Price is what you pay, value is what you get. Familiar? This is a famous quote by Warren Buffett.
The essence of this phrase is that you should never pay more than the value of a certain stock. If the value of a stock is worth $1.00, you’ll get a bargain if you pay anything below $1.00; and similarly you would have overpaid if you pay anything more than $1.00. Simple to understand? Yes it is. The challenge though, is giving an accurate valuation of the company that you will be owning. Some investors will measure the assets & liabilities that the company CURRENTLY has while some investors will forecast FUTURE earnings and get a valuation based on that. Either way, investors would have a magic number in their minds, known as the value of the company.
In fact, this theory applies to everything that happens to us in life.
Price is what you pay, value is what you get. How much are you willing pay for a 10-day trip to Taiwan? How much are you willing to pay for that 4-room BTO flat that you and your girlfriend intend to get? How much are you willing to pay for a good meal at a reputable Japanese restaurant over the weekend? How much are you willing to pay for a new GoPro Hero 5 or the new iPhone 7?
Well it depends.
It is a good deal if the perceived value exceeds the price. This is called the consumer surplus – the difference between what consumers are willing to pay and what they actually pay.
The higher the perceived value of something we buy, the more willing we are to buy it. Value comes not only in tangible terms but also intangible terms. For people who travel often, these phrases may sound familiar to you:
“Travel while you are young and able. Don’t worry about money, just make it work. Experience is far more valuable than money will ever be”
“The greatest reward and luxury of travel is to be able to experience everyday things as if for the first time”
“Working makes you money. But travel makes you rich”
“Travel is the only thing that you can buy that makes you richer”
The value in travelling comes in the experiences that you have, the memories that you make during travelling. These are not physical assets; we can’t value them easily. If you value these intangibles highly, the more you are willing to pay for. Again, it is only a good deal if and only if you pay a price that is LOWER than the value of whatever you are buying.
Faced with limited resources that we have at our age, it is hard to prioritise how to spend our money wisely to maximise the TOTAL value we can derive from our money. How to maximise the “Value per dollar spent” to get best bang for your buck.
Will the $10,000 that you are going to spend on a student exchange maximise your value per dollar spent? Or perhaps spending the $10,000 on a car will do the trick?
Ultimately, the decision is ours to pull the trigger to spend money in areas we feel that we should spend to make us happy. Some of us like to live in the moment, some of us like to plan for our future. My take is that we should ALWAYS live in the moment AND plan sufficiently for our future. How? I’ll leave it till next time 🙂