How Do We Determine the Value of Things? [Musings]

What is Value?
How do we determine the value of things?
If you cant answer this question, then you cant say what’s a good price or bad price for anything. This makes investing hard as you dont know what stocks to buy, what real estate to purchase, what companies to spend your time on.
Life is a constant process of finding things that are undervalued, getting involved, and waiting for your thesis to come true or fail.
So it is critical that we have a solid understanding of how to value things, in order to determine whats undervalued and over valued, and make decisions based on these assumptions.
The problem is value is subjective — there is no one answer here. If we knew apple was worth exactly 1.3 trillion dollars, then there would be no stock market, etc.
Economic law of diminishing marginal utility.
We need to understand all of this in order to understand where to put our dollars. $1 can only go to one place.
Traditional Finance (Companies)
Book Value
Book value is the value of assets minus liabilities — essentially the value of a company is equal to the assets that it currently holds.
Discounted Cash Flows
Market Capitalization
Enterprise Value
EBITDA
Present Value of a Growing Perpituity
Future / Hype value
Real Estate:
Traditionally you would look at real estate with a Capitalization rate, typically a 5% cap is good.
Depreciation is anonther factor because some properties will reduce your tax bill which saves you money, which means it’s more valuable.
Crypto.
If crypto doesnt produce revenue back to the holders, than it doesnt make sense to value it like a company. If its burning supply then its deflationary, which makes the holdings go up theoretically?
Store of Value
Technology
Developers
Ecosystem
NFT’s
Live in an entirely different universe thats based on other factors. One factor is utility, which makes it able to be valued more realistically,
This works in certain scenarios, but ultimately, if we enter a period of time where we revert back to economic law of diminishing marginal utility, then the value of water and shelter will have a preimum to things like diamonds.
Rarity
Utility (passive income, etc)
Tangibility
Interopoerability
Social Proof
Liquidity / Scarcity
Speculation
Hype Cycles:
Each Hype Cycle drills down into the five key phases of a technology’s life cycle.
  • Innovation Trigger: A potential technology breakthrough kicks things off. Early proof-of-concept stories and media interest trigger significant publicity. Often no usable products exist and commercial viability is unproven.
  • Peak of Inflated Expectations: Early publicity produces a number of success stories — often accompanied by scores of failures. Some companies take action; many do not.
  • Trough of Disillusionment: Interest wanes as experiments and implementations fail to deliver. Producers of the technology shake out or fail. Investments continue only if the surviving providers improve their products to the satisfaction of early adopters.
  • Slope of Enlightenment: More instances of how the technology can benefit the enterprise start to crystallize and become more widely understood. Second- and third-generation products appear from technology providers. More enterprises fund pilots; conservative companies remain cautious.
  • Plateau of Productivity: Mainstream adoption starts to take off. Criteria for assessing provider viability are more clearly defined. The technology’s broad market applicability and relevance are clearly paying off.
Philosophy:
when we talk about what a company is worth, what we’re actually saying is if i put one unit into this company, how much will it change my quality of life with relation to putting it into another company.
A dollar can only exist in one place at a time, so you have to make a bet in the real world instead of leaving it in quantum space.
So thats what we’re talking about.
Growth is a factor too because you have two things. One is the money it spits off that you can use, and two is the money it grows. cashflow vs principle growth.
So value is two things. Cash today and principle growth tomorrow.
Real estate is great at that because you get RENT today and you get appreciation tomorrow (hopefully).
So how do you answer the question. Another factor is ‘for how long’ … some things payout high early, but then fade away. A popular ‘ makes a ton of cash, but then can go away. And then how do you value that? Take the money now, who cares what happens later, you can take that money and do other things? You just have to treat it the right way. treat it like that and you’re fine. Hold too long and you spend the money thinking it’s an infinite pool.
It’s like this. Energy is neither created nor destroyed. But businesses, and things of value, need to create something out of thin air. They need to combine things together to generate something of greater ‘value’ ….. Thats where the word value comes from. the mis-pricing. The error in math. that is value. value is a miscalculation by others, thats identified by someone at a particular point in time. change the time, then the ‘value’ may have changed. it may no longer have value, or the same value as at the previous point in time.
The math should look wrong for value to exist. Thats what value is. That’s where value exists.
1+1=3 that means the value is 1. The mis-pricing is the value.
If 1+1=2 then you have no value, it’s already done creating value. Value has been extracted, and its priced correctly. Broken Even = No value = No juice.
If 1+1=1 then its over valued. What you’re putting in is worth less when it comes out the other side. Negative Value.
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Value is a mis-calculation by others, thats identified by someone at a particular point in time.
Thats why it’s subjective. Because you need others to be wrong, in order for you to be right, and all of this occurs at a particular point in time. Usually people that are good at predicting the future, are able to find things that are mispriced because others cant see the value.
I have a particular skill with picking early stage companies and technologies.
*redacted name* with real estate. He can look at an area and know its up-and-coming. He can look at a dead property and see the gold underneath. He is able to switch off the time component in the equation, and understand that value changes with TIME. It may not have value NOW, TODAY, but TOMORROW the equation shifts from 1+1=2  (breakeven) to 1+1=3 (value creation)…

Also published on Medium.