Recently I came across an article about the trading of dinosaur fossils. Although the exact figures are unknown, dinosaur fossil trading is now a luxury market worth billions of dollars globally. Imagine today, 66 million years after this species has long become extinct, people are interested in buying their bones, teeth or eggshell fragments. In July 2024, a fossil named Apex was sold for a record-breaking $44.6 million at an auction by none other than Sotheby. The buyer was also a high profile individual, Kenneth Griffin a hedge fund billionaire.
Source: thekeyexecutives.com
This is how the world works. What may seem as waste can achieve enormous value under the right circumstances. Talking of waste, the waste generated from households termed as municipal solid waste or MSW is fuel for energy generation & is a key feedstock for biogas generation. The garbage, literally as garbage is useless but the generated electricity or biogas has a value and a market as well. Coming back to dinosaurs, their popularity shot to fame due to the classic 1993 movie Jurassic Park. However, owning the fossilised remnants of one of the most monstrous species ever lived on the earth was for the museums and research labs. However, today it is considered as a status symbol for the rich. One example of this is Hollywood’s famous actor Leonardo DiCaprio who had entered but lost a bidding war for a skull of a dinosaur for an amount of $276,000.
Source: Daily Beasts
Let us move a bit further in time in the early 1600s of the Dutch Tulipmania. Tulips, a variety of flower introduced by the Ottoman Empire in Dutch, assumed a status symbol. Its striking color and unique broken patterns were a result of a virus.
Source: Wikipedia
Initially it was just another flower adorning the gardens of Dutch people, but owing to its rarity it soon became a status symbol. The Dutch gardens with Tulips became platforms to signal wealth and status. More and more people became interested in planting tulips, which created a huge demand for Tulip bulbs. Ultimately trade for the bulbs ensued which grew exponentially into a market akin to today’s futures & contracts. Investors, merchants and common citizens entered into bidding wars based on speculated prices of Tulip bulbs. They began to be traded as commodities with deals changing hands multiple times in a single day culminating into a “bubble”. In the year 1637, this bubble burst and many people were led to financial despair as they realised that the tulip bulbs were not even worth a fraction of the prices paid to have them.
Let us take another example from the recent past. After seeing a middle class family of 4 traveling on a 2-wheeler, Ratan Tata dreamt of making a car for the masses. Tata Nano, widely marketed as the middle class’ dream car, was priced at around Rs. 1 Lakh. It had innovative design measures to keep its price low. It could easily have become the Maruti 800 of the masses. But, Maruti 800 in its prime signaled wealth and prosperity, while Tata Nano was signaling the opposite: economy & affordability. Beyond the obvious utility value of a car, even today people consider it as a luxury, an emblem of success & prosperity. despite the visionary and noble intent, the Tata Nano was widely undervalued by the public.
Source:CarWale
All the above examples point to the famous saying:
“Beauty is in the eye of the beholder”
Similar to beauty, we can say,
Value lies in the eyes of the buyer.
Value is subjective and cannot be quantified in objective measures. There are no set rules to define value and hence it varies from person to person. The seller of a stock values the profits earned or the losses encountered more than owning the stock. On the contrary the buyer values the future return potential of it. Since every analyst values a stock differently there are always buy & sell side reports for the same stock. Morgan Housel says that two forces control every investment market:
Money is emotional
Most people don’t think they’re emotional.
So, more than excel sheets, people are acting with emotion. He says that forecasting, conviction in stock, optimism & pessimism, goals, ambition are all emotional things. It is hence difficult to quantify value in absolute numbers as the emotions are beyond measurement.
I recently attended an investor meetup where the topic of Gensol engineering came up. The group was a mix of young & old, seasoned and novice investors. Naturally a consensus was seen emerging that there must be a mechanism to avoid “value traps” like Gensol. Ideas such as, assessing the promoter honesty, observing management’s execution, analysing financials and physical scuttle-butts were discussed at length, to avoid such fiascos. At the end an individual, a banker by profession said, “To each his own. I am interested in earning money so I did it from Gensol as well. For me management didn’t matter as I could see a positive narrative. It was just a matter of timing my entry and exit and not being overly greedy about the returns.”
For the banker Gensol was not a value trap but in the classical meaning of the term, it was not a “value buy” as well. The banker was successful as the process applied by him worked, but may not work for other investors. However, many of us will get influenced by his story and use the classic “good outcome, bad process” to eventually get trapped.
The banker’s words highlight what Ian Cassel wrote in one of his recent blog:
Valuation is a hard topic because we all value different things and we all value things differently.
Oftentimes market experts, analysts and research reports mention a stock to be under or overvalued. It is natural for investors to be influenced by them. But, few of these research reports ever mention the valuation methodology. More so, what the analyst values is never bold or bulleted. It is the job of the reader to read between the lines. However such research reports are a good starting point as we learn the various qualitative factors of the business. I feel we, as investors, must be aware of our own valuation metrics. In simple words what excites us, in the business, the company, the stock. Is it the product, business model, the management, the financials, cashflow, return metrics or a combination of some of these? That way we will read the research reports without being influenced by the conclusion of over and undervaluation.
When I started understanding fundamental investing, I learned about the intrinsic value of a stock. Ben Graham, Warren Buffett & Charlie Munger all prophesied the importance of buying when the stock price is below the intrinsic value. Naturally I was curious to learn about valuation. I started with price to earnings P/E and landed upon DCF & reverse DCF. However, I could never employ these techniques much while actually valuing companies. For example, DCF & reverse DCF calculations require me to assume some data and I was not sure whether I was doing it correctly. Moreover, the valuation number arrived at the end of this exercise never gave me the conviction to buy the stock. Effectively I was surely not valuing my skills of stock valuation. 🙂 To cut the story short, I still don’t know how to value a stock in absolute numbers, nor can I deduce a stock price range for buying or selling a stock. I feel a lot of us and more so the new investors would be facing this dilemma. I would advise them, know yourself and then the business. Understand what makes you feel confident in the future of the business. Focus on those parameters. It is better if like Charlie Munger we work with checklists. Have checklists of “must have” and “must have not” features of the business. So, if you are comfortable with businesses with low debt, put that into the “must have” checklist. If you feel too many subsidiaries and complex business structure makes it difficult for you to understand the business, put in the “must not have” checklist. Study businesses and in the process the checklists will keep getting refined and you will have your own valuation methodology. Should the valuation be always in numbers? I think not…
At the end, I sincerely hope that this article could add some value to your investing journey!!
Love this. Valuation isn’t a formula — it’s a filter.
I used to obsess over DCFs and spreadsheets, thinking I could math my way into conviction. Turns out? The numbers don’t mean squat if you don’t trust the business, the model, or the people running it.
This idea that value is personal — 100% yes. What excites me might bore someone else. What looks like a “value trap” to one investor might be a well-timed trade to another.
Forget chasing perfect models. Build a system that fits your brain, your goals, and your tolerance for chaos.
That’s the edge.
Rightly side.
It's a filter.
In the initial years of my investment journey I was also guilty of trying to zero upon an exact valuation number. Slowly realised this is just a spreadsheet exercise.
I am glad you liked this article.