‘May I ask you Susanna, what this lounge suite ended up costing you?’
‘Well the marked price was $2,200.00 and I snapped it up for only $1,540.00.’
‘And if tomorrow you placed the lounge suite into a clearance auction, what would you expect to get for it?’
‘Oh come on Charles that’s not fair. You know I’d be lucky to get $500.00 for it. The buyers there are mostly dealers and bargain hunters.’
‘Mmm, exactly,’ I replied shrugging. ‘So what could you sell the lounge suite for privately?’
‘Probably $850.00 - $900.00.’
‘So what you are saying, is that your wealth total upon purchase went down by a massive $690.00 even though you received a 30% discount off of the “bigger sucker’s theory” price. On the other hand if you had purchased this lounge suite at an auction your assets would have temporarily risen by $350.00. That’s a differential of $1040.00.’
Susanna appeared offended. ‘But others would have paid the $2,200.00 for it and paid interest on their credit card whilst paying it off. At least I paid cash and waited for the sale price.’
‘That is true. The average punter would pay the full $2,200.00 plus credit card interest of about $300.00 - totaling $2,500.00. This amount is paid out of after tax income so they would have to earn about $3,300.00 to have the after tax proceeds of $2,500.00 available.
“Smirking Sam’s” of course, might have purchased the lounge suite from an importer who in turn bought it from the manufacturer. Beside Uncle Sam, there may also have been wholesalers and distributors involved in the purchase chain. You can readily perceive that each person values that lounge suite differently. Of course being a ‘depreciating value item’ the lounge suite will steadily loose value until it is worthless.’
‘Then Charles could you explain to me, how does one set the true value of an article?’
‘You came to me to ask my advise on wealth creation techniques, so I will answer the question “What is Value?” from the wealth creator’s perspective. Let’s start by destroying the myth of “supply and demand”.’
My student wealth creator readily agreed and appeared most willing to learn so I continued.
‘You might be under the mistaken assumption that the value of a commodity or product is relative to the supply and demand of that commodity or product. The academic purists have been selling us that line for decades. What poppycock!
The wealth creator is ever thankful that the concept of values is not, has never been, and will never be, that simple. You will notice in the above example of your lounge suite that at no stage in the selling chain has the supply or demand of that lounge suite gone up or down yet the value to each participant in the play is quite different.
Supply and demand, business trends and cycles, and inflation may well affect the value - but these factors alone do not set the value.
So let’s try my wealth creator's definition on for size:
“The value of any article is in direct proportion to the current needs and means of the potential buyer, and the current need of the potential seller to dispose of such item.”
A buyer's current need and means must be compatible. For example, a person dying of thirst in the desert certainly has the need for your jug of water that you are asking a $1,000.00 for, but the poor soul may not have the means.
The seller's current need also affects the value.
For example, a lawyer, acting as the trustee of a will, may have the current need to dispose of the household effects in an estate quickly to finalize an estate, so the law-firm consigns the whole inventory into a clearing auction. As a wealth creator you attend the auction and buy an antique dresser from that estate at less than half the price you know you can easily resell the dresser for. Naturally your then current need to dispose of the dresser is different from the lawyer's.
A seller who is desperate for money, will obviously have a differing current need to dispose of an article than a seller who isn't desperate to sell.
Both buyers and sellers have differing current needs. The countless reasons behind those needs sets the nominal value in each transaction.
And isn't this absolutely wonderful for the Wealth Creator?
For the wealth creator, the word "value" takes on an extended meaning. The value is merely an indicator of the current respective needs and means of the parties to the transaction, upon the wide spectrum of potential values. The Wealth Creator merely buys from one end of this wonderful spectrum and sells at the other end.
‘So Charles you are saying, in regards to my lounge suite, I should have kept my eye on the clearing auctions etc and bought one similar for $500.00.’
‘No I didn’t say that at all.’
‘Then I still don’t understand.’
‘Your $500.00 is still paid out of after tax income and the lounge will be worthless in a few years time, so even though you are losing much less on the deal, you are still losing wealth not creating wealth, are you not?’
‘I guess so but what is the alternative?’
‘Remember a wealth creator hates the words “losing” and “loss”. Simply be patient. With the $500.00, purchase various items from the auctions or yard sales that you will then on-sell for at least $1,000.00. Then if you wish, you can take the $500.00 profit and go and buy your lounge suite.
With the other $500.00, why not start your part time wealth program. Turn the $500.00 into $100,000.00 via the principles in my book and then if you want to, you can go and start your own “Smirking Susanna’s franchise” LOL!’
‘So my lounge suite has in effect cost me nothing and I can go about creating a fortune with the other $500.00.’
‘God you make it sound so easy.’
‘Oh but I assure you, it is easy.’