Existential Analysis Applied To Finance & Investment: An Inquiry into Intrinsic Value
The philosophical hypothesis made in this essay is that there’s no such thing as intrinsic value.
I recently took a 2-month depression leave from my work. I needed time to solve existential problems that I never had a chance to solve due to the fast progression of my life — started university right after high-school in September, began working immediately after undergrad, and I have been living off of that momentum ever since.
My life has been a ripple effect of decisions I made when I was 17 when I graduated high school; I’m 27 now. I did engineering in undergrad, worked in tech for a bit, and currently, I am a CFA level 2 candidate.
On one unexceptional Monday morning — as I was brushing my teeth getting ready for work — I suffered an existential panic attack because I couldn’t answer a basic question “why should I get up to do something that doesn’t feel right for me?”
I mean, I genuinely thought that that’s what I wanted in life, otherwise, why would I get up every day at 7 am to do this? sacrifice my time, my young years, my life…if it’s not me, then I must be insane!
Like a Pavlovian dog who forgot that the bell should represent the lunch, I forgot that the money should represent the outcome of providing something as a result of honest self-expression — in whatever form that looks like.
I am the pavlovian dog who suddenly realized he was drooling over the sound of the bell but didn’t even know what kind of dog food he really liked.
So, I immediately ceased and desisted by taking a 2-month leave of absence. Engineering, Tech, Finance…pause.
I started to fully focus on existential philosophy research — up until that point, it had been more of a hobby that I enjoyed doing in my free time.
A fascinating philosophical hypothesis surged in my mind this morning, as I was watching Bloomberg, while drinking my morning coffee.
(I watch Bloomberg every morning to keep up with the world while being on my hermit-like sabbatical. I find that this regimen provides some semblance of stability which endows me with confidence to conduct existential analyses without the innate anxiety and panic that come with it)
As Vonnie Quinn was talking about the Gold price index (COMEX Gold Futures), an existential hypothesis began to coagulate in my mind:
There’s no such thing as intrinsic value there’s only intrinsically perceived value.
I’ll try to make a case for it.
First, let’s clarify the distinction between price & value. Price is the quantitative unit of accounting placed on something with the hopes that it estimates the underlying value closely — And when it doesn’t?
Well, that’s the name of the game in investing. To spot mispricings in different investment classes. Mispricing between the “price” of something and its “intrinsic value”.
If something has a lower price than its intrinsic value then it’s undervalued, if something has a higher price than its intrinsic value then it’s overvalued. Then all you have to do is to figure out a technique to take advantage of this mispricing before everyone else catches on.
(again, I’ll make the case that intrinsic value is not so intrinsic and only slightly less dynamic than price)
So, what is this intrinsic value and how is it agreed upon?
Well to answer that, you need to understand the premise of investing and what you’re really investing in.
What are you fundamentally investing in?
The premise for investing is that you are sacrificing a sum of money now, to receive more money later. You choose to transform the money into distinct forms of capital — conduits of capital allocation. Each conduit is susceptible to unique risks.
All the bells & whistles are surface aspects branching out of very core principles. So, what are you investing in, really?
Equity —
You’re investing in the demand for a product or a service offered by a company that you believe to be the best in managing the inception-to-consumption costs for that product or service.
Fixed-Income & Money Markets —
You’re investing in the demand for money. Interest rates are simply the costs of money. Different debtors can “buy” money at different prices depending on their history and their perceived credibility (creditability).
Currency —
You’re investing in the demand for a country’s currency relative to the demand for another country’s currency.
Do you see the pattern? beneath the bells & whistles, what we call “intrinsic value” is simply a measure of demand. Which means it’s intrinsically perceived value.
We simply believe that it’s intrinsic because the rate of its fluctuation is not as rapid as price is — dampened dynamic.
There’s no such thing as value that exists in isolation in nature.
What is the intrinsic value of an ounce of gold if a meteor was hurtling towards earth and we had 24 hours to live?
Well, its intrinsically perceived value would be 0 even though you might’ve overpaid for it yesterday in fear of a looming recession.
