Sunday, May 25, 2014

Is Net Worth a delusion?

The richer you get, the less you know about how much you’re worth.  The reason is that values of assets change continuously.  Suppose you have $1 million invested in a stock market index ETF and the market falls 10% during a correction that lasted a couple of weeks. You happen to apply for a loan with a bank during that correction, are you worth $1,000,000 or $9,00,000?   Suppose you also own a $1 million house?  Did the house fluctuate in value like the stocks?  Nobody knows because there is no real Calgary real estate index that reports the price of your house minute by minute. So did the house value not change?  Did your total net worth drop from $2 million to $1.9 million or worse to $1.8million?

Reality is that the stock market does not determine the value of your stock portfolio and certainly not that of your house. It is not that Microsoft varies a couple of billion dollars in value just because Yellen announces the Federal Reserve Bank’s view of the interest environment that week and the Microsoft’s share price dropped as a consequence along with the rest of the market. In fact, if your name was Bill Gates, your net worth could fall or increase by half a billion in the blink of an eye.  That doesn’t really make sense does it? Basically, the stock market provides you with a price that you can sell your share holdings for right now regardless how much that company’s true value is. 
People look at their holdings at a market peak and say “Oh, my net worth is $2.2 million”.  A few months later, at the bottom of a correction they say, the stock market is down 10% and I lost $200,000 and they feel depressed. After all, they probably ‘lost’ more than what they earned on their job in a year! Net worth is a snap shot number, and you shouldn’t let that affect your psyche.  It is a number that fluctuates from minute to minute and the only real concern you should have is accumulating assets.  Suppose you own a house in Canada worth $1 million and that the U.S. dollar increased from 99 cents Canadian to $1.02.   Does that mean your house is now worth $30,000 less?  Oops, the Euro fell from $1.30 to $1.27 Canadian. Does that mean your house is worth $ 30,000 more?    Oops the price of gold dropped $15 from …. You get my drift.  Assets fluctuate in value against each other and really ‘net worth’ is relative. If you expressed your net worth in Canadian dollars are you worth more or less than if you expressed it in Euros?  Oh, I can do it in Dutch Guilders or Italian Liras. I would probably be infinitely rich because those currencies are nearly worthless!
Currencies are a means of exchanging assets. Stock markets only tell you that there is a buyer who is willing to buy some of your assets for a particular price right now, but a couple of hours later there may be another guy coming by paying you double. So do you have to sell to the first buyer or to the second? The answer is that you don’t have to sell at all!  If someone knocks on your front door and says here is $1.00 for your house does that mean your net worth has crashed from $1 million to $1.00?  Of course not. Instead, you tell the guy to take a hike. Because in your eyes, your house is priceless. You love the place, you enjoy the neighbors and nearby family whom you visit on the weekends. The place is full of memories and things that makes you feel good about your live.  Don’t worry about your exact ‘net worth’, instead accumulate assets that produce things that you need to live and that provides you the means for achieving in life what you want; not only now but also in the future.
A man walks into the bank.  He asks for a meeting with the loans officer. He tells the officer, "Do you see this button on my shirt?  My lovely wife sewed it on yesterday. Just thinking of the love she put into this shirt makes it priceless. I would like to mortgage it for only $500,000."  J
Yesterday I had an interesting discussion with my son. He stated: “Those rich people that own billions, they really don’t need that much to live off; the rest of the money is taken out of the economy doing nothing.” An interesting point of view. But then I realized that this was not quite correct.  You see, our assets, whose momentary value is sometimes expressed in terms of ‘net worth’, are not only for us. Basically our assets are part of the world we live in and we are just the stewards of those assets as long as we live individually or as long as our society survives collectively.  If we manage our assets well, we’re getting more assets under our stewardship.  If we only think short term or if we mismanage these assets in other ways, we’re likely to lose them to others who are better at managing it.  This is why the terms ‘retirement’ is so ludicrous and why ‘financial adult hood’ is so much more meaningful. 
Really, it is all about life and managing the resources of this world. When I ‘retired’, I could only look out of the window and do nothing for so long. Next, I got bored and went nuts. Really, we are not creatures that just pass time; all of us have to do things that we feel are worthwhile.  Yes you may like to travel around the world, but for what purpose?  You may just spend time with your family, but I guarantee you that if you spend hours in your aunt’s kitchen drinking coffee and blather meaninglessly without end, you will not much longer be welcome. We all do things that add value one way or another; if not we might just as well be dead.
Why is it that we all have this urge for being wanted? Why do we need to be appreciated by those around us?  Because we all want confirmation, acknowledgement that we are doing something worthwhile. The ‘rich’ have more money than they need to live from, that is not to withdraw money and resources from the economy. It is because these rich people, up to now, have proven to be effective allocators of the resources of this world. The moment this is no longer the case, that so called ‘affluence’ will be taken away. If Warren Buffett makes a number of poor investment decisions people will stop buying shares of Berkshire-Hathaway and consequently he will lose resources to manage. When you buy a house that you cannot afford, basically you have acquired a resource that you really do not need but that someone else may. So you will be forced to sell; possibly at a loss or it may be foreclosed on you. These things may not happen right away but in the end if you don’t properly manage the resources of this world it will be taken away from you.
Your wealth is not only expressed in terms of tangible assets; you may be having a lot of intangible assets that are managed by you superbly.  Your friends and acquaintances; your contacts they all ad value and purpose to your life. They are part of your ‘net worth’.  Say a plumber friend helps you repair a sink in your place that adds to your net worth. Rather than spending money in a movie theater you spend hours in the pleasing company of your wife or husband or your children or friends.  It is all part of your ‘net worth’ but much more difficult to express in dollars and even if you could, dollars can devaluate. If you wonder about your true net worth, look around you and see what resources life has allocated to you. You are richer than you think.
Next time when you think about wealth, realize that your real purpose in life is doing things that you feel are worthwhile and you will be allocated this world’s resources to do so. Having access to those resources also is a reflection of how well you manage them for the good of us all.

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