Intrinsic Value vs Book Value

We’ve all had an instance in our lives when we need to buy a product, and we just turn to the most known name in the industry. Or maybe we instantly refer to the name that’s most prestigious. We don’t look at what it can do on paper, we just trust that the product beats its competitors because of the badge that it has associated with it.

I’ve been looking at buying a Ducati recently. I put a few tentative bids down on eBay and I bought a book that describes the development of the specific bike I’ve been looking at. I got really engrossed into how they created the bike, how everything they do is derived from two principles: handling and power. How they pretty much build the whole bike around the engine, and the heritage they have with L-twin engines.

And then a weird realisation happened. I realised that I was buying the brand more than I was buying the product. I was buying the story of the bike and the association with Ducati, more than the technical ability of the bike. I had shifted from my product focused philosophy to a brand focused one.

Up until now, I’ve rarely cared about a brand. I’ve always judged a product’s merits based on it’s ability alone – untethered to where it actually came from. This is the process of making a decision using logic to quantify the specification of the product vs. it’s cost. The product with the most “bang for its buck” wins (i.e. specs:price ratio).  And I still think this is the correct approach if you’d like to be rational. On paper, the Ducati is seriously overpriced relative to bikes with similar stats from other manufacturers.

But other people judge a product’s merits, less on the actual product, but more on where that product came from. They have “Brand Focus”. This isn’t necessarily a bad thing – it’s not a completely rational thing to do in my opinion – but there is definitely an intangible value about owning a specific brand: a bit like art has intangible value. You can’t rationally derive the value from specifications: speed, braking ability, durability etc; rather you start deriving value from how the product makes you feel. And that, in my opinion, is a slippery slope.

Famous stock broker Warren Buffett calls these two ways of valuating ‘intrinsic value’ (product focus) and ‘book value’ (brand focus/how much the stocks are actually selling for, regardless to how much their calculated worth is).

Regardless of all that, however, is that Ducatis seem to really maintain their value well.  With a Ducati, its perceived worth is not detrimentally affected by lacking in specs: it holds the price it was originally sold for simply because it is still a Ducati and people continue to perceive it as valuable. This is also an apparent fact when buying stocks. There’s the worth of the company based purely on stats: it’s assets. But then there’s the public opinion on how much the company will grow: which is pure speculation and creates the perceived worth of each stock.

So, in the end, does it really matter where the value is derived, as long as it’s stable and predictable? To some extent, I think: yes, it still does. Brands can fall out of grace with the public: people might start to perceive Ducati as less luxurious. And public perception of a company’s growth can change overnight: and with it, the perceived worth of a stock. Stats are less fickle. Horsepower won’t change overnight unless someone gets a wrench to the bike (or mistreats it). Will that stop me from buying a Ducati in the future? Only time will tell…

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