Cost and Value 101

The words we use shape our outlook on the world. As such, I feel it is incredibly important to be careful in our word selection.  Given the amount of economic turbulence we have all experienced over the past few years, I feel it would be useful to revisit two words that often get used – mistakenly – interchangeably; cost and value.

Cost is easy to observe. It is one of the first things any of us pay attention to when considering a purchase. It is the sound bite that commercials on television bombard us with. The cost of a thing is quite simply its price tag.

Value, on the other hand, is a much trickier term. It is hard to pin down what exactly is the value of a thing. It isn’t announced or boldly placed on display. Value is the true worth of a thing. Value goes beyond the price tag and asks, “Is this thing really worth the advertised price?”

One of the most interesting observations I’ve seen is that any person would agree that it is better to buy a new jacket for $25 rather than $50, and in fact that same any person would jump at the opportunity to cash in on such a sale, but yet fails to take the same measures in their investing life. The financial herd who convinced themselves to buy at $50 manage to convince themselves to sell at $25 rather than to buy more of a given company’s stock even when the story or investment thesis is unchanged. The same person who sees more value in the $25 jacket somehow manages to fail to see the same value proposition when it comes to the investment marketplace.

The reason for the above is rather simple, I believe. While people are able to inherently understand that paying $25 is favourable to $50 for any given item, investing isn’t so black and white because it is also an emotional endeavour. The reason the masses fail to capitalize on opportunities like this while investing is because fear overtakes their inclination to snag a basement bargain price. For this reason, investing is as much – or likely far more – about taming your emotions than a matter of intellect.

Beyond the emotional aspect is the fact that to get past the cost to see the value of a thing requires actually digging down and studying. After careful deliberation, after all of the facts have been weighed and the fundamental and technical data has been analyzed, it is time to make a judgment and trust that judgment to be the right one. Given the volatility in the market, this requires fortitude through trying times. This can be a very good thing from a true investor’s perspective because the less others are able to identify the value of investments and act on them, the longer they sit on the table for the astute student of the game.