Value as a topic is fascinating and all of us need it, use it and perhaps earning a living measuring, selling or consuming it. So diverse and complication that I could not possibly write a complete nor accurate depiction of value pleasing everyone. It is a concept which helps defines us as a civilisation and has caused the break up of many others.
In the 17th Century, when financial markets as we know them today started to take shape, a French nobleman named Francois de La Rouchefoucauld wrote:-
“The greatest of all gifts is the power to estimate things at their true worth”
I have it written on a pink post-it note and it holds pride of place at my desk, in the world of accounting and financial planning this is not just an inspirational quote summarising my own perceived contribution to the world but is a sage warning.
As most finance people will tell you we tend to over and underestimate things quite regularly and we live in a world where it is increasingly getting harder. This is especially true since the global financial crisis and with advent of quantitative easing.
Typically, we attribute concepts such as usefulness and utility to value. From this we can get to markets of supply and demand and in a simplistic way the markets will determine the price.
Then this happened.
I remember several years ago now, an auctioneer coaxing bidders to bid more with “Come’ on money is cheap!” and from one perspective this is correct and it appears we are now confessing that this “cheap money” was the primary reason for inflated assets. The problem this creates for the individual decision maker is “does the price reflect true supply and demand?”.
We shall find out in the coming years, however there are a few other ways to judge value which can be useful.
Firstly, value can be assessed by what direct and indirect benefits and costs occur, as our previous blog Thoughts on stopping you from a business failure suggests, that means figuring out your cash flows and what your plan is.
Secondly, understand the time value of money and what that means to you. A dollar today is always worth more than a dollar tomorrow and by way of implication that may means judging value by what price you would receive if you need to have it sold by the end of the week.
Finally, pay attention to both sides of the argument and be informed when making a decision. Accountants and to a lesser extent financial planners can make a significant contribution in these decisions and assist you in navigating such decisions.
In today’s world being well informed and having a balanced judgement will assist in you in making the right for you.
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