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What is value?


premfan
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  Hey guys, i have been thinking lately what exactly determines the value of  an asset. An asset is basically anything in this world. So why is something considered  valuable compared to something that is not valubale? An ideal asset would be something in low supply and in low demand= low asset price. My thinking is if the supply is low. The demand will ultimately be high because of the low supply. After major wars or natural disasters the supply is low and demand is low. Depending on the geopoliticial risk involved the supply and demand will ultimately catch up. So my thinking is countries that are finishing a war that have a democracy and practice capitalism will ultimately in the future result in higher asset prices. That is the best asset to buy when supply is low and demand is low. I guess what i'm trying to say is demand for any asset will be high if the supply is low. Also when the supply cant be manipulated or created out of thin air. So our job as value investors are to find assets that in the future will be in higher demand and that have a low supply. My current list

 

1.) gold

2.) physical land

The greatest asset will always and forever be a human being. Demand is always high and supply is always low(Only one of you). Create more demand for yourself and society will give you a higher value.

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I like Klarman's definition - if can create cash flow it is an investment otherwise it is a speculation.  You can value an investment but not a speculation as it is solely dependent upon what someone else will pay.

 

Packer

 

I prefer to go with Buffett's characterisation of value being something that is so obviously cheap that he doesn't need a calculator to figure it out.

 

While it is good to have a framework (like Klarman's for e.g.) to work within, it can be counterproductive to dogmatically stick to a fixed viewpoint. Most of the time the framework makes sense but there can be times when you may want to go beyond the framework.

 

Consider this hypothetical. Assume that oil prices fall below the cost of production for a significant time, speculators start to bail out and you are offered a million barrels of oil at a 10% discount to the market and say 40% discount to cost of production. Might it not be a good value investment?

 

Can cashflow make a gold company a good investment when its product is a commodity that does not produce cashflow? Does the same argument apply to an oil company (oil, like gold, does not produce any cashflow either)?

 

There's no advantage to boxing oneself in to a rigid definition - what matters is developing the skill to identify value when it presents itself to you, whatever form it may take. Like the judge said about porn: I can't define it but I know it when I see it.

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I agree.  It is the creative use of frameworks in different contexts that creates value.  In this case since there is a production price where the commodity is lower than, I think you can use that price as value benchmark because eventually the price will return to costs.  The context Klarman was discussing in areas like collectables, art and other items where a majority of price is above production costs. So examples today wouold be gold and other commodities selling a premium to production costs.  By association, cash flow from these premium commodity prices should also be recognized and discounted appropriately.

 

 

Packer

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