Updated: Mar 22, 2020
When you have a job or run a business, you earn your money not by working necessarily, but rather by delivering value. A mechanic who works hard and doesn't fix your transmission as agreed, isn't going to get paid for that work. In an ideal market, you only get paid when your work is valuable. In the real world however, some people do slip through the cracks. Through greed or ignorance, many take money despite not delivering any value in return. But it eventually catches up to them. Some day down the road, the performance review comes. Or a new competitor who does things better. Playing catch-up usually doesn't work.
That's why value, the creation and maintenance of value, is the gateway to sustainable wealth. So, what is value?
In its simplest form, value is what people value. Something is valuable if someone is willing to pay for it. That's the secret behind capitalism, it's that the information inherent in pricing is value.
Find legal and ethical manners of delivering value to others, find a way to scale that value to many multiples of people, and you have a recipe for success.
The only value and wealth we care about, the only income we respect, is an honest one.
If you try to make money off unsustainable schemes, misdirection, or even pure ignorance of common fundamentals, it'll catch up to you. Just like it catches up to the markets. Like it caught up to SoftBank on WeWork. We do not like the idea of making money without delivering value because it is not a good long-term business strategy.
If you instead, take care to identify what people are willing to pay for (market validation) and then go forth and develop out a product in the most efficient manner possible, you will generate surplus value and therefore significant margin.
Investing operates on this same underlying principle of value creation.
If we think about the early days of today's blue chip companies, all of them started and succeeded because the early capital understood this concept. Their investments were drivers of value. Their dollars were put to work directly in the company to achieve a direct aim. However, in recent years, this concept has been lost. Investors have been sold the lie that you can just put your money on autopilot and spread it across dozens of companies and that's investing. Well, it's not investing. It's speculating and what's worse (for you), it's simply inflating the prices of the earlier investors whose capital was put to work.
If our investment is the reason Amazon is trading at a P/E of 80.23 instead of 80.21, are we really investing? Or are we blowing bubbles?
And that's when it clicked for us. We pulled everything out of the market, we sold all of our "diversified" and "passive" investments, and we went 100% cash. Then we started to study. And we realized something... ...we had missed a lot of basics. Everyone had. In fact, the more we found, the more we were convinced, this was the future of investing. Or rather, this was what investing was before it was twisted and misinterpreted by large fund managers. So we completely shifted our focus to: Value-Add Investing.