what is value

Understanding ‘value’: How to save more and invest better

KnowHow founder Bushy Martin unpacks what ‘value’ really means, and how to determine true value for success in money management and investing.

Value is a common word in investment circles, but what does it really mean to invest in and create value for long term gain?

Let’s start with the question of valuing our savings decisions. Particularly the difference between what we intend to do and what we actually do, because there’s generally a big gap between our intentions and our actions.

And when it comes to saving and investing it seems that we are always going to get around to it tomorrow, next week, next month or next year – but as we all know in our frantic busy lives driven by the urgent rather than the important – tomorrow just never seems to come.

The four behavioural factors that impact your saving decisions

According to Richard Thaler, the 2017 Nobel Prize winner in economics and the author of Nudge, there is:

Hyperbolic discounting

This is the tendency for people to choose a smaller-sooner reward over a larger-later reward.

If I offer you a bar of chocolate now versus two bars of chocolate in a month, then chances are you’ll grab the mouth watering chocolate now. However, if I offered you a bar of chocolate in a year or two bars of chocolate in a year and one month, you’d probably be happy to wait until the year and one month to devour the chocolate.

If a reward occurs in the distant future, it ceases to be valuable. In a nutshell, we love instant gratification and are not good at delayed gratification – we lack self control and willpower.

Bounded rationality

This is the idea that people have limited time and cognitive abilities to make decisions.

Complexities in a savings program can make it hard for us to decide how much to save. We feel this in decisions about which super funds to pick and how much to save, as well as compulsory superannuation.


Delaying making a savings decision produces inertia. This is your tendency to stick with the status quo and accept your current situation rather than think about different options.

This is a problem in our superannuation system because most of us are defaulted into a fund, or multiple funds, without any thought. By sticking with the default, we might be missing better saving opportunities.

Loss aversion biases

We generally have a tendency to care more about losses than the equivalent gains. Thaler describes how loss aversion means people tend to view less money to spend now as a greater loss than the equivalent gains to their future savings.

As Thaler and his long-time collaborator Cass Sunstein put it, saving and investing for retirement is challenging for most of us.

We need to know how much to save, then exert a lot of willpower for a long time to follow through with it.

How to overcome our inbuilt tendencies to downplay the value and avoid saving and investing

Thaler has come up with a great approach and program that makes it easy, called Save More Tomorrow, which is beautifully summarised by fellow behavioural economist Daniel Kahneman.

As he points out, traditionally if we want to change someone’s behaviour, including our own, we generally adopt one of three main approaches.

  1. We are socialised to argue, to promise and to threaten.
  2. We use arguments to convince people of the errors of their current ways
    and the great benefits of doing things our way.
  3. We promise them rewards if their behaviour changes as we wish it to change and we warn them of the bad consequences if they don’t change.

These are all natural ways to answer what seems to be the relevant question of how do I get this person or this group to do what I want them to do.

But what if there’s a fourth approach which starts with two different questions.

The first one is why isn’t this person already doing the wonderful thing I want them to do? What is keeping them from doing the right thing?

And secondly, how could I change this person’s situation so that it would be easy for them to do what’s good for them?

And according to Kahneman, this approach has been around in psychology for a long time and in recent years has been adopted by the thriving field of behaviour economics, acquiring a new name that has become part of everyday language – called ‘nudging’.

And the best application of Thaler’s nudging has to do with how to encourage people to save more for the future.

It’s widely known that people in the West save less than they want to and indeed they plan to save more starting next year but next year somehow never comes.

So again, why is it then that people don’t save more than they do and as much as they would like to do?

The answer: human nature.

Most of us are much less interested in the future than in the present. Most of us also dislike the idea of cutting our consumption or sacrificing our lifestyle now and we’re basically too lazy to take the actions that are needed to organise a higher saving and investment rate, and this on top of the delusion of just paying off your home loan and surviving on super, has contributed to the situation in Australia where over 73% of retirees over the age of 65 are surviving on an average of $15,300 a year which equates to just $295 a week!

So the inventor of the concept of nudging, Richard Thaler, has come up with a brilliant idea  to create a situation in which our inherent laziness and lack of valuing the future can be harnessed to make it easy to adopt a higher rate of investment saving.

In the test cases he ran, employees in an organisation were offered an investment plan that is known as Save More Tomorrow. In this plan they don’t increase their saving rate immediately, they only commit themselves to increase their saving rate by 2% of their salary

the next time they get a raise, with the savings to be deducted automatically from their pay. A series of automatic increases then continues until the employee decides to stop it at which point the saving rate will stop increasing.

Note how effectively this works. The increased savings takes place later, not now, and it doesn’t involve a cut in consumption or reduction in lifestyle, because the savings increase is associated with a pay rise, and it requires no action because it happens automatically.

And in fact, on the contrary, our inherent laziness will work to increase the saving rate because an action is required to opt out of the program.

Now the investment savings rate in the test organization actually increased from an average of about 3% to 11%. And nudging is a very powerful force with millions of workers in several countries now willingly enrolling in Save More Tomorrow plans.

And interestingly, people are actually happy to enrol in a plan that will cause them to do what they’ve always wished to do, which is to save and invest more without putting any load on their willpower. They save more when it is made easy to save more.

Subtly, slowly and surely they are learning to value tomorrow more than they do today.

And this leads us to another aspect of value that’s particularly relevant in the current climate, where the frenetic activity and fear of missing out is driving investment asset prices that are way above anyone’s expectations and seem to defy logic and don’t make any sense.

This is why Ramin Nakisa believes fundamental valuation of investment assets is so important – it gives us a guide as to what the price should actually be. It doesn’t mean that investment markets will agree with us and many of the forecasts and models disagree with one another but it does give you a fundamental idea of where value really lies.

Price Vs Value

And the key thing to understand is that price and value are very different. Price is driven by market sentiment – people are driven to buy assets and sell assets due to emotion but also due to narrative stories. And many in the media are simply making up narratives to fit the price action.

At the beginning of 2021 the narrative was that markets are not the economy so even though we were seeing a global recession it made perfect sense for equities to be rallying.

Another narrative is that prices are justified by the huge amount of predictable central bank support which is out there.

The fact is that people don’t want boring models – they want a story and it better be a good one!

So the question is, can we do better than that? Can we move away from this narrative driven justification of the price to something which gives us a much better handle on the value of an investment?

How to determine value

If you’re investing, how do you determine the value of what you’re investing in? Or in investment speak, how do you establish the intrinsic value of what you’re looking to invest in?

Intrinsic value is a measure of what an investment asset is worth and is very different from the current market price.

Intrinsic value refers to an objective fundamental value contained in an investment asset, in such a way that if the current market price is below that value it may be a good buy.

As the world’s most successful investor Warren Buffet has repeatedly said, the only reason for making an investment and paying out money now is to get more money and value later on – which is what the game of investing is.

Investment is putting out money now to get more money back later on from the asset and not by selling it to somebody else, but by what the asset itself will produce.

If you’re an investor you’re looking at what the asset is going to do and what value it’s going to create which in Buffet’s case are businesses and in my case have historically been properties.

This is the difference between an investor and a speculator or trader. If you’re a speculator or trader you’re primarily focusing on what the price of the object is going to do, independent of what value the asset can produce.

Its why Buffet doesn’t consider crypto, gold or silver to be investment assets, as they don’t produce any income or cash flow – they are speculative assets reliant on their market price value.

And on a similar basis, your home doesn’t qualify as an asset as it doesn’t produce an income and it actually costs you lots of money to hold on to it.

So in this context, an investment is an income producing asset that grows in value and cash flow over the long term.

And on this basis, the intrinsic value of an investment asset, whether it be businesses, company shares, equity indexes or property as examples, revolves around the future cash inflows or outflows from the asset over the long term (say 20-30 years) and then discounted back at an appropriate interest rate to cover risk and a margin of safety.

So assessing the intrinsic value of an investment asset revolves around future cash flows – and as I’ve already said, the only reason for putting cash into any kind of an investment now is because you expect to take more cash out later, not by selling it to somebody else because that’s just a game of who beats who – but by what the asset itself produces.

This is true if you’re buying a farm, it’s true if you’re buying an investment property, and it’s true if you’re buying a business or shares in a business or sector or index.

So the critical question you need to ask when determining the intrinsic value of an asset, is how much cash is the asset going to give you over the life of the asset?

It isn’t a question of how many analysts or advisors are recommending it or what the volume of trading in that location or stock is or what the charts looks like, it’s a question of how much the income producing asset is going to give you long term.

Intrinsic value is about investing your cash out now to get more cash later on, and the question is how much you’re going to get, when you’ll get it and how sure you are of getting it.  

To paint the picture of the concept of investment intrinsic value, Buffet often uses the illustration of the ancient Greek philosopher Aesop who in addition to the story about the tortoise and the hare, also came up with the fable about birds, which is just as relevant today as it was over 2,500 years ago.

Aesop famously said that a bird in the hand is worth two in the bush now, according to Buffet, that isn’t quite complete, because the question is, how sure are you that there are two in the bush and how long will you have to wait to get them out? 

Now that’s all there is to investing – you just need to figure out how many birds are in the bush, when are you going to get them out, and how sure are you?

So if interest rates are 15 percent roughly, you’ve got to get two birds out of the bush in five years to equal the bird in the hand today but if interest rates are three percent and you can get two birds out in 20 years, it still makes sense to give up the bird in the hand because it all gets back to discounting against an interest rate.

The challenge with investing is often that you don’t know how many birds are in the bush, and in the case of the internet companies in the early 2000s, and now meme stocks and some crypto, there weren’t and aren’t any birds in the bush – but they’ll take your bird that you willingly give them now.

In the investment sphere, price is about current monetary worth, while value is about future growth and cash flow.

So, how does this understanding impact the way you’re investing?

Let’s talk about where you’re at, and what your best investment options are to maximise value. Contact us for a no obligation discussion about your needs.

Bushy Martin is the founder of KnowHow Property, a successful property investor, award winning author and host of the Get Invested podcast.

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