## How do you value value?

What is value?

Value refers to an object or items worth to somebody else. Value is what somebody else is willing to pay for it. In theory in a perfect market everybody would know about the item that you're selling and as such the person that wants it most would be able to give you their best price. Unfortunately markets aren't perfect. Not only does everyone not know about the item that you're selling but they also don't willingly reveal their best price. In practice the true value of an object is a little difficult to decipher.

### A valuation problem

Let's take an example of a house. What is it worth? It can be valued in multiple different ways. The value could be the sum of the  discounted net rental income cash flows. It could be the replacement cost of the house. It could be whatever price a similar house within the area sells for. It could be valued at the discounted cost of the next best alternative eg the cost to you of not owning and house and thereby paying a rent. Or else it could be the best offer within a particular time span - ie how most sellers value their property when they sell.

However, there is even more complexity in the form of speculation. People may be interested in your asset in the hope that they can find someone else willing to pay even more for the asset. This is called the 'greater fool problem' - it suggests that assets keep being bought and resold until the final buyer is unable to find anyone else willing to pay a higher amount. He is the greatest fool!

### Is all value just speculation?

Arguably, all valuation is just an excuse for speculation. A property company will value its assets on a value per square foot. It will measure the square foot of the prospective investment property and then multiply that by the pound per square foot value for the area. However, who determines the value per square foot? It's purely whatever someone else is willing to pay per square foot.

Alternatively, a stock analyst will calculate the value of a company based on a multiple of profits. The multiple differs for each sector. However, how do you decide what value the multiple should be? It is simply whatever multiple some greater fool is willing to pay for it.

The value of a crypto currency such as Bitcoin is just....whatever someone else is willing to pay for it!

It's difficult not to simply reach the conclusion that all value and valuation techniques are simply synonyms of speculation. Because you've given your valuation a logical structure and process does not necessarily mean that you haven't simply guessed at what the value may be. As for me, I am undecided. I believe that things do have an intrinsic value. How to calculate that value is another matter!