Value for Money

"Price is what you pay.  Value is what you get." - Warren Buffett

"If you would know the value of money, go and try to borrow some." - Benjamin Franklin

"A stock broker urged me to buy a stock that would triple its value every year.  I told him, 'At my age I don't even buy green bananas." - Claude Pepper

The value of money is a very interesting economic concept.  Everyone places a value on money but everyone has a different value associated with money.  To some money is evil and should be avoided, rather live in the mountains as a self sufficient farmer with no need for the evils associated with money, to others it is highly prized and coveted.  To most capitalists, money shows social status and often people's egos get the better of them when they try to maintain a social status above their means.  To these people greed often takes over at the expense of moral virtues and they end up committing a crime of some form to get hold of the source of perceived joy.  It is only once they are serving time does the true realization of their actions take hold and they realize that the perceived value of money was far less than they initially thought.

Economics deals with the value of money in many ways and one is the utility function of money.  This is a concept given to the perceived value of receiving an additional dollar into your bank account.  To most of us an extra dollar really has no impact and therefore it has a low utility function but to someone begging on the street it means an awful lot.  As the amount of money that flows into you bank account increases the utility function of money loses its luster as you need more and more money to make you feel better about yourself.  For example if you are earning $100,000 a year and you receive a bonus of $1,000 you would probably feel slighted.  This would be the equivalent of leaving a 20 cent tip on a $20 tab at lunch.  So utility function is also related percentages although not completely.  For example if you earned $100,000 but you spent $101,000 then that $1,000 would mean more to you than a person who earned the same but only spent $50,000.  So while there is a relationship with percentages it is relatively loose.

Taking this a bit further there is also a time where the perceived value drops so low that the investment or the service is shunned.  Take for example eating out.  As earnings have stagnated in the United States the purchasing power of each dollar earned has depreciated by inflation.  We are currently earning in inflation adjusted dollars the equivalent to what we earned in 1995.  Furthermore inflation has cut into company profits so they have cut back to keep earnings robust.  Combined this has resulted in a large drop in the value of money.  Back in 1995 the cost of the meal was lower and the portions were larger so the perceived value was there.  Eating out was not considered a luxury but rater a way of life in the United States.  Fast forward to today and the portions have been reduced to keep profits up and the prices increased to such an extent that eating out is now considered by many as a luxury.  The perceived value for money has swung against eating out and so more food will be purchased at the grocery store as consumers swing their budget towards the better value for money.

While these are relatively easy concepts to understand often people forget to factor them into their investment philosophy.  Buying into companies that are being hurt by this loss of value for money will result in a drop in the share price as these companies will see their margins cut.  Make sure that you invest in businesses that can retain their earnings power by continuing to provide value for money and you will be well served.