Friday on my mind - continued

I hope that you've had some time to think about the original thought experiment.  Please read it if you haven't, or else the rest of this post will make no sense whatsoever.



The questions raised were regarding your own valuations against the market valuations:

How valid is your valuation? Is it real? Do you trust it? Or, does it need to be validated by the market?

Does it mean that you can "think" your house to be whatever value you like? If you suddenly think it is worth $2,000,000, does it make it actually worth that much? Or is that meaningless? What if  you value your house at $550,000, and no-one else in "the market" does?

So, what's the answer?

The answer becomes clear when you consider Saturday.  If on Saturday, you had to pay someone $1,000,000 cash, then you wouldn't feel comfortable until you had the cash in your hot little hands.  Not only that, but if the best offer you had by Friday was $900,000, then your valuation of $1,000,000 would count for naught, and you would be force to sell your house for the $900,000 and somehow find the other $100,000 somehow.

On the other hand, if there was no such requirement to have $1,000,000 in cash on Saturday, and you were free ignore all market offers that you weren't happy with, then your valuation is perfectly valid.  Other may tell you that "you are dreaming", but so what?  You either have 2 houses that you think are worth $1,000,000 or you have $1,000,000 cash.  And there is no way that you will come out of it with anything less that $1,000,000.

There is a very valuable lesson to learn from this - If you remain in control of the timing of your transactions, then your valuation is valid, and conversely, if you lose control of the timing of the your transactions, then your valuation is meaningless.

Under what circumstances could you lose control of the timing of your transactions?  Well:

• Margin loan calls
• Fixed date future contracts
• Falling behind on mortgage payments, and the bank deciding to sell your house.
• Being a "forced seller" (or forced buyer) for any reason
• Using an investment strategy that has fixed timing schedules

So, I believe that to be a successful value investor, you must always remain in control of the timing of your transactions.