[MUSIC] Google the word value and you will get over 2.5 billion hits. It's a word with many meanings Wikipedia associates value mostly with business. As does Finance for Everyone, which is about money and how we raise, spend, and manage it. Of course, money was created as a medium to store and count value. Apparently, by government decree or [FOREIGN] in China over 1,000 years ago. In this course, it's not as much about how value is represented by money, decree, or fear, but why and to whom value is important. And most of all how value is created, distributed, and destroyed. Let's start by connecting a few threads from the two prior courses in this specialization, to the idea of value. Decisions began by differentiating managers who are motivated by a variety of reasons that count for value such as personal gain, power or a competitive edge from owners, stockholders motivated by very different metric for value. Price appreciation also known as capital gain. When this misalignment of values occur, when manager not serving the interest of the owner and stockholders. While this creates agency costs that come into form of incentives, oversight, audits and controls to encourage alignment. These are expensive, and ultimately they destroy the value of the firm. Besides important behavior motivations affecting value, another important takeaway from decisions was the notion of time value. Time value. Wasn't just about mechanics of compounding future values and discounting present values but also about the significant role of ever changing interest rates. Then in the next course, markets, we saw how central banks have been relying on interest rates and perhaps desperately using low and even negative interest rates to kick start economies. We connected interest rates to yields and required returns invaluing the bond, stock, commodity and derivative markets. These financial markets are volatile places rooted in a history of turbulence that exhibit creative destruction in the cycles evaluation. In these places, economic, political, and psychological forces bear on buyers and sellers who collectively determine value in the quadrillions of dollars. Just a gentle note for our participants, I just used quite a bit of jargon and to understand these yields, required returns, and a description of the financial markets I've mentioned. Please visit us Curation Corner, that lists brief videos to explain these terms, so that you can get the background, and, now we will be in a quest to better understand just how financial experts arrive at a value. This is extremely important, if you are trying to make the case, that your idea has more value than somebody else's idea. Not surprisingly, the competition for ideas happens wherever you work. However, would it surprise you to learn that these ideas are almost always evaluated by commonly accepted techniques? Well, that's exactly what happens, and probably the most valuable takeaway from this video. Let's take a couple of examples to see how widely these criteria can be applied. Suppose you want to manufacture a new technology which experts have determined will or has the potential to open a market bigger than the personal computer, tablets and cell phones combined. And that this idea will play out In our lives, not in the next 50, but in the next 5 years. Did I get your attention? I just said that producing this new idea is potentially bigger than the biggest breakthroughs in technology over the past 50 years. Wow! If you think I'm just making up a hypothetical example I'm actually referring to a real idea and that's really big. This new technology is called Microelectromechanical Systems or MEMS. MEMS is the technology of very very small sensors, the size of a hair. That going to devices to help them to talk to each other, such as a laptop sending data back and forth with a cellphone. It's what makes many devices we currently use function in ways, that have already become ubiquitous. Even though MEMS are already out there being produced and used the power of this idea is huge because the applications are the nascent stage. This means there are so many potential projects that have yet to use MEMS, in fact, check out the endless range of applications for MEMS in our curation corner. Let's get back to our great idea a budding technology with giant potential. Knowing that there will be other ideas that will be competing with this one and knowing that organizations commit their scarcest resource which of course is money, very quickly. It's not surprising that everyone, including you, wants to be the first in line to get his or her ideas funded In the world of work. The value of an idea is multiplied enormously by knowing what the valuation criteria are. If you knew from the outset what the universal criteria to value these ideas were, your idea would suddenly increase its chances to move forward dramatically. In other words, don't let the finance guys decide whether your idea's worthy but instead determine that for yourself. Learning how to value your own ideas gives you time to devote your energy to go beyond the financial aspects and think about things like the intangible factors. Strategic aspects and other elements that are almost always implicated in the value proposition. Elements that we will explore during this course. Let's now change gears and consider a couple of very different contexts. What if in this example, you wanted to build a team in your not-for-profit organization that produced a learning experience for a community you wish to serve. That example could be a course you're producing, like this one. Again, deriving a value will help you to understand whether the learning experience is not only cost effective but also sustainable. We will build that skill of deriving value together in this course. And this knowledge, should help you to move forward in any situation in which you want to evaluate a business idea. We can similarly take valuation approaches to our personal decisions. For example, what if you're thinking about continuing your education? Say a certification program that you'd like to enroll in. You might wish to frame your decision by answering questions like, how long will it take to get money back? What are the cost and benefits of enrolling? What is the value added if I get this education? All in all, this course will help you to develop techniques. To approach valuation of your own ideas, other ideas and a range of ideas in the work place to personal decisions. Once we explore a handful of techniques, we will come to the conclusion that some valuation techniques are better than others. These clearly identify special types of cash flow that are attributed to the idea. It is these types of cash flows that are based on universal assumptions that financial experts make that are not really that obvious but they're not that hard to identify. Developing the ability to make universal assumptions results in the kind of foresight that's akin to that of expert chess player. Who effortlessly thinks he can move ahead while you are stuck on the first move. Or when let's say, a soccer player makes a pass, it looks so easy but behind that pass there are years and years of practice. Estimating types of cash flows into the future may seem challenging if you're just starting out. But not really all that difficult if you're ready to grasp the basics in the following video segment. Once we get a handle on the valuation techniques, we were to going to the next leg of valuation. This shifts our focus from the components of cash flow to the factors that determined it's size and it's timing. These factors explain, what makes valuation an art more than a science and will have to do with two key terms? One of these is risk and the other is uncertainty most people aren't familiar with the key differences between these two terms but in finance, this is the difference between night and day. It's because risk can be assessed whereas we do not know how to predict uncertain outcomes. For example, think about the weather. We hear the weather report every morning and then decide what are we going to wear and how it's going to bear on a number of other expectations we have during the day. And yet, there is still always uncertainty about what the actual outcome will be. Similarly, forecasting values is challenging because changes in values are influenced by different sets of information. which make for some very interesting lessons to be learned. For example, do prices reflect historical information? What about public information that's freely available to everyone? Do regulations protect us from insiders using information to their advantage? And so on and so forth. Now economic and financial literature is full of award winning models and frameworks that help us to determine whether assets are over value or under value. And many of these models have and are widely adopted in practice. It’s a very interesting area of finance that has produced dozens of Nobel prizes and yet predicting, estimating value will always remain at least a little uncertain. But here’s one forecast we can rely on. We can look forward to some very cool insights and take always, as we explore these ideas in Finance for Everyone Value.
