What Is Something Worth?
The value of "something" is not an issue to take lightly. Value can be derived from several factors such as supply and demand or utility value, things can spoil or become obsolete making where you invest very important. Value is not as constant as many people think or always destined to rise. The whole concept of value is also deeply rooted in "relevance" meaning drinking water is very valuable to a man dying of thirst. I have over the years discovered many opportunities to buy things at ten cents on the dollar and will confirm your money goes a long way in such a situation. It must be noted that values can really change if you are forced to sell into an illiquid market at a time when others are doing the same.
Too buy things at deep discount it helps to have money or the equivalent, it also helps to be able to move quickly. The importance of developing good negotiation skills should not be underestimated. Years ago a business venture took me into an area where I had the opportunity to attend many auto auctions and placed my own bids. I soon learned getting the best price is an art. It is a combination of things, like timing, you soon learned when to step in or how to slow the bidding down thus cooling the animal spirits. Often simply not bidding against yourself was a good start.
When it comes to value the market place is the final judge and shows little favor or mercy. One of the favorite stories garnered from this experience came from when a seller complained to the auctioneer about the low bids he was receiving on a car he was selling. When the high bid came in at one thousand dollars the surprised seller said, "but I paid four thousand for that car just last week". The auctioneer's response said it all , "well sir, it is a thousand dollar car today"!
This "theory of value" is something that also extends to stocks. These are promises that were at one time no more then a piece of paper known as a certificate that signified part ownership in a company, now it is just a line on a financial statement. How many investors have seen that line vanish? "Value" can change in a heart beat, and we live in a time that information travels at the speed of light. May I mention just two of the great teachers of what I call financial reality, Bernie Madoff and Enron.
When it comes to real estate low interest rates and liquidity have a huge impact on value effecting both the value by making it easier to purchase thus driving up prices, and at the same time allowing more building to take place and increasing the supply. When we exceed demand rents fall and people stop buying as an "investment". Prices must rise more then the natural depreciation from the wear and tear of age or the main driver for owning real estate vanishes. Oversupply is the bane of real estate and crushes the value of this hard and expensive to maintain commodity.
For years I have struggled with the inflation/deflation conundrum and like many people studying the subject been surprised at the lack of inflation. Never before has mankind diverted such a large percentage of wealth into intangible products or goods. I now argue this is the primary reason that inflation has not become a major economic issue. Our modern economy is loaded with interwoven contracts reeking of contagion. If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation could soar even as debts go unpaid and promises are left unfilled.
Call me a skeptic but I contend that the illusion of value should not be held to close. The value of a building can be altered when a tenant goes bankrupt. The value of a currency drops when everyone starts to sell it. Even the value of something as sought over as gold can drastically change if a government confiscates it and makes it illegal to buy, sell or even own can. What something is worth can be difficult to determine. And most of all tell me the value of a promise on paper or implied, remember if you own gold that is represented by a certificate, you own a piece of paper.
Footnote; Your comments are welcome and encouraged. If you have time check out the archives for other post that may be of interest to you. The articles below delve deeper into how the value of money can quickly change,