“Business to me is the form and organization by which people creatively apply their skills and talents to solving problems or serving other people. The more a business serves others, and the more problems they solve, the more profitable they will be and the more an investor in those enterprises should make.”
– Tom Gayner, President and Chief Investment Officer, Markel Corporation
When most people think about business, what’s the first thing they think of? That’s easy, money. You know… benjamins, mula, cash, coin, dough, dinero, cheddar, etc. And it’s so easy to think this way because that’s how business is portrayed in popular culture. Businesses think only about the money and making a buck. And while that’s the easiest way to think about it — probably because it’s quantifiable — it’s not the most accurate.
There’s a simpler, more fundamental way to look at them though: businesses solve problems and provide services. The quote above from Tom Gayner gives a very useful way to look at businesses — not in terms of money, of course — in terms of value. The value they bring when solving someone’s problem; the value they bring when they service someone’s need; and, yes, the value they bring for the investor who has allocated her capital with the company.
But money isn’t really the central idea here — it’s actually just the scorecard. How does a business really know if it’s actually solving someone’s problem or providing a valuable service? When someone’s willing to pay for it. If more people are willing to pay for it, then the service is more valuable. It’s a crude measure, yes, but quite effective in aggregate.
This idea that money is nothing but a (crude) scorecard is an important one. It works whether you’re making money or just spending it. On the money making side, getting someone to pay you (like at your job) is really about trading your skills, talent and time for money. In other words, you provide value, you get paid. What a useful model to use when you want to get a raise. Want a $5,000 raise? Easy, just provide at least $5,000 (preferably more) in value. Want a $50,000 raise? Provide at least $50,000 more in value 1.
On the spending side, it’s the reverse. For every dollar you let go, you had better be getting back (at least) a dollar in value. Now, of course, value is measured differently for everyone. That’s why a $4 latte is both a great deal or a ripoff depending on who you ask. The important part is that the value it provides is greater than what you’re paying. Remember this quote from Warren Buffett: “Price is what you pay, value is what you get.”
This difference between value and money is probably the main reason why value is talked about so much less than money. Value isn’t always quantifiable like money. It’s not something you can plug into an equation. It’s subjective by nature. And that means that you’re going to have to figure out for yourself if something is valuable. It’s not something your mom, your friend or even your professor can tell you. It’s something you decide. Just like you’ll have to decide the value of this post. All I can hope for is that the price is right.
- [1] Of course, it’s not that easy. For one, the value you provide is a function of competition, which we all know nowadays is fierce. [↩]