How Much Is That Asset In The Window?

Photo Credit: Kevin Dooley || At the Ice Museum, ALL of the assets are frozen!

This article is another experiment. Please bear with me.

Q: What is an asset worth?

A: An asset is worth whatever the highest bidder will pay for it at the time you offer it for sale.

Q: Come on, the value of an asset must be more enduring than that. You look at the balance sheets of corporations, and they don’t list their assets at sales prices.

A: That’s for a different purpose. We can’t get the prices of all assets to trade frequently. The economic world isn’t only about trading, it is about building objects, offering services… and really, it is about making people happier through service. Because the assets don’t trade regularly, they are entered onto the balance sheet at:

Cost, which is sometimes adjusted for cost and other things that are time-related, and subject to writedowns.

The value of the asset at its most recent sale date before the date of the statement

An estimated value calculated from sales of assets like it, meant to reflect the likely markets at the time of the statement — what might the price be in a deal between and un-coerced buyer and seller?

Anyway, values in financial statements are only indicative of aspects of value. Few investors use them in detail. Even value investors who use the detailed balance sheet values in their investment decisions make extensive adjustments to them to try to make them more realistic. Other value investors look at where the prices of similar companies that went private to try to estimate the value of public equities.

Certainly the same thing goes on with real estate. Realtors and appraisers come up with values of comparable properties, and make adjustments to try to estimate the value of the property in question. Much as realtors don’t like Zillow (Z), it does the same thing just with a huge econometric model that factors in as much information as they have regarding the likely prices of residential real estate given the prices of the sparse number of sales that they have to work from.