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Visit yamava.com/palms to discover more. ♪ Radical Personal Finance, episode 21. On today's show, stocks, bonds, and derivatives. What do those words mean? What are these financial instruments that we hear about so much? How do they work, and why should you care? ♪ Welcome to the Radical Personal Finance podcast for today, Wednesday, July 16, 2014.

Thank you for being here. I've been looking forward to this topic. It's one of my favorite topics. It's basically to discuss and walk through the basics of stocks, bonds, and derivatives to really establish a foundational knowledge of what these financial instruments are so that you can understand how to use them in your life to better your goals.

♪ A lot of times as a financial advisor, I would spend time working with clients, and clients would ask me questions about their investments. Clients would ask me questions about their 401(k)s, about markets, or things like that. And I always had this experience of trying to answer their questions directly.

And with clients who were very financially literate, I found that it was easy and fun to answer the question to kind of have a discussion. But I found that many clients did not have a high degree of comfort or literacy with the basic terms and the basic things that these words mean.

When you talk about stocks, or you hear about the stock market, there are different pictures that come to everyone's head. And so we want to understand what do these words actually mean so that we can have a really relevant idea of how to interpret the news, how to interpret what we read and what we learn about.

So on today's show, I'm going to try to unpack and build a foundational knowledge of understanding about stocks and bonds. And so I hope you'll enjoy it, and I hope that it will be really valuable to you. I think I'll probably be able to give you some information today that will be very relevant to your life, whether that's your life as an investor in publicly traded securities, or whether that's relevant to your life as an individual with just some ideas about how you can use stocks and bonds within your own business, or as a wealth transfer mechanism, or in other ways.

So we'll talk about that today. I'm pretty excited about it. Before we do that, I just want to get into a couple of announcements, and I want to lead off with announcement number one, which is thank you. Thank you for listening. And I really mean this from the bottom of my heart.

I'm so thrilled with some of the feedback and the response that I've been starting to get on this show, and some of the emails and the questions and the conversations that I'm having. I am so, so thrilled with this. Yesterday was a record day for total number of downloads on the show.

It was really, really a record day. And I don't remember if I've said this on the show or not. I don't think I have, but you may wonder why am I doing this show. And here's why I'm doing this show. To me, my doing this show is an answer to my $10 million question.

I did a previous episode back when the handheld voice recorder-- the handheld voice recorder days. Hopefully you can get through the audio quality. And I talked about, like, what do you want? And I said a good question that has served me well in my own journaling and my own ideas and understanding is to sit down and start with, what do I want?

What do I really want out of life? And so I find the $10 million question useful. And basically the idea is pretend you win $10 million, income tax-free and a lottery, and you now have $10 million in the bank. Now, assume then you go and you give some money away to the people that you want to give money away to.

You buy some of the toys and the things that are on your list, and you take some of the--for me, I'd take some trips or whatever the fun things are. Now, fast forward a year, and you wake up on Monday morning a year later after that $10 million windfall, and you still have plenty of money in the bank.

You can live it your lifestyle without ever having to go to work again the rest of your life. What would you do every day? And I really feel like that question should form the foundation of financial planning. What would you do every day? And no matter what you would do, there's probably a way to figure out how to do it now and skip the $10 million.

I really feel like this just makes sense to me. And so in my answer to that question, if I did that, you know, as I try to think about it--now, I'm pretty young, so I don't really know for sure, and we won't know until we get to the $10 million, and I can say, "Yes, this is exactly what I would do." But I feel like my best answer so far is that if I had $10 million in the bank, I would get up on Monday morning, I would have a cup of coffee, I would eat breakfast with my family, I would go out to my nice office in a sunny window with a comfortable chair, I would probably read some books on topics that I'm interested in, whether that's topics of investing or whether that's topics of finance, whether that's topics of financial planning, whether it's philosophy, whether it's politics.

I enjoy just thinking and talking with people about these types of subjects, and I love to teach, so I get most-- I feel really alive when I'm able to see the light bulb go off in somebody's eyes. That's why I love doing financial planning, is that when I can explain something to someone in a way that makes sense, and I can just teach them about some ideas, that they can really see it, and I see that light bulb go off in their eyes, that just makes all of the impact in the world for me.

It makes me feel really, really good, and it gives me a lot of joy and a lot of gratification. So I don't have $10 million, but when I look at it, and I look at the online world, and I see that we are sitting in a day and age where anybody can teach-- if they're an expert in something, they can build a platform and teach others some of their knowledge and share some of their knowledge and some of their joy over things.

And that's what I love to do. I love to learn. I love to consume. I love to just engage and grapple with ideas. And so in today's world, I see lots of people able to do that, and I see lots of people able to do that and earn a little bit of income off of it.

The vast majority of people who are building and teaching and doing things online don't make any money off of it, and they certainly don't make any kind of living wage. But there are some who do, and I believe that the people who are the best in the world, the best world-class teachers, those people are going to be able to establish themselves in a really meaningful way and be able to impact the lives of students.

I'm so inspired by Salma Khan with what he did at the Khan Academy. He just started teaching, but he gets to spend all of his time teaching. And he's able to help millions and millions of people all around the world. And that can be the same when very, very focused, niche topics, or it can be the same in huge topics.

I'm so indebted. Last night I discovered a new podcast, which I would commend to you, called the Thomas Jefferson Podcast. And here's this guy. I think he's a college professor. I only listened to one episode, or even the first half of an episode. He's a college professor up in Virginia, and he's an expert on Thomas Jefferson.

And he's recorded something like 100 and some odd shows about Thomas Jefferson. He has a show on public radio, and so it's kind of simulcast on the podcast and on the show. I listened to 30 minutes of his show, and I was just blown away by how much I learned and how much I gained from the life of Thomas Jefferson and what he did that made him truly a remarkable man.

And so I want to do the same thing in the areas of finance. I've shared my dream. I want to get a letter someday from some 18 or 20-year-old young man or young woman that says, "Joshua, I discovered your podcast when I was 15 years old. "And over the last five years, with this information that I have received, "I have been able to transform my life in way A and way B and way C.

"I've been struggling to try to find out what is the theme of the show, "and what I really see right now "that I'm trying to craft in a little bit better language "is that the theme of this show "is to help you cross the chasm between your goals "and your ideas about your vision of a perfect ideal life "and where you are today." Because there's a lot of great stuff out there, a lot of great inspirational, kind of fluffy goal-setting, visioning, idealism.

You know, go out and figure out what you want. There's a lot of awesome resources that are out there. But then you sit and say, "Well, here I am. I got to go to work. "I got to get in the car and sit in traffic, and what do I do about that?" There are a series of very specific, tangible steps that can occur to take you from here to there.

But we got to talk about those steps. And the void that I see in the marketplace is lots of people are talking about the inspirational ideas. And that is so valuable to have, the inspirational ideas. But we need a plan to get from where we are today to there.

It's inspirational to have the idea of getting out of debt. But we need a plan to sit down and say, "Well, how much extra can we pay towards that debt this month "in order to get that started?" So that's what I want this show to do, is to serve as a conduit of great ideas, both the inspiration and the education and the ideas, and then the specific tactics and strategies that you can implement into your life to really help you to make progress.

That's the void that I see, the topic that's not being met in the marketplace. And so in order to do that, we got to reach people. And so with this show, I'm just so thrilled. Yesterday, I mentioned yesterday was a record day. In case you're interested, I want to involve you in the show.

So we've been going now since I launched on July 1, so we're about two weeks in. And yesterday, we had 600 downloads, 596 downloads total of the show. And now, in the world of podcasting, I don't actually know what number matters. And I know that I have at least one or two listeners, and you, one or two listeners, I'm really thrilled that you're here.

And the ones that I've heard from, the ones that I've corresponded with, it just makes me feel really good to know and to share some ideas and concepts that might be helpful with you. But I figure kind of the most meaningful statistic for me, with this being a daily show, would be to look at and see how many downloads are done of a show in one day.

So right now, as of yesterday, we released the show yesterday, episode 20, the interview, and since yesterday, there have been 210 downloads of that show. So I figure there's probably almost a couple hundred of you listening to me at this point, maybe 100 or 150. And I just want to say thank you, because the idea, to me, it's so motivating to think of the idea of what 100 or 150 of you sitting in a room would look like.

And it's really humbling with the idea that I've got to come up with ideas that are going to really help you. So thank you for listening. Thank you for those of you who are helping me spread the message of the show. And I want to read next to you, I want to just read some, share some iTunes reviews with you.

By the way, just in case you hear it in the background, I'm in Florida, and as I record this, it's 146 p.m., and we are having our summer thunderstorm. So if you've never been to the subtropics, generally during the summer, we have a rainstorm every afternoon, early afternoon, and so it's thundering outside the window.

And so welcome to Florida. Hope you enjoy your visit, your virtual visit. So the way that we can reach more people, and I'm just so thrilled, is to help the show be found. And in case you're not familiar with this, only as a podcast listener, the most important thing to help the show be found is reviews.

Because if you have reviews and downloads and reviews, if we can generate a certain number of downloads and reviews, then we can start to have people find the show, we'll start to show up in the directories. So if somebody searches, you know, finance, or somebody searches debt, or someone searches investing or personal finance, or whatever their search terms are in iTunes or in Pocket Casts or Stitcher or whatever it is, the more reviews that we have, the more likely it is that we'll be higher in the search rankings.

So the biggest help, and I just want to say thank you, the biggest thing that can be helpful to me is for you to review the show. That really helps people to find us, and it helps me hopefully to be able to help more people and for us to really grow this thing together.

I want this show to serve you, so if you have questions, if you have topics that you want me to cover, I want this show to serve you. Leading off, we have three reviews on iTunes right now, and I just want to say thank you. The first one is from the author.

His name is Steve Anomics, and Steve Anomics was actually a contributor to the show. He asked a question last Friday on his website that I want to point you to. I was remiss in not pointing you to his website when I answered his question on Friday's Q&A, but he said, "Extremely informative, the best financial podcast out there.

So glad he's back on the air." Thank you. That means the world to me, Steve. I really, really appreciate that. If you're interested, I want you to check out his website. He has a website called Steve Anomics. It's S-T-E-V-E-O-Nomics, O-N-O-M-I-C-S, that he writes and he talks about. His tagline is "Where freedom and fashion meet finance." It's really interesting.

I found a post, and I just tweeted it out last week. He has a post on Huffington Post. He had an article written and published on Huffington Post called, "I spent just a thousand bucks on my wedding. Here's how." It's a really neat insight into his life about how he and his wife were able to get married and have a really fun, really ideal wedding for them and do it in a frugal way.

I feel like that's such an amazing benefit for people when they're getting married and starting off, to be able to have the wedding of their dreams without a huge price tag. Another one from Wolf M. in Germany. This is on the Germany iTunes listing. His title says, "Smart." He gave us a five-star review.

He said, "An awesome, non-dogmatic approach to finance with some real gems, where several layers of efficient concepts are stacked on top of each other. Really good to broaden one's own horizon. Daily shows, please don't burn out." Wolf, thank you for the review. Yes, I'm thrilled that the message that I have, the non-dogmatic approach is getting out, and then the several layers of efficient concepts.

You're going to hear, as we get into the meat of today's show, how I see these concepts working together. In my mind, I think that every bit is valid to compare the cost of investing in a stock through your retirement plan at work. I don't know how the system works in Germany, so forgive me.

Hopefully, there will be enough ideas here. I see the analysis should be, "Is it better served to invest $100 into my retirement plan and buy a publicly traded stock, or am I better spent to invest that $100 and buy four fruit trees for my front yard that are going to spit out apples and apricots if you're in Germany or down here in Florida, mangoes and avocados and things to feed my family and lower my grocery bill as time goes on?" That's the analysis that's missing, and that is a valid analysis, and that's the analysis that's missing in the personal finance world.

You've got to understand and look at these things. I hope that every day I can bring you concepts. My goal is to bring guests on that are going to challenge you, that are going to inspire you with ideas and ways that they've solved their problem so that you can get exposed and then look at your own life and say, "Well, how can I do this?" He said, "The Daily Shows, please don't burn out." Thank you.

I'm not going to burn out. I think I've got some stuff burning inside me. I think I could do a thousand shows on my own, no interviews, with just some of the concepts that I think would be helpful without burning out. I love doing this, and I've got enough other income and other things to-- I've got enough other income to fall back on that I can do this for quite a while, and I don't plan to go anywhere.

My hope is--I don't expect anyone to listen to every show, but my hope is that this can be a real source of inspiration and education for you every day. I do hope over time that the show could generate some profit that I would be able to live on and support my family with.

That is my ultimate hope. But it's clearly going to take a while to do this, so I'm committed to doing a thousand shows no matter what. If after a thousand shows, then we'll reconsider, but I'm not going to quit before a thousand shows. The third review just came in this morning.

It was a four-star review from Elisa Gabriela. She says, "Help me save money. It's so nice to have a lower cell phone bill than my friends and parents and still have all the same features. An interview on this podcast explained how to choose the best plan for me. I'm not going to spend $25 a month on a smartphone.

Yes, please." So meat and potatoes versus meat and potatoes stuff, but man, that matters. That really does matter on a daily basis. So with that, I think that's good for the announcements for today. I want to get into the meat of the show. Oh, if you have questions for Friday Q&A, email me your questions, tweet me your questions, however you want to get a hold of me, joshua@radicalpersonalfinance.com.

On Twitter, it's @radicalpf, and pretty soon here I'll have a voicemail line set up that you can call in as soon as I can get that done. And please, if you want to help me, please tell one person about the show, and I would just be so thrilled and so grateful if you would leave a review for me on iTunes.

And again, one star, five stars, doesn't matter. Give me your honest feedback, and if you have a website or something like that that you wish to disclose, let me know, and I'll make sure to comment on that and share that with the audience, and I'll be thrilled as we build this thing together.

Thank you for listening. All right, into the meat of today's show. Today we're going to talk about stocks and bonds and derivatives. And basically there are three major classes of financial assets, and they're stocks, bonds, and derivatives. And I'm going to cover mostly today stocks and bonds. This is the important thing, really, because this makes the biggest difference in most people's world is stocks and bonds, although we do want to cover derivatives because they are their own unique class of financial assets and explain what that word even means.

You'll see all over the world, or all over the Internet, which I guess the Internet is basically the world, but you'll see all over the Internet discussion about derivatives and what's going to happen with however many trillions of dollars in the derivatives market. And I think the average person would say, "What on earth is a derivative?" So we'll talk about that in just a moment.

Before we do that, we've got to set the stage, and we've got to start with some definition of terms. And I'm going to use primarily a metaphor and an example to build on today, and we're going to talk through basically the construction of our own little company. We're going to use this to teach how we would do stocks and bonds and derivatives with our own little company that we're going to start.

And then you'll understand how these things work together. But before we do that, we've got to start with a definition of terms. So the first term that you need to understand is you need to understand the difference between real assets and financial assets. Real assets and financial assets. So ultimately, in any society, in any economy, the material wealth of that society is determined by the productivity of the economy.

So if you talk to an economist and they're trying to say, "How well is this economy doing?" What you're ultimately trying to measure is you're ultimately trying to measure the productivity of an economy, but you're trying to make that measurement based upon--you're trying to measure the output, the productivity.

Now that can be measured in different ways. It may be goods. It may be services. And so that's where you get into the gross domestic product, the gross national product. There are good things about that. There are not so great things. I have an interesting book on my reading list about the gross domestic product.

This lady from Britain wrote an entire book on the GDP and the history of it and how it's in some ways a great measure and in some ways it's incredibly flawed. And so the macroeconomists come together and talk back and forth and try to figure out how do we measure the output of an economy.

But the output of the economy drives the wealth. But the productive capacity of the economy is a function of the real assets of the economy. So this would be the land, the natural resources, the timber, the oil, the farmland, the buildings, the machines, the knowledge, all of these things that go into actually the ability to produce goods and services.

So some economies will have a built-in advantage. Some nations will have a built-in advantage over other nations. One tremendous reason that the United States of America has been so incredibly economically successful is because this country has been incredibly blessed with tremendous natural resources. If you go back and you read the history and you see the tremendous natural resources that the nation was blessed with, then that leads to ultimately wealth.

That is a valid measure of wealth, is the natural resources. That is in many ways real wealth. Now, what does that mean? I'm not sure how to define it more accurately, but any time you're talking about real assets, you're essentially talking about real wealth. The ability to produce the daily needs of living.

So food, farmland would be real wealth. Shelter, housing or building or lands would be real wealth. And then the ability to have a productive economic machine. So the ability to have a business that creates money. That would be, in my opinion, this would be a productive machine and you're into the world of what would be kind of an offshoot of a real asset.

Now, on the other hand, in contrast to real assets, you have financial assets. So financial assets would be an example of stocks and bonds, our financial assets. Financial assets are purely pieces of paper. Or in today's world, digital digits. So the majority of wealth, the financial wealth that is held in an economy, is not real at all.

It's just digits that exist in a computer. That's all it is. The money, even the pieces of paper that we have, people talk about fiat money and all that, and it's true. You have Federal Reserve notes that are paper money. But you know what? The vast majority of money doesn't even exist physically.

It's not tangible, it's an idea. And all that is the financial assets. And so the financial assets do not contribute directly to the productive capacity of an economy. Rather, the financial assets represent a claim on the productive assets of an economy. So a financial asset is a claim to the income that's created from something, that's created from the real asset.

So the example is, I may not be able to own an oil refinery or an oil well. I may not have the ability to own an oil well. But I can still buy shares in Exxon Mobil. And Exxon Mobil can go and own the real asset. And then my financial asset, the stock that I own, represents my claim on the income that Exxon Mobil can earn based upon their oil wells' production.

So all wealth and all income ultimately comes from real assets. And the financial assets just simply allocate the income or the wealth among the investors, among the owners. So if you've come in and you've transformed your human capital, your labor and your time and your skills, into this concept that we call money, which is basically a system of accounting, then you can choose to consume this goodwill that you've bought, the system of accounting, this money.

You can choose to consume it today on something, or you can choose to invest it for the future. So in this world, the only rational way to make that decision would be to say, "Do I value the consumption that I can get for today's expenditure, or do I value the future consumption that I can have with the investment growth?" So the example here that comes to mind is the biblical story of Jacob and Esau.

And at the end of Isaac's life, if you're not familiar with the account, at the end of Isaac, Isaac was the son of Abraham, and Jacob and Esau are the sons of Isaac. At the end of Isaac's life, then--or excuse me, as part of Jacob and Esau's life, Jacob and Esau were born, they were twin brothers, and they were at odds with each other.

They fought all the time. So at one point in time, then Esau was out hunting, and he had the ability to go out and hunt. He was a master woodsman. He went out hunting. And he came in from a hunt, and Esau was the firstborn. So in that system in Israel, the firstborn was entitled to the larger share of the inheritance.

It was called a birthright. And so Esau came in from hunting, and he was incredibly hungry. He hadn't eaten. I think the hunt had been unsuccessful, if I remember my biblical stories correctly. And Jacob had prepared a soup, or a meal of some kind. And Esau said, "Hey Jacob, can you give me some of the meal?

Can I give me some food?" And Jacob said, "Yes, I'll give you the food if you give to me your birthright, your claim on the major portion of the inheritance from our father Isaac's estate." And so Esau, as the aphorism goes, Esau sold his birthright for a bowl of soup.

So in my terms, Esau sold his claim on the future economic benefit that he would have had by being the firstborn. He sold the value of that future ability to consume for the benefit of today's consumption. He wanted the bowl of soup. He was hungry. He needed some food.

So this is the decision that we all face every day. My wife and I are in the process of painting our house. And so if I go down to the paint store and I buy a $20 can of paint, that can of paint is going to be consumed by being spread on the walls of our living room.

So once as it's spread on the walls of our living room, I no longer have the ability to gain the future income from what that $20 of, let's say I had bought, excuse me, my English is usually better than that. Let's say that I had purchased one share of a stock valued at $20, and that stock was paying out a $2 dividend.

A $1 dividend would be a 5% dividend rate. So a $1 dividend each year going forward. So I'm giving up the benefit of a dollar going forward into perpetuity and having the value of the stock for the benefit of having a painted living room. This is my decision. Now I value and she values and we value having a beautifully painted living room more than we value the money, the dollar a year coming in off of the dividend of this stock.

So by putting these things into perspective, we can start to see that one of the most important investment decisions that we can make is which, what of our capital and of our resources that we've built together. So we take human capital, work, labor, whether that's time invested, skills, knowledge, skills and abilities.

We take this human capital, this ability to be productive that we as humans have, and that human capital is usually turned into some form of financial capital. We call it money, a system of accounting among us. That's all money is, is a representative concept, a system of accounting. So it doesn't matter whether it's U.S.

dollars or euros or gold coins or seashells or bitcoin or whatever. The system is money is just a system of accounting. And so we take that system of accounting that we now have and we say, "I'm going to choose to do this with the money." Now if we're broke and we don't have any food, let's say that we live in an impoverished area of the world and we're earning just enough to pay our daily--just enough money to hopefully buy some food.

I'm in close--we have some--I have some friends in parts of Africa where they're in this situation every day, not knowing where today's food is going to be. And there's been crop failures and crop shortages, and they don't have any ability to get today's food or to know exactly where it's going to come from.

And so in that world, the rational thing to do is to buy food because we've got to survive until tomorrow. And if we don't have food for enough consecutive days, we're going to have a very difficult time. So we're forced to consume it. But when we can generate a surplus over and above what we need for that daily need, then we can decide, "What do I do with the surplus?" And so one of the decisions is, "Are we going to buy real assets or are we going to buy financial assets?" So a real asset, are we going to buy a house to live in so that we--to shelter us?

Are we going to purchase farmland so that we can produce crops? Are we going to purchase a timber--a tract of timber with trees on it so that we can sell the timber? Are we going to start a business? Or are we going to purchase financial assets and lay claim on some other aspect of income?

So real assets ultimately drive all economic growth, but yet we're mostly used to looking at financial assets. Now the key is if you were to look at a payment of accounts, if you were to look at a balance sheet for something like U.S. households or a country or an individual, if you were to look at a balance sheet, you would see listed a differentiation between the real assets and the financial assets.

So the real assets would be the real estate, would be the factories, would be these types of things that we've gone over probably too much. And the financial assets would be stocks, bonds, cash, mutual funds, debts that are outstanding, life insurance, cash value reserves, pension reserves, these types of things.

But the key thing to remember is that all of those financial assets are financial assets of households, but they're liabilities of the issuer of the security. So let's say that you have $100 and you bring it to me and you say, "Joshua, I'm going to invest $100 in the Bank of Joshua." So as a bank, I would then say, "I'm going to issue you--let's assume that I'm going to issue you a piece of debt security.

I'm going to issue you a bond," which we'll get to in just a moment. "I'm going to issue you back $100 bond, and I'm going to promise to pay you $5 of interest payments every single year for the next five years, and at the end of five years I'll return your $100 to you." So you now have an asset on your balance sheet that is called a $100 bond from--and I owe you from Joshua, and I now have a liability on my balance sheet, so I owe you $100.

So if we were to look at this in aggregate over a nation or over a community or over the world in aggregate, what we would find is that all of the financial assets will ultimately cancel out, because every financial asset is an asset for one entity, and it's a liability for the other entity.

So the financial asset would cancel out, and then we're ultimately only left with the real assets. So all--whether we're talking about a community or a nation--wealth only consists of the real assets-- the structures, the equipment, the inventory of products, the land, these types of things that are real assets.

Now, in financial planning, we almost exclusively focus on financial assets. So we almost exclusively are talking about money, about financial assets, but we really shouldn't start there. We really should really incorporate into our conversations an accounting of real assets and financial assets, because sometimes you can substitute the two of them.

So as I mentioned in the introduction, I believe that a rational decision--I love avocados. It's one of my favorite--one of our favorite fruits that we have, and we grow them well down here in Florida. We don't have the dark ones that they have out in California. We don't have the Haas avocados.

We have Florida avocados, and there's many varieties. I'm planning to go and buy some avocado trees. Avocados are expensive down here, even though--because what happens, they ship them in from California or New Zealand or other places, and they're expensive. So when my wife goes to the store and brings home a bag of avocados for us to eat, that is--it's not--they're not cheap.

I don't remember the exact price. They fluctuate with the season, but they're not cheap. So I can go and I can buy an avocado tree for, say, $25. So I plan in the next couple of months I need to plant some avocado trees. So I'm going to go and plant some avocado trees.

And for a $25 tree, if I buy a $25 tree and I plant it well and I care for it well, a good mature avocado tree that's 5 to 8 to 10 years old is going to produce hundreds of pounds of avocados for me in any kind of growing season.

And what I plan to do is instead of planting one tree, which just puts forth a torrent of avocados that I can't eat them all in one season, where you're just sick and tired of eating avocados morning, noon, and night, I plan to plant maybe four or five trees that ripen throughout the year.

So I may have one crop on one variety that ripens in March, another crop on another variety that comes in July, another one in September, and the fourth one in December. And I plan to keep these trees small so that I can allocate more of my property, which is the small limited amount of space that I have, to keep these trees small so I can fit four trees in instead of one big tree and have a smaller harvest that's spread over a period of time.

So to me, spending $100 on four avocado trees is exactly and should be part of the investment decision as should I put $100 into my cash value life insurance policy, or should I put $100 into Apple stock, or I'm always going to use Apple stock as the example. I don't own any Apple stock, but it's going to be the example because I think it's still the largest cap stock on Wall Street, if my memory is correct.

So this should be every bit of a rational decision. I would believe, under the scenario that I've given you, if I can buy a $25 fruit tree, and it's not going to produce much for me in the first couple of years, but then this tree may have a lifespan of, I don't know, 20, 30, 40, 50 years.

I don't know how long avocado trees live. And I'm going to get hundreds of pounds of fruit, and I know that avocados are usually a couple bucks a fruit at the local fruit stand. That is a huge return on investment, and that's probably better for me to focus on buying that real asset, the avocado tree, at the beginning of my life if my family likes avocados, than for me to buy the financial asset that's going to give me a certain amount of return.

Me lending money on a General Electric bond or lending money to the U.S. government on a U.S. savings bond where they're going to pay me 2.8% interest, that does nothing for my financial life. So I'm not going to do it. My going down and buying an avocado tree for $25 allows me in the future to free up that maybe $10 a month that I might spend on avocados or $5 a month that I might spend on avocados into the equivalent of basically perpetuity.

And the wonderful thing about that is those avocados are not taxed, so now I can avoid the taxes. I can avoid the sales tax. I guess avocados aren't in Florida, or they're food, so they're not going to be sales taxed. I guess my example breaks down, but I got excited.

But I can avoid the tax and all that gain that's never taxed. So all the gain of the income -- so that would be the example -- is that I could, on the one hand, let's say I spend $10 a month on avocados, I could go down and every month I'd have to earn, if I'm at a 20% effective rate, $12 to get my $10 that I can spend my after-tax money on avocados, or I could just plant the avocado tree.

And to me, that makes all the sense in the world. Now, if I'm renting in a small apartment, if I'm living in Hong Kong or Singapore, it's likely that I'm not going to be able to make that scenario. But isn't that an intelligent way to look at it? I mean, not to pat myself on the back, it just makes sense to me.

And so I feel as though it's smarter for me right now to go and buy four avocado trees and eight mango trees and 16 -- well, that's too many -- four orange trees and some grapefruit and some kiwi and some blueberries and really develop my property to provide food for me and plant a garden.

My wife and I had this amazing tomato harvest from our garden. It's so easy. You buy a packet of seeds, you stick them in the ground, the tomato plants grow. In Florida, they die when the summertime comes, so they're all dying out there. But no big deal. It cost us a dollar, and we've reaped bowls and bowls of little cherry tomatoes.

And the things, if you go down to Publix and get the package of cherry tomatoes, they're a couple bucks. So that's a real wonderful investment. And then the wonderful thing about the cherry tomatoes is that if they're not a hybrid variety, or the avocados, is that they reap dividends, and I can reinvest those dividends.

I can take an avocado off the tree, and if it's not a hybrid or if it's not grafted, I can go ahead and I can just stick it in the ground, it'll grow again, it'll grow me another tree. And I can take and I can sell those avocados, and I can sell to my neighbors and friends a bag of avocados.

This is rational economic thought. Now, we could start an avocado plantation, and if we were going to do that, I might need more than $25. And so that might be where we'd get into the financial assets. So we're going there now, but remember that we never lose sight of the fact that the value of financial assets and the success or failure of those financial assets is ultimately dependent on the underlying performance of the real asset that is backing the financial asset.

So if you invest in my avocado plantation, and I go and I buy 100 trees, and then I lose 50 of them to a freeze or to a bug, that is going to really impact the profitability of your financial asset. So we need to really always remember that the financial assets are tied to the real assets.

Real assets generate income. Financial assets allocate that income. Now, in general, we're going to distinguish between basically three broad types of financial assets. Those three broad types are called different names, but you'll hear these always used interchangeably. They're essentially fixed income, equity, and derivatives. Fixed income, equity, and derivatives.

So fixed income would be also referred to as a debt security or a bond. These are all the same things. Equities are also referred to as stocks. Equities are shares of ownership. You would have equity or value or ownership in a company. And then derivatives. A derivative is something that derives its value from the performance of something else.

So let's talk through these, and I'm going to explain these terms in a way that I hope makes sense to you. And then we're going to talk through a practical example of how a business would develop and use these instruments. So fixed income is in many ways the simplest -- well, no, they're all simple.

Fixed income is a simple type of investment to understand. And so essentially a bond. A bond is basically -- it's debt. It's lending money to a company. So the example here would be if you were going to come to me and you were going to say, Joshua, I need money.

I said, okay, how much do you need? I need $100. All right, I'll give you the $100 and I'll lend it to you, but I'm not going to give you the $100 that I could spend on my consumption unless you can give me some additional benefit that I can't get by consuming the money myself.

So you say, well, I'll pay you -- instead of when I bring it back, instead of paying you $100, I'll pay you $105 and I'll return it to you a year from now. So we're all familiar with the idea of a loan. You have an interest rate. I say, that would be good.

I would value more having $105 in one year. I would value that more than having the $100 to use today, so therefore I'll give you my $100 and you can use it for a year. This is the simple concept of debt. That's what a bond is, except in general it's not usually just one year, although it could be.

More typically when we think of bonds, we think about it as something like this. I'm going to lend you my $100, you're going to pay me $5 every year for the next five years, and then at the end of five years you're going to give me back my $100.

So in that bond I'm going to lend you the $100 and I'm going to get my $5. So that would be if I were to lend to a company or if I wanted to lend to a government. Now, your ability to make good on those payments, those $5 annual payments to me, your ability to make good on those payments is very much dependent on whether you have the money or not.

So the performance of a bond is very closely tied to the financial condition of the borrower, or in bond terms this is called the issuer, who issues the bond. So in our example of the $100 and the $5, you would issue me a $100 bond with what's called a $5 coupon payment, and the coupon payment refers to, in old days, they would send a book of coupons that you would use to lay claim on your interest payments.

And so it's called a coupon payment, a $5 coupon payment that gets paid based upon the $100 security. So you create the security, you create the financial asset, and that financial asset is backed based upon your ability to make the payments to me. There are a vast, vast, vast array of different ways that these types of bonds, that bonds could be structured, that they could be securitized, that they could be issued.

They can be on fixed interest rate payments where we're going to pay you 5% per year. They could be based on floating interest rates. So, for example, if I were a corporation, I could borrow money for you at 1.8% above the rate paid on U.S. Treasury bills. So the government has its borrowing rate, let's say that's 2%, and I'm going to pay you 1.8% on top of that, so that would be 3.8%.

So then I could adjust every year. But the reason that it's called a fixed income investment is that you know how much your payment is going to be. If it's a 5% fixed interest rate, a 5% fixed coupon rate, then you know every year you're getting $5. Or if it's determined by a formula, you know all you've got to do is pull open the newspaper, see what U.S.T.

bills are paying, add 1.8%, you know that on December 31st, when my bond payment is due, then you're going to receive, in my example, $3.80. So it's a fixed income. But my ability to pay is purely determined based upon -- if I'm the issuer of the bond, my ability to pay is based upon my financial state.

There can be short-term bonds, long-term bonds. If you're the U.S. government and you're borrowing money, you issue Treasury bills, Treasury notes, and Treasury bonds. So Treasury bills are short-term, notes are intermediate-term, bonds are long-term. If you are a local municipality, you could issue short-term, you could issue long-term. If you're a company, you could issue very short-term.

You could issue very short-term or long-term. I won't go into more details, but right now. This could be across the board, and they can be risky or they can be very, very safe. So the U.S. government bonds that the U.S. government issues are generally considered to be the safest that they could possibly be.

And there's zero risk of default by investing in U.S. government bonds. And the reason that there's zero risk of default is because the U.S. government has the legal ability and the legal authority to tax people. So the U.S. government will always be able to make payments on bonds as long as they retain the ability to tax the income from people to ensure that those payments are made.

Many of you are immediately thinking, "Well, what about the value of those payments?" That's another issue. I'll show for another time. U.S.-issued securities have zero risk of default because the government can tax the people. Now, if the government lost the ability to tax the people, so in the United States at the Civil War, what would happen when the Confederate government in the southern states issues its bonds and it promises to pay people back the money in exchange for them giving it to the government?

Well, the government loses the war, the government goes bankrupt, the bonds become worthless. That would be an interesting piece. I made that up off the top of my head because I believe it's true. If anyone knows, I'd be interested in reading a book about that. If anyone knows of any books or any information on that, I'll have to research that later.

So, if the government loses the ability to tax the people, then it loses its ability to make those payments on its debts. That's debt securities. That's fixed income securities. Now, the second type of assets are called equities or stock. So, equity, a stock represents a financial asset that represents an ownership claim.

So, instead of it representing a debt claim, an accrediting claim to a company, equity represents an ownership claim. And so, a bondholder is promised a certain payment rate. That's why it's called fixed income. An equity holder is not promised any particular payment. So, there's no specific amount that an equity holder can be promised.

So, this is why if you own stock in a company, you really never know how much you're going to get for your asset. You really never know how much, for example, if your company is paying a dividend, and a dividend is a share of the profits that are returned to the owners of the company.

If your company is paying a dividend, you never know from quarter to quarter, if the dividends are declared quarterly, how much your dividends are going to be. Now, some companies are very consistent, some companies are not. And a company may increase those dividends or may decrease the dividends, depending on what's going on in the individual business.

But you're not necessarily promised any specific amount. You get the dividends that the firm pays, and you have an allocated percentage of ownership in the assets, in the real assets of the company. So, if you and I are going to go into an avocado plantation together, and we decide to make you an equity holder, let's assume that you invest $100 and I invest $100, and you own 50% of the stock and I own 50% of the stock, and we buy 10 trees, well, you own 50% of the value of those trees.

So, if we need to split up, we can sell the trees on the secondary market, and we can split our money. So, we can share our money between us. And so, hopefully, my example is not a very good one with the avocado plantation, because it's kind of hard to dig a tree up without killing it.

But it is theoretically possible. So, the performance of equity investments is directly tied to the success of the firm and directly tied to the performance of its real assets. So, because of this, you'll have a lot more volatility, a lot more fluctuations in the price of equity securities than you will have in debt securities.

Because those payments are promised at a certain time, at a certain amount, it's a little bit more consistent. But because the equity payments are not promised at a certain time, at a certain amount, there may be more variability in the amounts of payments that are paid to the person who owns the financial asset.

Now, there are other advantages and disadvantages of it. So, for example, if the company were to go bankrupt, bondholders come ahead. So, creditors to the company, the bondholders, come ahead of the owners of the company. And this would be normal. If you owned a company, and you had debts that you had to pay, and you had to close your doors, then you would be paying those debts first.

If there was any money, you sold all your assets in the company, you'd be paying those debts first to your creditors before you would be taking whatever was left over for yourself to have in your own money. So, hopefully that's a good background on fixed income and debt securities.

The third type of financial asset that is a primary type of financial asset is called a derivative. And so, a derivative security is a financial asset that derives its value based upon the underlying performance of another financial asset. So, you might hear the words "options" or "futures contracts." And so, there are many types of derivatives, but options or futures contracts would be the specific amounts.

So, we'll talk in detail another time about options and futures. But you could purchase something called a call option on a stock. And so, if you purchased a call option on a stock, you would pay money to somebody, and that payment that you would make would allow you to buy the stock as long as a certain thing turned out to be true.

So, let's say that under a call option, let's say that you're going to buy one share of XYZ Corporation stock. And you have the option to buy it for, say, $30 per share. You're going to pay your trading partner in the derivatives world, you're going to pay that person, say, $2, for the option to buy the stock at $30 per share.

Now, there's a certain time period that's applied to that. So, let's say that any time within the next six months. So, let's say you buy a six-month call option on XYZ Corporation at $30 a share. What you are hoping is that the -- and you paid $2 for it in my example.

What you're hoping is that the value of that stock, the market value, the market price of that stock, will increase higher than $30. So, if six months from now, the market price of that stock is currently at $40, then what you would do is you would go ahead and do what's called exercise the option.

You would go ahead and pay me $30 for the stock. And then you would turn around, and you could turn around and sell it at $40. So, what you've effectively been able to do is you've been able to control the $30 worth of stock for an outlay out of pocket of $2.

And the value of that control is what drives the value of your security. So, if in my example, if the market price of the stock goes up to $40, and you have had the ability to buy the stock for $30 plus your $2 cost of buying the option, and then you turn around and sell it, you've profited $8.

So, that's a profit for your six months. But if the market price of the stock in the open market is $25, then what happens is your option becomes worthless. It's worthless because you would have no reason to go and pay $30 to exercise the option to buy the stock when you can just go around and pay $25.

Because now if you were all in, you still wanted to buy the stock, you're essentially paying $32 for the stock when you could buy it at $25, the $2 for the insurance -- or excuse me, for the option price, plus the $30 for exercising the option. So, the derivative, the value of that security is going to be derived based upon the underlying performance of XYZ Corporation stock.

The derivatives will go all over the place as far as their value. But the key thing is to notice that they can be hugely valuable or they can be worthless. If you had a call option on XYZ Corp, and if that call option -- and you could buy it $30, and you paid $2 for it.

Let's say that XYZ Corporation invented the guaranteed cure for cancer, and they are set to make billions, and so the market price of the stock increases to $100 or $200 or $1,000. You have a huge upside. But if the cure for cancer turns out to be bogus, you have an unlimited risk of loss.

Well, not unlimited technically. You have a risk of total loss where you can lose all of the $2. You don't have any claim on the financial assets of the company. You don't have any claim on -- like you would if you invested in the stock directly. You don't have any claim over forcing the company to sell the factory and taking a portion of that money for yourself.

So, the underlying value of the stock literally becomes worthless when the exercise date arrives. So, hopefully that makes sense as just a brief blink into derivatives. And today, derivatives are really a major part of the larger investment environment. And there's many, many ways and reasons that they can be used.

They can be used as speculative instruments, or they can be used as ways to manage risk. But probably the primary way that derivatives are used today is to hedge risk or to transfer the risk of a certain thing happening. So, if you're managing a portfolio, you may be concerned about a certain thing happening in your portfolio.

And you recognize that my portfolio, if this event occurs, then I may be in a problem. So, you may go ahead and say, "Well, I want to insure against that." And the way that you insure against that in a portfolio is through the use of derivatives, whether it's options, futures, swaps.

There's lots of variation on these. But that's essentially the value of derivatives. And then, last thing as far as assets, as far as investments, don't forget that you could always invest in real assets directly. So, the choice is not always, "Should I buy this stock or should I buy this bond?" But rather, the choice is more of, again, fruit trees or shares of XYZ Corp.

So, that's just a brief overview. Now, I want to give you an example and talk about some different ways that these can be used. So, you can use this concept of stocks and bonds, and you can use this in a large context of the "stock market," as we're accustomed to thinking about it.

Or you can use it in a smaller context. And it's exactly the same tools, they're just applied in a different context. So, let's start with a very, very simplistic, overly simplistic example. And let's talk about some of the ways that we would use stocks and bonds in our business.

Let's talk about some of the advantages and disadvantages. I'm going to completely ignore, now, derivatives. And because derivatives are a little bit more challenging, if you're not comfortable with the lingo, a little bit more challenging to wrap your head around. And I think we had enough of an insight with just a simple options example.

But you could use derivatives, and basically you could create derivatives. If you can find a buyer for the market, you're basically making bets on something happening. And as long as you're willing to agree to the terms and agree to the price and agree to the risk, then the derivative should work.

But for now, let's ignore derivatives, and let's just focus on stocks and bonds. So, you and I have -- I have an idea. I have noticed that people are drinking coffee, and that gourmet coffee has now become quite in vogue. And I went to -- you'll notice I'm stealing the story.

Let's say that I went to a European country. I went to Italy, and I noticed that in Italy it's quite -- what's the French saying? I think it's "d'il y'goule." The quite -- if my usage is correct, quite popular to sit in a coffee shop and enjoy my coffee.

And I come to the U.S., and I notice that in my country, in the United States, that people -- coffee is more of just something that you get at the cafe and a brown cup for 22 cents. And I think, "Why is it that Americans always drink coffee with their breakfast?

Why don't they actually go and just drink coffee like the Italians do?" So I decide to open a coffee shop. Now, I don't have any money, but I read the book that Jake DeSilis wrote on entrepreneurship, and I said, "Well, why would I ever go and get a job when I could just start a business instead?" And I listened to Joshua, and he said, "Look, there's no risk.

What's the worst that can happen? I'm going to go bankrupt, big deal. So I'm going to go bankrupt, so I'm going to go ahead and try something." So there's no risk. I don't have any money now. I might make a lot or I might lose, but regardless, if I do some smart stuff, I'm not going to lose.

And I can control the risk, and I can always go sleep on Mom and Dad's couch, and Mom will feed me. So I'm going to open a coffee shop because I think people would enjoy this experience. So, but, let's see, in my example, who's the-- Okay, so I'm the guy opening the coffee shop, and you're the person with the money.

So I come to you, and you have $100,000 that you got because your great-aunt Matilda just died and left you $100,000. You say, "Well, Joshua, do you need some money?" I say, "Yes, I do." "Well, there's a couple ways that I could give you the money. How much do you need?" "Well, frankly, I need $100,000 to get started.

I got to buy some coffee machinery. I got to rent a space. I've got to hire some employees. I've got to invest in some marketing so that people will know that I'm there. I got to build a logo. I've got to buy aprons for my employees. So I've got--I need $100,000." And so I say, "Well, I'm willing to consider this." And you look at me, and you say, "Well, what would you like to do?

Would you like to borrow the money from me, or would you like me--?" You say, "Would you like me to invest in the company?" I tell you, "Well, frankly, I'd like to borrow the money." "Okay, what are your terms?" "Well, you as a rational person, you have $100,000, and you're looking at me, and let's pretend that, in my example, I was a young 18-year-old kid who just got back from backpacking around Italy, and you're saying, 'Well, how good is Joshua really at running a business?' After all, he has no business experience.

He has this kind of a harebrained idea that he wants to create a coffee shop like the Italians do, and he wants it to be a certain way. But really, people like paying 25 cents a cup for a cup of coffee, and he wants to charge $3 a cup.

So how on earth is this even going to work?" And you say, "I think this is pretty risky. It might work, but it could be pretty risky." So you say, "Well, I can get down at the bank. I can get 2% interest on my money, so that's my risk-free return." And usually in the investment world, we would usually not use the bank.

We would use a government security, we'd use a treasury bond, and say, "Well, my risk-free rate of return, if I do nothing else, I could lend money to the U.S. government, and they'll tax their people into oblivion to pay me. So I'll go ahead and just lend my money to the government.

There's my 2% return. That's my risk-free rate of return." So you've got to go over and above it. And if you say, "Well, if I charge Joshua a 3% rate of return, I could lend it to the government at 2%? I don't think that's enough of an interest rate for me to take a bet on him." And then also over here, I noticed that I read in the newspaper that Walmart is issuing a bond for $100 million to do some project that they're doing, and they'll pay me a 4% rate of return if I give them my $100,000.

So I think Walmart has probably got a brighter future than Joshua's coffee shop. So you're going to sit down, and you're going to figure out there's going to be some analysis in your mind at what point in time am I willing to lend this $100,000 to Joshua. Now that number may be at 5% or it may be at 55%.

It may not even be willing to lend it. But let's just say as an example, let's say that it is going to be $15,000, so a 15% rate of return or a 10% rate of return. And so under this example, if you say, "I'm going to lend it at a 10% rate of return," then I look at my books as the borrower and say, "Can I afford to do that?" I've got to come up with $10,000 in the first year of my coffee shop on top of paying me, paying my employees, on top of all the expenses to pay the bond payment.

And I may say, "Listen, I'm not sure I can do that." Well, we would have that option. If I think I can, then I can do that, then I would go ahead and accept the deal if I could make the $10,000, but I may not be able to do it.

So you say, "Well, I would be willing to lend you the money." But instead of lending you the money--apologize-- instead of lending you the money, I'd be willing to invest the money with you. And I'd be willing to, in exchange for a percentage of the company, I would be willing to invest the money.

And so we can go in as 50/50 partners in this company, and I will invest my $100,000, and you will invest your time and effort and knowledge and ideas to build the company. And then we will split the profits that we make. So that would be a stock investment.

So I would draw up some papers, and I would issue shares of stock. And I could issue 2 shares of stock, and I could issue 1 share to me and 1 share to you. Now, realistically, one of the values of companies is that we can issue more shares of stock.

So I would probably issue 1,000 shares of stock, and then 500 of them would go to you, and 500 of them would go to me. Now, this is an incredible way of basically creating wealth. When a company issues stock, it's simply issuing ownership in an idea, in a concept, in exchange for money.

So if I created this situation, then what I've really done, in this scenario, if I create my company, and I issue 1,000 shares of stock, and you give $100,000, and I buy $100,000 of assets, I have just printed money from my company by issuing you shares of stock. Now, you have claim over 50% of the assets, but I have claim over 50% of the assets as well.

So we've just had this transaction, and my company has been capitalized, it had money come in to build my company. And now I'm ready to go with stocks. And we could do this--entrepreneurs do this every single day. Now, it's very simple with one person. But what if I want to go ahead and over time, let's say you and I, business grows, you've chosen to invest in my company, you own stock in my company, and we're doing really well.

And now we have two locations in my hometown, but I've done market research, and I know there's people all over the country that are asking for more shares, that are asking for these locations of my coffee business in their town. Well, in this situation, we could go and we could say, "We need more money, but you don't have any more, and I don't have any more." And we're trying to fund it out of the profits of the company, but we can't really expand fast enough, because we're only making a profit of a few thousand bucks a month, and every new store that we open is $100,000.

So we're profitable, but we're not profitable enough to grow very fast. We can only open two stores a year. We'd like to do 200 stores a year. So we could go to the open market, we could go to the public market, and this is what's called an investment lingo.

This is called a primary offering or an initial public offering, and we could say, "We would like to solicit you to invest your money with us. Our business plan is that we're going to open a chain of stores, and in exchange for you giving us your money so that we can open our chain of coffee stores, you're going to give us your money, and we're going to try to raise $10 million or $100 million, and you're going to try to give us your money, and in exchange for that, we'll give you shares of the company." So we draw up some fancy stock certificates.

In the past, we would have done that. We would have created an entry in a journal, a journal entry in a ledger, and we print up these shares of stock. Then we go ahead and we issue them to the public market. Let's say that you think it's a good investment, so you give us your money.

Now we have $10 million, so we go ahead and we start opening stores. And then now you have claim in a share of the profit from all of those stores. This is how companies work. This is how business works. Now, there are various players involved, and it can work all along the way.

And then that same company, after we've issued the more shares of the stock, and we've grown out to be 100 stores, we may want to start building buildings. And so we need a special influx of cash to go ahead and build our own buildings, our freestanding locations, instead of going ahead and renting them.

So we may issue a bond, and we may promise to pay a 5% payment if you'll lend us the money. And the reason that we would do that is if we could borrow the money from you, the public, at more favorable terms, then we could borrow the money from a bank.

So hopefully my example made sense, and it was a little bit interesting. But you can do this at all different scales. You can do this at every single scale. You can do this as an individual. You can do this as an individual and own a corporation. You can do this with a couple of people and own a corporation.

It can be a small corporation. It can be a large corporation. So everything from Apple computers or whatever, Apple Inc., to a local mom-and-pop cleaning business, you can do this. Now the value of those shares is going to be based upon the company that's underlying and the assets of the company.

If I have a cleaning business, and I try to sell you shares in my cleaning business, but my cleaning business consists of me in my car with a broom and a mop going to someone's house and trying to say, "Hey, I don't really have any assets, basically. I have customer accounts." So to try to issue a stock based upon that and for you to figure out what the value of that is, it's very difficult.

That's very different than Exxon Mobil. They say, "Look at these oil wells. Look at all these assets that we have." And you can more easily figure out what the value of the stock would be. So if you understand that, and it seems a little simplistic, but if you really understand that, it helps when you're trying to figure out, "What should I invest in and how should I invest and do all of that?" So the key point that I wanted to try to drive home today is that you need to really understand how these things work.

And hopefully this just basic introduction to stocks and bonds would give you some idea of what these are. And you can use these at every stage of your wealth. You could use these if you have a lot of money and you want to buy shares of general electric stock.

You can also use this if you don't have any money and you're trying to start a business. And so you're trying to start a business, you can issue shares of stock and raise capital. You can use bonds if you want to invest in long-term savings bonds for your grandchildren.

And you say, "The U.S. government is always going to be there. It's not going to be much. It's not going to have risk of default. But at least it's safe. I'm going to go ahead and get it." So you can lend your money to the U.S. government, or you can lend your money to General Motors when they issue a bond.

Or you can lend your money to the local municipality when they want to build a new highway or when they want to build a new stadium, these types of things. Now, with every one of those transactions and decisions, then there's going to be a tradeoff. Now, here's the key point that I'm going to end with.

Buying stocks or shares of ownership in companies in the publicly traded markets is not always going to be the best move. I don't believe it's possible to really get rich quick on buying stocks because you have a large company, that's a very valuable thing. But if you're a young person, it's not going to do much for you.

What is a 10% growth rate going to mean if you're going to invest $100? Over a long period of time, that's a huge amount of money. But over the next 5 or 10 years, how much is it really going to mean? Now, if you have a decision between not investing the $100 -- let's just run some numbers here.

And usually, let's say that you're 20 years old and you're listening to me, and you're going to go to the traditional retirement age of 65. So let's just say you're going to invest $100 a month. Let's say that you're going to get the -- let's clear this out here.

Let's clear the register. Okay, $100 a month is our payment. We're going to do this for 45 years on a monthly basis. We're going to use a 10% number compounded 10% annually for the rate of return, and we're going to start with nothing. At the end of 45 years, if you invest $100, you're going to have $1,048,250.17, not adjusted for inflation.

So we're going to have a million bucks. But the reality is that what does a million bucks do for us in 45 years versus what could we do with $100? Now, if we took that $100 and we went out and we started a business with it today, we have the possibility of instead of making a 10% rate of return, to make a 10,000% rate of return.

If we take an idea and we put an idea for a film and we put it on Kickstarter and we get that film funded and then we raise our capital that way, or if we issue stock or if we -- whatever our project is, we can do it quicker.

Or if we go and buy fruit trees for the yard, or if we go and invest in whatever we invested. I mean, this is what the choices of investments should be. So once you understand the role that these financial assets can have, you can decide if it's worth it to you to invest your money into general electric stock or if it's worth your money to you to invest your money in hosting for your podcast on financial planning to teach people about the topics of financial planning.

I've personally decided that's a better investment for me right now. Now, is it always going to be so? Absolutely not. It doesn't get better if you have money. And if you want true financial independence, if you want true capitalism where you can just sit back and you can collect money without any real work, true financial independence where you don't have to do anything, I think only ultimately comes from owning companies that you don't need to necessarily control or be involved in.

And I tell you, general electric and Apple and Exxon Mobil and Walmart and these companies, that's an amazing way to do it. But if you're just getting started and you're trying to figure something out, it may or it may not be the right move for you. So all financial planning comes down to personal, and this is why I'm building this show.

Because for so many years I got motivated and I read these books on put your money in the stock market. I think that's awesome. I've managed large portfolios. But I wish at this point that instead of opening a Roth IRA on my 18th birthday, that I had started a couple of businesses.

Because you know what? There's no one in the Forbes 400 that got there by opening a Roth IRA. Entrepreneurship and building something and investing in something that you own or that you control is going to be incredible. Now what that is for you, I don't know. But the decision should not be should I buy shares of Apple or shares of GE.

The decision should be should I buy shares of Apple, should I buy shares of GE, should I buy a pickup truck and start a landscaping business, should I build a rental house and rent it out because I have the ability to build things and put a tenant in there and give them a place to live, should I buy a local hotel franchise and invest in a day's in at the local interchange between the interstate and the local road, should I buy a subway franchise and open a subway location, should I buy treasury bonds from the U.S.

government, should I pay off my high interest rate credit card debt, should I pay off my house, should I buy solar panels from my house so I can reduce or eliminate my electric bill, should I insulate my attic so that I can reduce or eliminate my electric bill, should I buy fruit trees from my front yard so that I don't need to buy so much groceries, should I call up and buy a load of horse manure from my backyard garden so I can grow some food, should I buy gold coins or should I buy food, should I buy cans of soup for the pantry, should I give the money away or should I go and buy education and a college degree which hopefully will get me a higher value in the marketplace.

This is the decision. And this is why all financial planning must be intensely personal. I'm never going to tell anyone again without knowing them, here's what you should do with your money. You should just go and you should buy this stock or you should invest in this index fund or you should do this.

It's so much bigger and more complicated than that, but it's so much simpler than that. But you've got to look at your life and you've got to figure out what are my skills, what are my goals, what are the things that I'm trying to do, what is it that's going to work for me.

And then based upon that, then you can make a rational decision about what will serve you and your interests and your goals to the best. You can make a rational decision on what will serve you and your interests and your goals in the best way and in the most intelligent way for you to get from here to there in the quickest way.

So remember, you can literally -- that's why I get so excited about entrepreneurship is because a lot of times people say, "I'm broke. I don't have any money." Okay, how are you going to get it? "I don't know. I only earn X amount of dollars." Well, why are you only earning X amount of dollars?

There's people making 10 times what you're making no matter how much you're making, so why don't you become one of those people who can earn 10 times that much. You can start at Walmart as whatever their basic entry-level wage is and retire a multimillionaire. You can move up in any company, any business, or you can just go out and create your own.

I was watching a video on YouTube. I was researching some camera things, and I saw a guy. He actually was watching his Creative Live class that he taught, which if you have any interest in creative arts, go check out Creative Live. They're doing an amazing job of just incredible free creative education on photography and music and just all of these fascinating classes that are all available for free right on their website.

They have at this point I think five studios running around 24 hours a day on their network. I was watching the photography class, and this guy was a filmmaker. I guess he was doing some work for somebody. He was flat broke, and he was doing some work with a guy as a part-time employee, but he wanted to make a movie.

This man had written a script for his movie, and he wanted to create it. He had some friends of his acting, and he'd written the script, and he borrowed from his boss. He borrowed the camera, and all they had was one of these Canon digital SLR cameras, basically about $750 worth of gear, a $500 camera.

He went to Home Depot, bought a roll of duct tape, duct tape, a piece of wood, and a broomstick onto a skateboard to make his dolly to create his movement shots. He created a movie, which he wound up producing, and he created the whole thing, and he sold it.

I didn't get the full story, but he wound up making some money and just breaking into a whole new career and a movie career, and being able just to do something with almost nothing but equipment, just a little bit of skill and a little bit of ideas. You see that all the time.

In today's world, you can literally print money without being the government. You can print money if you can bring knowledge, skills, and ideas to the table, whether it's through a Kickstarter, whether it's through issuing stock, whether it's just through creating a feature-length film with excellent production value that you can display and get your break into the movie business with $750 worth of camera equipment.

I was blown away by the quality of his production. It was amazing. You can do this, but you've got to think about it, and it's going to be unique for you. That's why, in essence, that's what my frustration with being a traditional financial advisor is that if I was paid based upon the sale of securities, and you tell me, "Joshua, I want to make a movie," there's so many different ways to handle that.

I just have to say, "Well, maybe you should not invest $100 in an IRA, and rather you should take that money and go make your movie." You should only invest $100 in an IRA if Walmart is going to pay you more money for easier in exchange for them having your $100 than you can do it in your own life.

I want to empower you to make those decisions. Hopefully today's information has been interesting. Sometimes with a lot of these shows, just as far as the detailed information, I'm not sure exactly how this is all going to work over the long term. I just feel like I've got to set the foundation.

Sometimes people are saying, "What are stocks and bonds?" I don't know about you, but there was very little taught about this in school. Even though I went to a school that did actually teach some of this stuff, I didn't learn it through that. I learned it through myself. I tell you, I've heard some people say some crazy stuff about stocks.

"It's not going to happen with stocks. It's not going to happen with bonds." I think you understand what a stock or a bond is. Hopefully today has helped with that. Crave your feedback on the show? Please consider leaving an iTunes review for me. It would just mean the world to me.

Make sure you leave your website there, and I'll advertise it for you on the show. Thank you for listening to today's show. I really appreciate it. If you have questions for Friday's Q&A show, ask me that. My interview with Jacob from Early Retirement Extreme has been pushed off until Saturday, so that won't be coming this week.

That will be coming next week, hopefully, if we get it done on Saturday. I appreciate your being here. Spread the word, if you would. I would be so indebted and so grateful if you would just tell one person about the show. Then any question that you have, any topic that you specifically want me to cover, if you'll let me know that, I would be happy to do that to serve you as best I can.

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