How To Know If Something Is Valuable Or Not

Previously I wrote about what it means when an investment is risky and how to minimise that risk, so I wanted to touch base on how to know if something is valuable or not.

But let’s define the word valuable first:

Valuable = “worth a great deal of money”, “a thing that is of great worth, especially a small item of personal property”

So how do you know if something is valuable? And I’m talking about monetary value rather than sentimental value, or other things of great importance that could be hard to replace (like a passport for example).

There is a couple of angles that we can approach value from.

Supply and demand

Here’s a simplified example of supply and demand.

Let’s say you sell hats and you’re the only one who sells them. There is a steady demand for them and all the buyers come to you.

You get to decide on the price, or the value of your hats and if the buyer wants one, they will pay the price you set.

But what happens if another seller of hats appears, and they sell identical hats?

If the new seller prices their hats lower, and they’re exactly the same, who will the buyers go to?

Well, if everything else is the same, a normal buyer will in most cases choose the cheaper option.

Competition will most likely lower the monetary value of an item.

Perceived value

Now, what will happen if the hats you sell are extremely unique and only appeal to a certain buyer?

You might price them at $300 but get no interest. Are they worth $300 then?

Or other way around, you price them at $300, you get a lot of buyers but later find out that your buyers are reselling your hats for $400.

What is the value of your hats then?

On top of basic supply and demand, the perceived value matters too.

If buyers think what you sell isn’t worth the price, then they simply won’t buy what you are offering.

On the other hand you might be selling something unique that someone is happy to pay big amount of money for, even though others don’t understand it.

This is true for collectibles, second hand goods that you might sell and investments, to a degree at least.

How to know if an investment is valuable

Before we can decide whether an investment is valuable, we need to know what makes an investment valuable and how to measure.

I’ll use shares as an example, but these basics (with some modifications) can be used to value most investments.

Many things play a part in the value of shares:

• Supply and demand (more sellers than buyers => price moves down, more buyers than sellers => price moves up)
• Perceived value (brand name might drive the share price up purely because investors believe in the value of the shares, rather than having any financial data to back it up. Tesla could be an example, another is cryptocurrencies).

The above are unpredictable ways to value shares, so valuations are mainly based on the financial data released by companies. This data is available at places like Yahoo Finance.

Investors can estimate future growth of the company and future dividends to have an idea of the fair value of the company.

The fair value of the shares are calculated by getting the present value of the future dividends. (I’m planning on writing a separate post to explain in more detail).

After getting a fair value based on the financial data, you can compare it to the current market value (this is the price you could buy the shares for at the time you check).

If the current market value is higher than the fair value you calculated, it is an indicator that the shares are overvalued by investors and might not be the greatest buy.

The opposite is true if the fair value is higher than the market value.

This is called value investing, You’re looking for differences in the perceived value and value based on financial data calculations.

This one way to determine if an investment is a good buy, or valuable.

What is the most valuable thing you own? How do you know it’s valuable? I’d love to hear in the comments!