Thoughts on "net worth"

One of the recent threads got me thinking about figuring one's "net worth." I can tell that I view the subject differently from most, so I thought I would post some thoughts for discussion.

Basically, if you are figuring your net worth for your own benefit, there are three ways to track it: by market value, "firesale" value, or cost basis.

Which method you use depends on the conditions under which you plan on selling.

• If you are planning on selling the items that figure into your net worth within the current market timeframe (i.e. your house under the average time it takes to sell a house in today's market), then tracking market value makes sense.
• If you are not planning on ever selling the items that figure into your net worth, then you are most likely only going to sell them in an emergency and so would track what you could get for them in a firesale. (Didn't Ben Suarez come up with this one?)
• If you are trying to maximize the profits on the items you are holding, then cost basis makes a lot of sense. After all, your profits are your proceeds minus cost. But if you are going to take this route, you should track age and turnover as well.

Under this way of thinking, you would probably track various items differently when computing your full "net worth."

It's important to pick the right method; otherwise you can set yourself up psychologically to make un-fruitful decisions -- like selling your house in a down market in order to stop "losing money" when you otherwise wouldn't have sold.

Now, things are different if you are calculating net worth for tax purposes or as a basis for a business deal. In those cases, you pretty much have to follow a standard formula.

Just some thoughts.

-Phil


Learn a profitable strategy for investing in the stock market...

I just realized some of my assumptions which may cause confusion from my last post:

1. By "investment," I'm referring to something that's bought with the intention of selling for a reasonable profit within a reasonable timeframe. I'm not a buy-n-holder. I'm a trader, but not a speculative trader. I also believe in taking profits regularly.

2. By "cost basis," I don't mean to imply that you never watch market value; rather, you keep your eye on the difference between market value and cost basis (profit = proceeds - cost). I'm against watching market value exclusively (or even predominantly) when considering investment assets.

Sorry to be so confusing.

Best,
Phil


What is "investing?"...

Use a different method of determining value based on your "intentions" and item being valued.

When I use the "what could I get for it in a garage sale" method, I am refering to my household possessions - TV, Fridge, Furniture, etc., etc.

To me, real estate should be valued at Current Market Value (or comps). But with that, you need to know WHY your NW might have gone down. If it [your NW] has decreased because real estate has dropped in value (I personally never recall any instance where real estate prices dropped, they just stop going up for a while), then at least you know why and won't think you are losing money through some hole somewhere.

Business earnings and business valuations: Well, seeing as there are something like 25 different ways to value a business, your NW can change drastically depending on the way you value your business.

Whichever way You use though, you should keep using the same way. If you use a different way to calculate your NW everytime you do it, you don't discover anything other than what the new method tells you you are worth.

Funny, I recall The Donald getting upset because Forbes' calculations of his Worth didn't include vacant land he had.

Michael Ross


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