On Value vs Price

XXIX

2024.01.14

Even though I’m no longer an active hedge fund manager & am now nothing but a recovering hedge fund manager, there are some investing concepts that I’ll use everywhere I go. 

One of them is pretty straightforward but can be very potent: value vs price.

Investing

Value vs Price is a great investing concept, and is pretty self explanatory.

In investing, when you buy a stock, the share price is what you’re going to pay; it moves up and down with the mood of the market. It could be $10 today, $15 tomorrow, $7.50 the next day, and maybe $0 or $100 in a year–who knows, and, quite frankly, who cares?

Contrary to what you might think if you watch some people react to the news or price movements on a stock, you’re not buying a share of some idea that has a price that just shifts up and down haphazardly. You are buying a sliver of a business, a slice of something real, and that real thing is worth something, t has value. 

What is it actually worth? If you knew that with certainty, you would never have to think about another investing decision again. If you knew with certainty that the value of a stock was $10, and it was trading at $5, you would spend your life savings on it. On the other hand, if you knew the value of the stock was $10, and it was trading at $15, then you’d go to great lengths to make sure you profit when the price inevitably falls. Easy enough, right?

Well, the problem is, you don’t know the value of the stock. That’s what many investors make a career of: trying to figure out what that value is, so they can compare it to the price of the company, and make a no brainer decision.

That takes time and patience, and even then, you can be wrong. What if that $15 priced stock worth $10 never corrects to the “value” before you run out of money betting against it?

Thus is life. 

Decision Making

Over all, the price vs value paradigm is a great decision making heuristic in life. If something is worth more to you than it costs you to buy it, then you should buy it. 

If Price < Value:

    Buy = True

Else if Price > Value:

    Buy = False

Simple as that. 

Is your hunger worth $20? That double chicken bowl at Chipotle is a great solution to your problem, and you’ll still have some cash left over. 

You just got asked to find 100 linkedin profiles and emails based on a list of jobs and names? My friend Alyanna will fill the info for you at maybe 20 leads an hour for $4 an hour; is the time it would take you to do that same amount of work worth more than $20? If so, I’ll connect you with her and she’ll take care of it. 

Simple math. Why ever make another decision any other way ever again? 

Well, sometimes it’s not so obvious what something actually costs, or what it’s worth. After all, there could be some shady salesman trying to pull a fast one on you. You can’t let that happen!

The Power of Sales

An exceptional sales men can sell ice to eskimos, but he won’t. A truly great salesmen wouldn’t even try. Take it from one of the best salesmen there is:

Of the 75+ sales people I’ve interviewed in the past 2 months, the best ones have all said the same thing: they are not selling a product, they are selling a solution. They listen to the customer first and foremost to see if the customer even has the problem to begin with. If they don’t, it’s “No thank you, next.”

If the prospect doesn’t have the problem, then the value of the solution is almost always lower than the price.

Why would you try to sell a solution to a problem that someone doesn’t have? Nothing sells itself, but you do have less selling to do if value > price, which only happens if the prospects will get value from the purchase!

Building Things that Have Value

If you’re building something, you want to build something where the value exceeds the price, at least for a subset of people—your target customer.

I don’t know what this newsletter is worth, value wise, but I can tell you the price that you pay each week to read it–your time!

So, if you read it, I’m going to assume that you got value out of it, or you’d just stop reading it. You keep me honest! If you stop liking what I’m writing, then you can just stop reading it. 

The goal of a creator should be to build a product that is worth an insane amount of value. That way, you can charge an off the wall price and still be helping your customer out. 

As much a I hate it, here’s some basic econ: 

Consumer Surplus = Value Received - Price Paid

With Ultima, we are obsessed with creating something that has undeniable value for the user. I can’t really prove that to you, as the product is still in its nascent stage, but I can make an interesting observation–we haven’t tried selling anything since the beginning of November.

Rather, we’re testing and iterating on what we’re delivering, ensuring that it has enough value for users to want to use it each week… that’s a pretty good litmus test for whether or not there’s any value in something.

Secrets & Value

Switching gears, keeping secrets has a pretty interesting value vs price frame that reveals something about the effect of time on price and value.

In the short term, the price of sharing someone else’s secret is incredibly low–all it costs is the time it takes you to say something you shouldn’t out loud. And god, does that dopamine from being the guy able to say a thing that nobody else knows feel good, or what? 

Price of saying a secret < Value of saying a secret

However, if we extend the value and price over a longer time scale, that equation quickly flips:

Price of saying a secret > Value of saying a secret

Your friend, when he or she finds out that you spilled the beans (and trust me, he or she will find out), will lose trust in you. The person you told the secret to, if they’re at all wise, will also lose trust in you. And, if you keep doing this, everyone will just generally lose trust in you.

Something I realize that I do subconsciously is give people who I’m not sure if I should trust low order secrets, ones that I won’t be super heartbroken about if it gets out, and just wait and see. Do they bring it up inappropriately? Do I hear about it from someone else?

Hyperbolic Discounting

This last example emphasizes an interesting point about an underlying human bias when it comes to value & price equations: we, as humans, tend to do “hyperbolic discounting,” which is just a fancy way of saying we prioritize immediate rewards more than we would if we were thinking more strictly in mathematical terms.

Survival wise, there are arguably some good reasons for this, but those reasons fall apart a little outside of a context in which your existence is constantly threatened. 

This concept is pretty loaded and deserves more time than one section, but the rub is that when you’re making decisions, it can pay dividends (literally) to not just think in terms of the immediate price and value of something, but to factor in the long term price and value of something, as well.

Most good, but hard to make decisions, like working out or reading a book, have incredible long term value, even if the short term price feels high. On the other end, those bad but easy to make decisions, like Twinkie eating, have a much higher long term price than you think, and no real long term value.

Back to the selling concept–maybe the short term value of selling something ice to eskimos is high, but the long term price of doing that is not having any returning customers, or a long term business model for that matter.

So, why not try to make something in which the value is outsized, and then figure out the pricing question later?

Value, value, value. How can you create it and add to the world with what you’re doing, rather than taking from it?

Live Deeply,