Sunday, November 18, 2012

What Is Something Worth?

The value of "something" is not an issue to take lightly. Value is not a constant and 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. I have discovered that when you start buying things at ten cents on the dollar your money begins to go a long way. This is a lesson many people may soon learn, or maybe not.

To buy things at deep discount it helps to have money or the equivalent, it also helps to be able to move quickly. Years ago a business venture took me into an area where I had the opportunity to attend many auto auctions, and often I actually made the 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 it 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.

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 and even the value of 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 two post below delve deeper into how the value of money can quickly change,



  1. This is a little add on I think is important; Another factor that influences value is inflation or deflation. The perception of where prices are headed and the speed they are moving tends to speed them along in that direction. Currently the world is a wash with debt and money. Much of the debt can be washed away with default or bankruptcy, if this is done the damage and pain will be intense in the sectors of the economy holding debt. Much of the recently printed money is being held as a cushion of safety in case the economy gets into difficulty. This has been exacerbated by low interest rates and bond prices. If that money decides to start flowing into "hard goods" inflation could soar as the velocity of money spikes.

  2. My point is spotlighted with the closing last week of Mt. Gox, a major Bitcoin exchange in Japan. This bankruptcy has focused attention on the risk of digital currency, As a man standing outside the headquarters of Mt. Gox talked about how he had lost over $200,000 worth of the digital currency all that can be said is oops!