Alright, so next in principle is what I call the principle of volatility, right? And the reason why I think this one’s really important is because a lot of people mistake volatility for risk. In fact, the finance industry sort of has always tried to equate the volatility of something with risk. And I think the best definition of risk, if we start with that, is that the risk of something is the likelihood of not getting the result you want. So risk is always relative to the result. So if you’re trying to achieve something that’s highly unlikely to be achieved, then you’ve got to do the things that increase the probability of that outcome occurring, even if it’s really unlikely. So if you wanted to be an Olympic gold medalist, for example, there’s a whole bunch of things – it’s very hard to do that if only a few people achieve that goal – but there’s a whole bunch of things that you just must do to even have a shot at it. And so that increases the probability drastically by you doing those things, but it still might be a long shot, if that makes sense. But doing anything that doesn’t increase that probability makes it extremely risky. a really good example that we also see with people who are, you know, they want to protect their money. So they put a lot of money into cash because they think, well, cash is safe and protected. Only the whole reason we have money, the whole reason we have financial assets isn’t because financial assets themselves do anything, but they allow us to purchase real assets, food, groceries, clothing, cars, etc. The things we use in the real world, right? And so the reason we want money is because we know we’re going to need more of things in the future. And so the purpose of financial assets really is to protect that future purchasing power, right, so we can buy more real things in the future. And so volatility is important because volatility means the value of our money, of our financial assets, might be changing at a particular point in time. But that doesn’t necessarily mean that the assets, the underlying assets themselves are risky, okay. Because what we find is if we take any asset, okay, and we divide the ownership of it. So the first thing is divisibility. The more divisible something is, the more the price is going to, the more liquid it’s going to become, right? So if we’ve got a big lumpy asset like say a big building, and the building might be worth $20 million, selling that building is going to be quite difficult. Yeah, we have to sell it all at once. Because you’ve got to sell the whole building, right? Unless you do little apartment blocks or… Well, unless you cut it up, right? Unless you make it divisible. So if we then, what But if the building was owned by a unit trust that had a million units in it, well now each unit is only worth $20. So now it’s much easier to sell bits of it, because it’s now divisible. And so by increasing the liquidity, because we’ve made it divisible, we’re now able to move it much quicker, increasing liquidity. But the problem with that is the more liquid something becomes, the more that thing can be treated like a commodity. So in other words, the more the unit of ownership in the building is more something that can be bought and sold as opposed to it’s actually the ownership of the building itself. Like you can flip the room instead of, like you don’t buy the room because you want to use the room, you buy it because you know you can sell it. You buy it because someone might want to pay you a bit more for it later. Yeah. Okay. As opposed to you really care about the whole building. Yeah. Right? So the more divisible something becomes, the more liquid it becomes, sure that’s going you can move your capital in and out more readily. But the more then those units themselves approach being simply a commodity of something that can be bought and sold. And that’s what we see very much in listed markets like stock markets, where you’ve got billions of shares in the Commonwealth Bank being traded, right, that are available. And so most of the people trading those shares on a given day are just moving money in and out based on whether they think they can sell those shares for more or less in a short space of time. Now a little bit of that might be driven by what they think Commonwealth Bank is really worth and what’s gonna happen to it in the future, but not really much in the short term because that’s not being realised. – It’s not happening in the next two days. – Correct, right? So the more something moves towards that commodity, the more the price, right, is a reflection of that and the more volatile it can be. Now when that’s extrapolated across the entire asset, it makes it look like the asset got volatile. – Yeah, it has nothing to do with the bank, it just has to do with selling and buying it. – Yeah, so just because this $20 million property, here got split up into a million units, they’re all worth $20 each, right? And you need 100 bucks, and you wanna sell yours, right? You might say, well, I’m happy to sell them for $18 each, which is a 10% discount. Now, does that mean the property is now worth 18 million? – No. – But that’s how you’d value that property if it was those units listed on the stock exchange. – Well, the value of the use of the building hasn’t changed. – The rent hasn’t changed, the expense of the property hasn’t changed. Okay, and more importantly, if you wanted to buy the whole building, if you went to all of the other unit holders and said, “I wanna buy yours for $80,” they’d be like, “No way. “I want at least 20 bucks.” In fact, probably more like 25. – Yeah, ’cause you wanna– – Right, so the value of the property is always going to be materially different as a property, right? – Yeah. – As opposed to the commodity of the shares themselves, right, and the reason those shares are a commodity is because they’re now somewhat detached from the bank because of that divisibility, which has increased the liquidity. – Yeah. – Does that make sense? – Yeah, it makes sense. – And so you get a volatility in price of the commodity, not a volatility of price in the underlying asset. – Yeah, but nothing to do with the actual bank. – So it can do, it can be, like if the bank was falling over, then you’re gonna see the volatility in price. But the volatility in trading is, it’s important to realise that it’s always somewhat removed from the underlying asset because of that impact of the visibility creating the liquidity. – So then like your news at night, where they go, “Oh, these stocks went up or down by X percent.” Just people trading it has nothing to do, well, majority of the time it has nothing to do with the actual underlying business or the actual underlying. – Well, from one day to the next, no. – Yeah. – So again, it’s one of those things, if you went to the CFO of a major listed company one day and said, “What’s your current outlook “and what do you think for your earnings profile “and how’s the business going? “Can you give me a full report?” And he gave it to you. and you did your analysis on it, and you went back the next day, and you said, “Can I have another one?” He’d say, “Read the one I gave you yesterday.” Right? Regardless of whether the share price moved 1%, 3%, 2%, or whatever sort of thing, you know what I mean? ‘Cause, you know, businesses just don’t change that much that quickly. But it’s not the business’s case, it’s the commodity being the small unit of the thing that you can own. And people will treat that as a commodity, right? In the same way that David Jones treat their winter coats at the end of winter as a commodity, right? And so they’re 50% off. They’re not 50% less effective, they’ll still keep you warm, it’s just that no one’s going to buy them. They need to move it, they need the capital to turn over, they make money trading it. So it’s just when it’s like, “Oh, Commonwealth Bank shares are down 2%,” it’s like, “No, it’s just there’s a bunch of people who wanted to sell their shares today.” Yes, and they were prepared to sell a little bit less than what people were prepared to it for yesterday. Yeah. Almost nothing. Well it can mean. Yeah. I mean it can mean. But most of the volatility you see in listed markets come as a result of that divisibility of the ownership creating liquidity which turns them into a commodity. Yeah. That’s my point right. That’s what’s created the volatility. There’s actually no risk in that volatility just because it’s people trading it has nothing to do with the risk. There’s no risk in it because you’re not being forced to sell it right. Yeah. – Yeah, yeah. – Yeah, correct. We’re looking at that in a bit more detail when we go into some, we’ve got some really good examples in some other videos where we go into looking at the volatility of prices, and we’ve got a really good example particularly with Hills Motorway, which was a version of a toll road in Sydney. So we’ll go and look at that. So have a look for that video, because that’s a really good example of, there was an opportunity to own that asset two different ways. One was a listed vehicle, and one was an unlisted vehicle. So you had a chance to own the same underlying asset but with completely different investment returns. Really different investment returns.