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Dhani, a fresh graduate, just got his first job with a salary of Rp20 million per month.

He wants to make smart money decisions but doesn’t know where to start.

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What is Insurance & Why Do People Buy It?

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What is Insurance & Why Do People Buy It?

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Why do people buy insurance? What risks are they trying to protect themselves from?

🔹 Your task

✅ Comment on why insurance is important (examples: health, car, life, business insurance).

✅ Share the example

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Higher returns come with higher risk.

Investors must balance risk vs. reward.

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Explain why you chose that option?

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🪙 If you received Rp10 million today OR Rp12 million in 3 years, which would you choose?

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💡 PV Formula

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💡 FV Formula

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📊 Example Calculation (For Rp12M in 3 years at 8% interest rate):

PV = \frac{12,000,000}{(1.08)^3}

PV = \frac{12,000,000}{1.2597} = 9,528,000 ]

🔹 Conclusion:

If you invest Rp10M today at 8%, it will be worth more than Rp12M in 3 years.

So, taking Rp10M today and investing is smarter than waiting!

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"Rp10 million today is worth more than Rp10 million in the future!"

Option A: Save money in a bank deposit (low risk, low return).

Option B: Invest in stocks (high risk, high return).

Option C: Buy gold (medium risk, steady return).

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He leaves his money in a low-interest savings account → Loses value due to inflation!

He realizes investing is key to growing wealth.

🔹 Key Takeaways on Time Value of Money

✅ Money today > Money in the future.

✅ Investing helps grow money faster than saving.

✅ Inflation reduces the value of idle cash!

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Vote & share one financial risk you know

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Vote & share one financial risk that you know

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Vote & share one financial risk that you know

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Would you put all your money in Tesla stock OR spread it across 10 different stocks?

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✅ Firm-Specific Risk → Can be reduced with diversification.

✅ Market Risk → Affects all stocks; cannot be eliminated.

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🔹️ Diversification as the shield of risk

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🔹️ Diversification as the shield of risk

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"Don’t put all your eggs in one basket!"

Portfolio Example: Investing in Tech + Energy + Healthcare reduces risk.

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Dhani Invests in Stocks

Investment A (Concentrated Portfolio) → Puts all money in one tech stock → Loses 50% in a crash.

Investment B (Diversified Portfolio) → Loses only 5% because other stocks balance the loss.

🔹️ Which Investment is Smarter?

🔸️ Diversification protects Investor B from single-stock crashes.

🔸️ Investor A could win big or lose everything.

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Exceptions to Diversification – When Is It Okay to Take Risks?

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Exceptions to Diversification – When Is It Okay to Take Risks?

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Some investors focus on a few high-growth stocks (e.g., Buffett, venture capitalists).

Requires deep research & market knowledge.

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✅ Diversification reduces firm-specific risk.

✅ Market risk cannot be eliminated but can be managed.

✅ Some concentrated investments can outperform but are riskier.

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Dhani Visits The Stock Market - the City of Speculation

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Dhani Visits The Stock Market - the City of Speculation

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He meets Mas Spekulan, a trader who claims to know how to beat the market.

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✅ Person facing risk: Pays a premium to the insurance company.

✅ Insurance company: Accepts risk and provides compensation if an event occurs.

✅ Insurance contract = Gamble: You may never use it, but you get peace of mind.

🔹 Your Task:

🏁 Comment: "Is insurance a waste of money if you never use it?"

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Do you believe you can consistently beat the stock market?

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💡 What is a Utility Function?

A utility function represents how individuals value money, risk, and decision-making.

It measures satisfaction (utility) from different financial choices, helping to understand risk preferences.

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Why Does Utility Matter in Risk Management?

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Why Does Utility Matter in Risk Management?

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💰 Not Everyone Values Money the Same Way:

Risk-Averse People → Prefer stable returns, dislike uncertainty.

Risk-Neutral People → Focus on expected value, indifferent to risk.

Risk-Seeking People → Love high-risk, high-reward opportunities.

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1️⃣ Risk-Averse Investors (Concave Utility Function)

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1️⃣ Risk-Averse Investors (Concave Utility Function)

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Value certainty over risk.

Their utility function increases at a decreasing rate (diminishing marginal utility).

Example: Prefer fixed income investments (bonds, savings accounts, diversified portfolio) over risky assets.

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2️⃣ Risk-Neutral Investors (Linear Utility Function)

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2️⃣ Risk-Neutral Investors (Linear Utility Function)

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Care only about expected return, not risk.

Utility grows proportionally with wealth.

Example: Would accept a 50/50 bet between $1,000 or $2,000, because expected value is $1,500.

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3️⃣ Risk-Seeking Investors (Convex Utility Function)

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3️⃣ Risk-Seeking Investors (Convex Utility Function)

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Love risk and seek high potential rewards.

Their utility function increases at an increasing rate.

Example: Prefers lotteries, high-growth stocks, crypto, venture capital.

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How Utility Function Helps in Managing Risk

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How Utility Function Helps in Managing Risk

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✅ Explains why people buy insurance (risk-averse behavior).

✅ Justifies diversification → Higher utility from stable, low-risk returns.

✅ Helps in investment portfolio decisions → Identifies personal risk tolerance.

💡 Example Decision Using Utility:

Investor A (Risk-Averse) → Will choose a safe bond over a volatile stock.

Investor B (Risk-Seeking) → Might go for high-risk crypto instead of bonds.

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📊 Real-World Applications of Utility in Finance

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📊 Real-World Applications of Utility in Finance

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1. Insurance Markets: People pay premiums because avoiding risk increases their utility.

2. Portfolio Theory: Investors maximize utility by choosing a mix of risky & risk-free assets.

3. Behavioral Finance: Explains why people make irrational financial decisions (loss aversion).

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📌 Definition: The Efficient Market Hypothesis (EMH) states that asset prices reflect all publicly available information.

✅ Key Assumptions of EMH:

Stock markets are informationally efficient → Prices adjust quickly when new information is available.

Each company listed on the stock exchange is followed closely by many analysts and investors.

Stock prices are set by supply & demand equilibrium.

💡 Example:

If Apple announces strong earnings, its stock price immediately increases because investors react to the news.

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Why do insurance companies face challenges in pricing and managing risk?

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Why do insurance companies face challenges in pricing and managing risk?

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✅ Adverse Selection: High-risk individuals are more likely to buy insurance.

✅ Moral Hazard: Once insured, people may take more risks (ex: reckless driving after getting car insurance).

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Do you think insurance premiums should be higher for riskier people?

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✅ Diversification: Reduces risk by spreading it across multiple assets.

✅ Insurance as a risk-sharing tool: People pay premiums so that risk is spread across many policyholders.

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Efficient Market Hypothesis (EMH) – Can You Beat the Market?

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Efficient Market Hypothesis (EMH) – Can You Beat the Market?

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📊 Weak Form EMH: Prices reflect past data → Technical analysis is useless.

📊 Semi-Strong Form EMH: Prices reflect all public info → Stock picking is hard.

📊 Strong Form EMH: Prices reflect all private info → Only insiders have an advantage.

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Implications of the Efficient Market Hypothesis

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Implications of the Efficient Market Hypothesis

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📌 What does EMH mean for investors?

✅ Stock prices follow a “Random Walk” → Future prices cannot be predicted from past data.

✅ No investor can consistently "beat the market" → Even experts struggle to pick winning stocks consistently.

✅ Active trading is risky → Most investors should consider passive index investing (S&P 500, ETFs).

💡 Real-World Application:

If EMH is true, technical analysis and stock predictions do not work.

The best strategy is to diversify & invest in index funds.

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🔹 Dhani Tries Day Trading – A Big Mistake!

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🔹 Dhani Tries Day Trading – A Big Mistake!

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He follows Mas Spekulan’s stock tips → Loses money in 3 months.

🔹 Why 90% of Traders Lose Money?

✅ Markets move randomly (random walk).

✅ Emotions make investors buy high, sell low.

✅ Long-term investing outperforms short-term trading.

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Case Study: Index Funds vs. Active Trading

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Case Study: Index Funds vs. Active Trading

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Dhani learns that S&P 500 index funds outperform 90% of active traders.

😮‍💨 Why Are Many People Poor Stock Market Investors?

🔹 Common Investment Advice: "Buy low, sell high"

🔹 Behavioral Mistake:

Many investors buy when prices rise and sell when prices drop

Example: Apple stock fell from $130 (May 2015) to $94 (April 2016), but many only sold when it rebounded to $143

🔹 Psychological Bias:

Investors believe rising stocks will keep rising and falling stocks will keep falling

Leads to buying high and selling low, reducing returns

📊 Why Are Stock Prices Hard to Predict?

🔹 Stock prices reflect all available information instantly

🔹 If new data appears (good or bad), prices adjust immediately

Example

📊 Snapchat’s Stock Price Reaction

📢 If Snapchat’s ad revenue is higher than expected → Stock price 🚀

📉 If revenue is lower than expected → Stock price 📉

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Case Study: Index Funds vs. Active Trading

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Case Study: Index Funds vs. Active Trading

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Why Even Experts Struggle to Beat the Market

🔹 Wall Street professionals gather massive data to predict future profitability

🔹 Yet, fund managers rarely beat market averages (e.g., S&P 500)

🔹 Study Findings:

Only one-third of mutual fund managers earn a higher return than index funds

Even fewer outperform for two consecutive years

🏁 Why Does Warren Buffett Like Mutual Funds?

🔹 Warren Buffett’s Advice:

Avoid picking individual stocks

Invest in low-cost index mutual funds

🔹 Why?

Mutual funds hold diverse stocks, reducing risk

Even if some stocks perform poorly, gains from others balance the losses

🔹 Can investing in mutual funds make you as rich as Buffett?

No, Buffett became wealthy by making large investments in select firms

However, mutual funds help investors build long-term wealth

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Asset valuation is the process of determining the true worth of an investment. Investors use different methods to analyze stocks, bonds, and real estate to decide whether an asset is overvalued, undervalued, or fairly valued.

🔹 Fundamental Analysis → The study of a company's accounting statements & future growth prospects to determine its true value.

📌 How Stocks Are Valued?

✅ Undervalued → Price < Value (Good buy opportunity)

✅ Overvalued → Price > Value (Potential bubble or risk)

✅ Fairly Valued → Price = Value (Market price aligns with intrinsic value)

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📊 Example:

If a company’s stock price is $50 but its intrinsic value (based on earnings, assets, and growth) is $70, it is undervalued and may be a good investment.

💡 How to Pick a Stock?

🔸️ Do research yourself (Read financial reports, market trends).

🔸️ Follow Wall Street analysts' advice.

🔸️ Buy mutual funds → A fund manager does the research for you.

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Key Takeaways on EMH & Investing Strategies

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Key Takeaways on EMH & Investing Strategies

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✅ Markets are efficient, but not perfect.

✅ Long-term index investing beats most traders.

✅ Some anomalies exist, but they are rare.

✅ The market is hard to beat consistently.

✅ Day trading is risky & not for everyone.

✅ Long-term index investing is the safest bet.

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1. Emergency Fund → 6 months of salary in savings.

2. Long-Term Investments → Index funds, real estate, mutual funds.

3. Medium-Term Goals → Saving for a house or business.

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🏁 Dhani’s Final Decision – A Smart Investor!

He follows the balanced approach → Investing in long-term diversified assets.

✅ Invest early, think long-term.

✅ Risk is unavoidable, but manageable – Diversify to protect your wealth.

✅ Ignore market noise & speculation – Focus on long-term value, not short-term trends.

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After learning from Dhani’s journey, what’s ONE financial rule you’ll follow

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After learning from Dhani’s journey, what’s ONE financial rule you’ll follow

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Open for Q&A.

What’s your financial plan after learning Dani’s journey?

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💭 “Should I save, invest, or spend my salary? What’s the best choice for my future?”