the numbers might be different today. For example, just to get an idea, 25% of our assets are in real estate, 5% in consumer durables. Let's see, pension reserve 20%, corporate equity 14%, just to give you an idea. And this is our liabilities mostly in mortgages, we have credit cards, so on and so forth. This is the balance sheet of US household. Just to give you an idea, how much real assets or financial assets? Now, bear in mind, for example, of the stock market crash, the corporate equity value will go down and also of the real estate crash too. Like what's happening these days with the coronavirus. No one knows the outcome of this. If we have a crash in commercial real estate, then we might have a crash in real property. Then obviously, the balance sheet value of the US household will be less invested in real estate. In the next session, what we'll focus on is actually financial assets, because this is what matters for investors, financial assets. As always, I'm going to invite you to, like this recording, share it. Put it in playlist. If it benefits you, it means it might benefit other people. And don't forget about my website, especially if you're trying to supplement your accounting education. Study hard, good luck. And if you are still going through this coronavirus, stay safe.