On today’s show, we’re talking about the notion of value. The market definition is that value is what people are willing to pay. But that’s too simplistic. As investors we seek to make investment decisions that are on the right side of history. Buy low, sell high is at the foundation. So then the right question is what is the intrinsic value of an asset?
In a world of falling asset values, it’s hard to make sense of any investment strategy, if you adopt short term thinking. But if you step back a little, the problem is actually remarkably simple.
We know that global gold production peaked a few years ago and is falling as the world runs out of gold reserves. Other precious metals are in similar shape. So why have commodity prices for gold, silver and platinum remained so low? We know the world is running out of oil, so why are oil prices falling so rapidly? Bitcoin has lost 80% of its value this year. It lost a third of its value in just the last 7 days.
If you went back through history and walked into a village and asked the towns people who is the wealthiest person in town. They would almost all point to the person who had the most land, the most livestock, or the largest number of trees. These are all forms of primary wealth. Secondary value is derived from primary value. This includes things like cash in the bank. Tertiary value is the paper that is derived from secondary value. This includes all the stocks and bonds associated with secondary value. Tertiary value doesn’t exist without secondary and secondary doesn’t exist without primary.
Problems get created when the primary, secondary and tertiary derivatives of value get separated from each other.