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    January 2014
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    Price Does Not Indicate Value

    Don Shaughnessy

    bitterness of poor quality
    Price, by itself, is a poor indicator of value.  Things have a lower price for a reason and the reason is that you are buying less.  If you do not know the excluded parts, there is no way to assess value

     

    The result of the “price describes value” mistake is in this common wisdom, often forgotten.  Everyone should know it by now.

    Best known for his work as an art critic and social critic, Englishman John Ruskin, expressed it clearly 175 years ago.  Nothing has changed since.

    Its unwise to pay too much, but its also unwise to pay too little.  When you pay too much, you lose a little money ….. that is all.  When you pay too little, you sometimes lose everything because the thing you bought was incapable of doing the thing it was bought to do.   The Common Law of business balance prohibits paying a little and getting a lot … it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that, you will have enough to pay for something better.

    The essential point is this.  Cost is what you pay and value is what you get.

    Price is one part of cost, but not the only part.  As Ruskin points out, the risk of loss because of an absent aspect is another part of cost.  What could be taken away?   Durability, support after sale, ease of use, difficulty in maintaining, or any of a hundred other things.  Maybe it was stolen.

    For example, Renewable Term 10 life insurance is about the lowest priced form that there is.  The reason is two-fold.  People who can pass a medical are nearly certain to live 10 years.  If they live more than 10 years and their health deteriorates in the interim, the price of the renewal will be high enough that the insurance company is okay.  They are saying to themselves, “Anyone who keeps this policy at this price, knows something about their health that we do not and that thing is adverse.”  If they had no problems they would just do a medical and buy new again.  You give up the right to keep the insurance at a reasonable price.

    All life insurance costs the same.  It is the package that changes the price.  For more premium, you get more value.  For less, you get less.

    Furniture is another category where the “price is not value” rule applies.  Good furniture is not cheap and cheap furniture is not good.

    Before you make a decision based solely on price, notice this idea, also from Ruskin.

    There is hardly anything in the world that some man cannot make a little worse and sell a little cheaper, and  people who consider price only are this man’s lawful prey.

    Being prey rarely ends well.

    Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

    The MONEY® Network