6.5.14

Guest Post 19 - "Valuing Value" - Jes Min Lua


Preface: When Parin first asked me to write a guest post on his blog, my internal monologue was... 

“Why would he ask me? Since graduation (thanks to a long career in consulting) I have not written a sentence that did not start with a "bullet point"  or started thinking about anything without first opening a blank Powerpoint document. He probably heard some of my jokes during our INSEAD year. As it was a year of much partying and inebriation, he must have developed an artificially enhanced perception of how funny I actually am.” 
That did get me thinking about how people perceive and value things, though, so armed with a blank Powerpoint document, I embarked to write my first ever document with no bullet points..

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Nowadays people know the price of everything and the value of nothing.” 
- Oscar Wilde, The Picture of Dorian Gray.

People are obsessed about value, in all shapes and form. Think about those investment bankers who spend 18-hour days knocking about on spreadsheets trying to come up with the magic value of a company in an industry they’ve never heard of since the previous week. They don’t want to get a number too high, because it means their clients will look silly, and they don’t want to get a number too low, because the company’s shareholders will throw it out and their clients will look silly. Think about Damodaran, and McKinsey, and other undoubtedly smart people out there writing thick tomes with funky symbols explaining how we should value things. It’s important because it’s the foundation of how trade works - people will only buy things if they value the item more than the seller does.

But after all that’s said, done, written and posted by the deep experts on Facebook, value is such a fluffy thing isn’t it? Consider the few points below:

(I did say no bullet points, but didn’t make any promises about numbering systems..so do be kind..)


1. Value is subjective to each person


The most general definition of value is how much someone will pay for it. A Manchester United jersey would be a precious thing to a fan, but quite bothersome to me (it takes up cupboard space, doesn’t function well as a dishrag and doesn’t go with any of my pencil skirts) - and hence he’d probably pay a good deal more than me for it. Is the shirt fundamentally different in his hands and mine? Not at all, but we definitely perceive it differently and attach a different value to it. 

The other weird thing about its subjectivity is that it also changes depending on the cost of his alternative supplies. Does the MU fan value the shirt less if instead of at the shop, he could buy it cheaper through a cousin in the states? He would never agree to that accusation, but he would also not pay the shopkeeper’s price if he could get it cheaper in some alternative way, hence lowering the value of the jersey.


2. Value is not just subjective to each person, it is subjective to the persons around him / her 


You would think that how I value something is completely dependent on the utility or pleasure units I can get from that thing. For example, how I would value a piece of fried chicken is how crunchy it is, how the spices explode on my tongue, how wonderful a full tummy would feel on a cold winters days, etc. Also, how I would value a company’s stock is the cashflow I can get from dividends, capital gains, etc. projected for the many happy years ahead until the cows come home. Is that really true though?

Company stock prices on the exchange are valued based on several methodologies, but a major component is the Weighted Average Cost of Capital (WACC) - in human language, how much it costs for them to borrow money from banks and shareholders. The costs of borrowing from shareholders depend on who the shareholders are - if they’re well-diversified, they won’t mind so much if you give them lower average returns but if yours is the only stock they own, they have much higher expectations on average returns you give them. So the value of your stock holdings depends on what kinds of other assets the other shareholders own - who would have thought! 


3. Value changes with information availability, but not in a consistent way

The third weird thing about value is that it increases or decreases when more information is known, but not in a consistent way! Company strategy, when printed nicely in annual reports and communicated openly to shareholders, increase the value of the company’s shares. The more investors understand what your company is about and how it is trying to do, the more they are likely to pay for its shares. This is not the same for information stolen from a company (say through espionage) - the less people know about it, the more valuable it becomes. And if it somehow became an open secret, both the information and the company loses value! Isn’t that weird?


4. Value changes with how much assets are in question, but not in a consistent way


If an item is worth something, two of it would be worth two times more right? This works when you’re buying oranges, picking out shirts, or buying gems on Clash of Clans - in general, the more quantities involved, the higher the transaction value. A company with only one product would generally increase in value if it launched a second, third, fourth product assuming they aren’t cannibalistic in nature or customers hate them passionately. 


Not so with other items in life - like luxury handbags, sports cars, and collector’s game cards. The more quantities that become available, the less each individual unit is worth, and the worth of the total sum may actually decrease with every additional item that becomes available. 


5. And how do you value value anyway?

Hardcore economists will say “Let’s get it clear - the value of something is the amount that the market will pay for it”, painting an image of an all-knowing fellow called “Market” who will magically know how much things are worth and pay the right amount for it. But think about this - assuming that you JUST bought a perfect, everlasting pair of socks two day ago for SGD 2, when the USD/SGD exchange rate was 0.8. It was worth USD 1.60 then. Today, the exchange rate moved to 0.7, which meant your socks would cost only USD 1.40. Would the sock seller re-price his products? Would you feel it was fair to insist for a USD 0.20 refund from him? Neither would happen - and it’s because, fundamentally, the value of your socks would not have changed. Not to you, or the sock-seller, even though everyone in the world (who would not have known you, or your sock-seller, or the joys a pair of new socks can bring) would now think they are worth less.

Isn’t it weird that in this day and age, we still have no idea how to value value?