What is value? I have watched people lose a third or more of the value of their assets over the past year. Those who were highly leveraged found themselves owing far more than their assets were able to repay.
How did this happen?
Value is capricious and subjective. There are three kinds of values. They are emotional, productive and market.
Emotional value comes from a need to own an asset to satisfy an internal feeling. The productive value is that value that comes from usefulness. Market value is what someone will pay you for it.
I have a farm in the Cheboygan area that illustrates my point. It has an emotional, productive and market value. The log cabin and barn built by my ancestors in 1870 are there.
The original deed is signed by Abraham Lincoln’s secretary in 1863. My great-great grandfather received the land as a bounty for service in the Creek Indian War. That gives a value to the property for my family that it would not have for anyone else.
The property contains 200 grape vines, more than 100 berry bushes, 20 apple trees, six cherry trees, eight plum trees and a large vegetable garden. It has productive value. According to the township assessor, it has substantial market value. He and I do not agree on that.
Herein lays my point: What is market value, and how do you determine it?
Market value is the amount of the check that someone will write to you to buy the asset. Until the transaction actually happens, the market value of a property is arrived at mainly by processes that make voodoo look acceptable.
I am asked regularly to give a quick opinion as to the value of a business. Business valuation is an art, not a science. You can get appraisals on real estate and equipment, but the intangibles are a crap shoot. They are valued based on history and projections.
Everybody knows that hindsight is 20-20 but projections fall somewhere between dreams and hallucinations. When you look forward, major customers may be gained or lost. Product lines may expand or contract. In reality, blue sky valuations are just that. If you are the seller, you feel pretty confident the customers will stay. If you’re the buyer, you pray they will.
But buying a business is still more rational than the stock market.
How about that stock market? Does the word “manipulation” mean anything to you? It seems to me that emotion plays a greater role in stock gains and losses than their underlying values. If I am wrong, then where did the trillions of dollars go that disappeared last fall? Exuberance took it up. Fear took it down. Is putting money in the stock market investing or gambling?
The people who created the mortgage and stock meltdown manipulated the country’s financial markets to make themselves billions. John Dillinger was gunned down outside a Chicago movie theater by a federal agent in the 1930s because he robbed banks. He lost his life because he did not know how to do it correctly. Today he would take his bonus and retire to the Hamptons. You needed to do it from the inside, John.
You borrowed how much against your home equity? What is a house worth beyond your emotional attachment to it as home and its intrinsic value as shelter? Its market value, like all other assets, depends on how much somebody will pay for it.
Houses used to be bought to live in. Then some geniuses figured out how to convince owners that their house could also finance cars, boats, vacations, etc. The house came back to being worth a little more than you paid for it. Surprise!
Where should you put your money, if you have any left? I don’t have a clue. I heard an economist on the BBC say you should go out and buy anything you want because, with inflation, money in the U.S. will soon be like money in Zimbabwe. Spend it now because it will soon buy much less. Financial advice from Robert Mugabe may be as good as anybody else’s today.
Pay down your debt. Keep your head up and your ears open. Just remember the opening concept in the book “The Road Less Traveled”: Life is tough. Once you accept that reality, it becomes less stressful.
Paul A. Hense, CPA, is president of Hense & Associates, a local accounting firm. He also is past chairman of the National Small business Association and the Small Business Association of Michigan.