Here’s a tidbit about my personal life: for the first time in 17 years, I got a new car – a Camry. Since I wouldn’t need two vehicles, I sold my old car. As I was investigating my options – getting a trade in from the dealer, selling the car to a dedicated purchaser like CarMax, or going through the effort to sell it to a private party – I was constantly reminded about the difference in value and price. Value is an assessment to what I think an asset is worth. If I had decided to keep the car, its price would be my subjective, personal assertion of how important and useful the car was, how difficult to replace, sentimental attachment, and so on. Once I made the decision to sell the car, its value became much more connected to its likely market price. Here, I had some guidelines about its monetary worth. I had a trade-in offer from a car dealer, so that existed as a “floor” on the price. I input optimistic information about my old car into pricing websites like Kelly’s Blue Book to get a sense of its maximum price range. It wasn’t until money changed hands that its monetary value became explicit. Value isn’t a price until someone puts money down for the asset.
Most times, investors believe the value on their statements is an accurate reflection of the monetary worth of their investments. Most times, they are right, because most securities are Level 1 assets – securities which trade so frequently on public markets with up-to-date price quotes. If you decide to buy 100 shares of IBM stock, you can have an extremely good idea about how much you’re going to pay for that transaction. Most traditional asset managers – buying stocks and bonds – can be deeply accurate about the price of underlying securities in a portfolio because the prices for the underlying components are updated daily.
In contrast, my old car was closer to a Level 2 or Level 3 asset – an asset in a limited marketplace, using similar – but not perfectly identical - assets for sale to determine price, and which used models and assumptions to “guesstimate” the value of my car. I’ve been thinking about the principles of value and price since I’ve been receiving a lot of pitchbooks for more exotic investments, like semi-liquid alternatives, auction rate securities, options & derivative strategies, and private equity deals. Everyday people know the value of their possessions – your house, your car, and the knick-knacks you can sell on EBay – will fluctuate over time. I’m just worried that a number of these pitchbooks on my desk aren’t making the case clearly enough – exotic assets without liquid, moving markets are hard to price accurately.