The Importance of Value Creation
The other day, we began looking at value propositions within investment choices. Today, we’ll continue that with a few more examples.
1) Let’s say that you live in a hot real estate market and values have been driving up. You’re considering buying one of three properties.
- The first is a single family home in a market that has been appreciating faster than any other in town. Your idea is to buy it and hold it for a year so that you can sell at a much higher price after it has appreciated even more.
- The second is a single family home that needs a lot of work, but you calculate that you could repair and renovate and then be able to sell it at a reasonable price to a new home buyer for substantially more than what you have put into the home at that point.
- The third is a single family home that you realize you could buy and then rezone into a duplex and rent out each side for a handsome profit each month.
- What is the value proposition of each of these? The first does not have a value proposition. You are simply hoping that the market continues to go up. We as people tend to have really short memories and so because something has been going up, that’s all we remember, and we’re really good at convincing ourselves into reasons why it will continue to do so. The renovation project has the value proposition of a rundown home being converted into a new home. The duplex idea has the value proposition of turning one unit into space for two families and thus doubling the value to the market.
- There is reason to believe that these last two examples of value creation will result in profit (assuming the numbers all look right), while the first one was a gamble.
2) A final example of value that is pertinent to today’s world might be gold. You might think that gold delivers no value to anyone. It doesn’t do anything, and it doesn’t pay you to store wealth in it. On the other hand, when investors look at the way governments around the world are destroying the value of their currencies by printing and borrowing at obscene levels, the fact that gold cannot be printed and is quite difficult to mine, provides security and peace of mind. This is an inherent value proposition within this oldest of currencies which governments have worked hard to convince people is a dinosaur.
This is Part 8 in the series Investment Due Diligence. To continue with this series, click on Pt 9. To use this as a growth tool to better understand your own calling, you might start by reading Part 1, Pt 2, Pt 3, Pt 4, Pt 5, Pt 6 and Pt 7.
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