The mentality of the rich
February 20, 2013 4 Comments
Do you agree that rich people are often misers?
Maybe the difficult route to great fortune makes them more reluctant to part with their money.
Or perhaps they come from a humble background. One day when they have money, they will treasure every dollar in their pocket.
But I think the real reason is: the truly wealthy understand the difference between Price and Value.
Hey, is there a difference?
Warren Buffet said, “Price is what you pay. Value is what you get.”
Price is the amount you pay for something. Value is what it really worth.
Supposedly you sell a bowl of laksa with the best ingredients and a special recipe to a rich man at $50.
He says, “I’m not buying.”
Can he afford it? Yes, of course.
Why doesn’t he pay for it? Because it’s not worth it.
Ordinary people can seldom tell the difference of price from value.
Ordinary people buy things based on their affordability. When they receive their year-end bonus, they immediately spend on something they have been eyeing at. Once they save enough for the deposit, they can’t wait to upgrade their car or buy that property.
Rich people buy things based on the concept of worth. If they see the value of an asset, regardless of the price, they will find means to acquire it.
If you want to win with money, you have to be able to tell the differences of three terms:
1) market positioning;
2) perceived value; and
3) actual worth.
For example, a manufacturer may position its latest product as a state-of-the-art product. The market also perceives the model as high-end.
But before you buy, ask yourself, how much is this really worth? What is a fair price to pay, at the moment, 3 months from now, and a year later?
Similarly, a developer had positioned a new project as the most luxurious condo at the peak of the market in 1996. The market also perceived it as a good deal in the high end market. What do you think the price had been in 5, 10 and 15 years’ time? When do you think is the time to buy at fair value?
Identifying the discrepancy between what an asset is worth and its market price is the name of the game in every case.
- Lauren Templeton & Scott Philips, Investing the Templeton Way
In 1957, Sir Run Run Shaw decided to make Hong Kong as his base to make professional Chinese films. He needed a big plot of land to build a movie studio.
A hilly place north of Kowloon called Clearwater Bay was deserted due to its proximity to the border of China. The threat of communism had made this place a no man’s land. In fact, the place was so hilly that, before one could build anything on top, he had to level it by removing 60 feet from the top.
Although it looked improbable, Shaw still went ahead to buy the 46 acres of land from the government at 45 cents per square foot.
Today, Clearwater Bay has long become a prestigious address for the rich and famous. The luxurious apartments there are easily fetching HK$10,000 per square foot.
He only parted with cash for quality assets in key locations that could churn out positive yields at bottom dollar.
- Ow Chio Kiat, CEO of Stamford Land and founder of Singapore Shipping Corporation
Wish everyone a prosperous Year of the Snake!