My Mother Taught Me More About Value In One Afternoon Than A Year of Business School
She took me to an auction and instructed me not to move, nod my head or even say a word.
Going once…going twice… sold!
Just like that, we lost out on what could’ve been our future home. Actually, the house sold for over $100k more than what my mom was willing to pay for it. It went for 20% above her max bid.
I didn’t understand.
I was 12 years old at the time. And as soon as the hammer dropped, I immediately turned to her in disbelief. She met the bewildered look in my eyes with hers and started laughing. Truth be told, she was a little confused too.
There were plenty of houses in the area selling for less, so I guess the winning bidder really wanted it. But it didn’t make sense to me, and I wanted to know why someone would overpay so much. Was this person a fool, a genius, or just rich? What motivated them to pay more than it was worth?
It was an eventful car ride home, my mom was a little disappointed to miss out, but I was infinitely curious. I started asking her why it sold for so much.
She laughed again,
“I don’t know! You’re asking the wrong person. You should have asked the guy who bought it!”.
Fair point. But bemused, I now sought the second-best alternative. I wanted her opinion. I continued to ask her incessantly, seeking a more insightful answer. She was tired, but persistence was my strong suit; we both knew that. I managed to squeeze an answer out of her.
“Maybe they’ll tear it down and turn it into a pub or something. Who knows?”
Intrigued, I prodded further, “A pub? But it’s a house.”
She explained,
“There is more to value than just the house. We would have just lived in it. But maybe this person saw an opportunity to do something with the land. Maybe they will redo the house, add an extension, or turn it into a block of apartments, etc.
Even though there are other houses in the area selling for less, maybe the person likes this specific location more for an important reason we aren’t aware of. Or maybe there’s some sentimental value they place on the house.
There’s a lot I don’t know.”
I sat in silence for the rest of the journey; we were both satisfied.
Although my mouth was shut, my mind began bursting with ideas. The answer she gave was better than if I asked the buyer directly. He would only have given me one perspective. It seems my mom triggered a re-organization of my thought processes, and I began to see the world through a new lens.
This was the first time I noticed the price of something didn’t match its “intrinsic” value — it wouldn’t be the last. It’s cliché to say that value is in the eye of the beholder, but it’s true. It’s clear in this instance that a different or more creative use of the property changed its value.
The lesson extends to more than just property.
If a single idea can change the value of something in an instant, what does that tell you about the value of ideas? Ideas have the power to magnify and create value.
Intangible thoughts can lead to tangible gains.
Gradually, I stopped thinking about value in absolute or fixed terms. I learned to think in ranges of possible values.
The nebulous concept of value is radically subjective, not universal. In economics, prices are set where demand meets supply. But the value each individual receives from the exchange differs depending on their own preferences.
As individuals, we get different outputs from the same inputs. Some get more than others. The interplay between people with differing opinions of value is what creates opportunities for trade.
The manifestation of this value gap is apparent in the world around us.
Want to make more money? Find a business that stands to gain the most from your skillset. The more profitable the business is, the higher the value proposition you bring, the more your compensation increases even if the effort you make is the same.
People confuse the idea of a common valuation — while the nominal dollar amount might be the same, the value it represents to each person differs. Mistakes occur when people don’t know their own value for something and instead buy (and hold onto) things based on other people’s values.
It’s dangerous to buy into something trying to experience someone else’s value (joy, utility, fulfillment, pride, opportunity, sentimental, etc.). That value may not exist for you.
Billionaires can spend millions on “non-sensical” artwork for bragging rights, simply to say they can afford it. They get to buy a story they want to tell. And if they donate the artwork, it becomes an income tax deduction that makes sense only for the super-wealthy. In many cases, they effectively get that story for free.
If my mom continued to bid beyond what she valued the house at, she would have been stuck financially. She didn’t have the plans for the property as the winning bidder. There was no way for her to realize the same value as they did. It made sense to leave it.
So, how do you maximize the value you receive and avoid the pitfalls that many fall into?
The idea is simple but slightly more complex in reality:
- Sell what other people seem to value more than you.
- And buy what you value that others don’t seem to understand.
Eventually, my mom managed to find us another home in more or less the same area at a price she was willing to pay.
This article is for informational and entertainment purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.