Valuation is an interesting topic.
In terms of companies, there are academic approaches to valuation that people learn in business school. Of course, that doesn’t stop the stock market from reflecting a different value to a company each trading day. Ultimately, no matter what theories a person applies, or what subjective opinions might be present, the market has its own assessment.
Therein lies the lesson: something is worth what someone else will pay for it.
It’s a concept that’s so simple, yet so easy to lose sight of. I know that I need to remind myself of this reality, and suspect that some others need a reminder too. Here are a few examples of this concept.
Value of Your Work
First of all, the definition of value we’re talking about is financial in nature, not one’s value as a human being. Additionally, there are some types of work that are more noble than others – for example, I find teachers and nurses to be doing more valuable work for society than someone in a corporate job. However, the financial value of the latter might actually be higher – much higher in many cases. Fair or not, it’s the way it is.
So in terms of how much your work is worth, or applied in everyday terms what type of salary do you deserve, I’d say it’s simply based on how much you can get on the open market. Simple as that.
Now, this has been something that I’ve needed to remind myself of. While I generally don’t like to compare or compete with friends, I’ve noticed that a few people I know have taken their careers to higher levels than me. I think I’m just as capable, intelligent, driven, etc. What gives?
Well, the reality is that we’re worth what the market will pay us. Maybe there are certain skills, accomplishments, etc. that are needed to drive up our market value. If we want our time to be worth more to employers or clients, we need to make ourselves worth more. Yes, this applies to me.
Sure, sometimes it’s a matter of asking for more. But often times it’s a matter of remembering that others have alternatives, and to command higher value we have to provide value back in return. When the market talks, it’s up to us to listen. And then, take action!
Value of a Home
So many people bought homes a decade ago when real estate was booming, and they paid a premium price for their purchases. While it’s hard to predict the future and avoid getting caught up investment bubbles, it can happen.
Let’s say somebody bought a home for $300,000 and then wanted to sell her home 3 years later. She then discovers that comparable homes in the same neighborhood are selling for $250,000. If she were to sell her home for that price, much of her equity would be wiped out.
Many people would hold out, or would simply price the home closer to that original $300,000 purchase price. After all, that’s what was paid for the home, so that’s it’s real worth. Right? Or, at least we can expect that it will go back to that market price soon enough, right?
No, not really. Sadly, the market value would just be what it is now, and we don’t know about the future. The past is a sunk cost, and the current value means the homeowner would not recover much of the initial investment. The market speaks, whether or not we like what its saying.
Of course, this can also work in our favor, as many people also discovered as prices bounced back in some places. Sometimes it’s all about timing and maybe some luck. Valuations change, but they are what they are at the moment!
Value of Collectibles
I was talking to one of my long-time friends recently, and we were reminiscing a bit about how when we were kids WAY back in the 1980’s (yes I’m old now), baseball cards were all the rage. Popular rookies had cards for sale at incredible prices, some as much as $50 per card. Keep in mind there were tons of these printed.
Today, cards from that same exact era could be purchased for a fraction of that. As in, a whole year’s set of cards (500+) for $20. The friend I mentioned looked at a few sites for prices, and found that all those cards are just worth what they were back then.
That’s the way it is. An over-inflated market one day, and nothing the next day.
It could work in reverse too, you never know. That old antique item you or a family member might own could be something that you might not care for, but someone out there might really be willing to pay some bucks for it.
Bottom line: Things aren’t worth what we want them to be worth, what we paid for them, or what we emotionally wish for them to be worth. Their values are determined by the market, based on what others will pay. This can change over time, and if keep this in mind at all times, we can use this insight to our advantage!
My Questions for You
What are your thoughts on this approach to value?
Do you ever think about this, or occasionally lose sight of the concept?
Do you have any other examples to share?