The inspiration for this story came in the form of a “joke” press release today.
Like most good jokes, the humor worked because it is based on part reality, part exaggeration.
The joke brought up a point that I hardly ever see anyone write about, but which maybe the single greatest factor in determining your ultimate financial success;
Your ability to correctly value assets.
First for the joke press release, which you should read because its very clever and well written; here is the punch line:
“”37signals is now a $100 billion dollar company, according to a group of investors who have agreed to purchase 0.000000001% of the company in exchange for $1.””
The release is obviously poking fun at those announcements we all have seen where a company without earnings or profits is suddenly “worth” hundreds of millions of dollars, based the purchase of a small interest in the company.
Yet the joke bring us to discuss the very serious issue of valuation.
All assets undergo a continuous process of valuation.
For some assets the process is transparent like the financial markets.
The various financial markets undergo a daily revaluation of the share prices of publicly traded stocks, commodities, bonds, and currencies.
Traders in these market are constantly revaluing assets based on news of companies, industries, over all economic conditions and personal factors.
The market meltdown of last year and the 50% rise from the bottom is just an ongoing revaluation of assets.
In addition to trying to place a correct, impartial value on an asset, each buyer and seller have personal factors that will weight heavily on how they value an asset.
Some Buyers are just looking to make a quick buck.
In the stock market you would call these day traders, in the domain business or real estate world you would call them flippers.
A buyer who is seeking a short term gain is going to value an asset differently than someone looking for long term appreciation.
On the Seller side, valuation is based on personal factors such as how badly the Seller needs money, whether the Seller is a short term or long term investor, and what other opportunities the Seller may have for the proceeds. A Seller may take 30% less than the know the asset is worth because they need the money to invest in something else they think has much greater potential.
Like other assets, Real Estate undergoes a continuous valuation process.
Although the prices of real estate, unlike those in trade markets, do not visibly change daily, they undergo continuous revaluation.
I watched a house on the beach go from $6.5M asking 6 months ago, to $5.25M 3 months ago to $4.85M last week, still unsold, the property is going through a revaluation.
This is being repeated on millions of pieces of real estate, all over the country, in all price ranges.
Domains like any other asset are going through a constant revaluation process.
For domainers, your ability to correctly value a domain is going to be a huge factor in determining your ultimate financial success in this business.
As a buyer if you overvalue a domain name, you’re going to overpay for it and put yourself in a bad situation.
Your going to be faced with the choice of either recognizing the mistake, selling the domain at a loss, or holding on to the domain, tying up capital you could have used for another investments, hoping the market revalues the domain higher in coming years, to fully recoup your investment, or at least cut your loss.
Do this frequently, and your going to face substantial financial problems and maybe financial ruin.
As a Seller if you overvalue your asset, your simply not going to sell it; undervalue it and you’ll have the pleasure of watching sell it for more, maybe substantially more, down the road.
No, its not easy.
You’re not always going to be right.
You are going to spend more on a domain than you should have.
You are going to sell a domain for less than you could have gotten for it (well everyone but Rick).
Bottom line, when it comes to valuation, you going to have to be right a lot more than your wrong to be successful in your financial life.
I made this mistake once. Learned very quickly what not to do.
Mike,
The value of an object, let it be a house, a piece of art or even a domain only shows up when it is actualy SOLD.
It is exactly the virtual rise in wealth which caused this horrific economic depression that is unfolding.
Read this recent story:
http://www.examiner.co.uk/news/local-west-yorkshire-news/2009/10/03/gem-owned-by-st-george-s-square-company-almost-worthless-86081-24840835/
And ask yourself: How many valuated million dollar gems do you have in your books?
C.
Caesar
I disagree.
Let’s say you own a condo.
If the exact same unit in the floor below you sold two years ago for $1.5M then yours was worth about $1.5M then whether you sold it or not.
All assets have a value.
Value can be determined by many factors, but the as I said in the post, value is always changing.
Right Mike…in real estate for example a homes’ value is assessed by looking at “like” properties that sold recently and applying that to a similar house in the area. The same can be done for domains…
The post is dead-on, Mike, and I disagree with Caesar as well.
“You are going to spend more on a domain than you should have.”
Good post, this is pretty unavoidable in domains.
Personally I think I probably overpay 30% of the time, underpay 30% of the time and perhaps get it roughly right 40% of the time. It is a very tricky market to know where “value” really is. To some degree only buying at auction would help though in that case though you won’t have as much potential upside as those who buy via private sale.
Snoopy
“‘only buying at auction would help””
Not sure about that one.
We have all seen how when an online auction is reheld, or restarted after a non-paying bidder defaults, the domain rarely if ever reaches anywhere as high as it did the first time. If auction value was a good indication of value the re-auction should produce pretty similar results.
“We have all seen how when an online auction is reheld, or restarted after a non-paying bidder defaults, the domain rarely if ever reaches anywhere as high as it did the first time.”
I think if the bidding in the first auction is fraudulent (ie bidder won’t pay) then it is pretty natural the is goes lower the next time. I’m not sure I would call those auctions the normal situation.
Probably a good indication is where some buys at auction, pays for it, the reauctions it. In those situations how different is the price? Not that I’m saying buying at auctions is a way to pay “fair value”, but the price is far likely to be closer to “fair value” then the average private sale due to the buyer competition/bidding process. Personally I don’t participate in auctions much because of that increased efficiency.
Mike,
I truly disagree.
I know buildings with 50 condos of which 5 have been sold. Let’s say they all sold for a million. Are the other 45 worth a million too, even being unsold?
At that very moment in time 2 years ago, that condo was worth 1.5mil to someone. That moment is actualy very brief, when the cheque is written and the deal is closed. Value could have changed a week after the deal and compared to now that condo may not be worth even a mil.
Take art for example. If somebody pays today 20mil for a Warhol painting today at auction. What is the value of the painting tomorrow?
Is it 25mil because at 20mil it sure must have been a bargain or is it 15mil because the highest bidder was in a bidding war and sure no piece of canvas with some paint can be worth 20mil?
Value is like the truth, it always shows up in the END.
You can fight it, but you can’t beat it.
C.