Monday, April 11, 2011

The Ins and Exes of Value

ow much do you value your horse?  Better question, how do you put a value on him?  When I got my license as an equine appraiser, I learned the math and got the software to apply it.  I had to do “comps”—comparisons—as part of the licensing exam.  It all seemed pretty cut-and-dried.  

But then the bottom fell out of the market.  Within months, the Unwanted Horse Coalition became a hot topic.  Don’t blame me.  I’ve been known to have a black thumb, kiss of death and all that, but I didn’t cause the crash.  Not this time, I swear.

My Pretty Money Pit, worth a lot to me, but to you... Eh.
This rapid recognition of equine overpopulation created a whole new learning experience for everyone in the horse biz.  First, there was an introduction to the “intrinsic” vs “extrinsic” valuation story.  Intrinsic value is the value something has by its very nature.  It's a totally Existentialist concept.  The degree to which something makes life possible (or bearable, if you slip another step away from the hard line) is its intrinsic value.  Children, flowers, earthworms all have intrinsic value to one degree or another.  Extrinsic value is value that is created by the market. Unless you plan on selling your children, flowers, or earthworms, they probably have no extrinsic value. 

Arguably, and demonstrably in the case at hand (horses), they’re pretty much the same thing.  Monetary value is a totally human invention; so, all of its combinations and permutations and appearances on reality shows notwithstanding, it really has no meaning beyond what we give it.  

Take a moment to absorb that.

Back in the day, everyone who was anyone needed a horse, a house, a suit of clothes or whatever.  Those needs put value on those items.  The degree to which a human needed a horse depended greatly on that human’s chosen lifestyle.  A farmer might have a far greater need for a plow horse than your average non-farmer human.  An explorer might need several horses for traveling great distances.  A warrior would need a big, brave horse.  The needs were met by bartering.  “Give me your big, brave horse, and I won’t kill your family” was a popular exchange rate.  So was “a pig and three goats for your plow horse and I’ll supply you with all the corn for your barbecues for the rest of the year”.   So it went.  Value was in the mind of the negotiating teams.  Even children were bartered away.  So much for the CQ (Cuteness Quotient) valuation.

Then money happened and, as always, things got complicated.  Cash value of anything has to be put into perspective based on the buyer’s level of wealth and where on his spectrum of “must-haves” the item might fall.  A human for whom dinner is a major expense in relation to his level of wealth is unlikely to put a horse, for example, higher on the list than potatoes.  

So here we are now in the chaotic up-and-down swinging of economic failure and recovery, and we need to find a way to valuate our horses along with our other stuff.  Where do we go with that? 

In a balanced market, all prices would be stable across the board, but that’s not happening because we humans also created economic market theory, and it’s full of holes because we did not account for mass hysteria and the ability of humans to overlook the obvious in the face of, say, Charlie Sheen.  The same horse may sell on one coast for twice what it will on the other.  In the middle of the country, that horse may have no value at all since breeders tend to live near open spaces more than near urban centers and seaside resorts.  Where there’s more to be had, the price tends to be lower.  The value will reflect the situation in both space and time that the specific buyer and seller are currently occupying.  In other words, it’s a free-for-all.

Uncle Mo, a fave in Derby 137
...Value galore till he loses
Much has been written about the crazy prices currently being paid at both ends of the spectrum.  Racehorses are likely to go for much higher prices if they are successful because they earn money both in their racing careers and afterwards in stud fees and foal sales and as advertising logos for their owners.  High-end show horses also have income-production in their favor, so valuation has to include their ability to reimburse their new owners for all that hay and grain and billable vet hours they’re consuming.   

At the bottom end are the horses collected at the various auctions and sold at prices that range from $10 (and less)/head to upwards of $1000 (sometimes for the same horse on different days).  Sometimes these animals have issues that lower the price.  If a racehorse’s income-earning potential is in the plus column, then a knock-kneed pony with heaves and a bad attitude has all that in the negative column.
Perhaps the best cost basis is the going price of slaughter-bound horses per pound.  Start there, which is a fairly rational proximal of intrinsic value; add on for pluses like sanity, good health, training, attractiveness (which, by the way, is way at the top of the comps program for increasing value—cuteness rules!), relative youth, and usefulness in the area in which the animal is being sold.  A ranch horse won’t be in big demand in Manhattan, for instance, and few cowboys will plunk down big bucks for a fourth level dressage star, so deduct for sheer bad luck.  Then find another horse like the one you’re assessing that has recently sold in the same locality, double-check for odd situations that skew the results, and BAM!  You’ve got a price.

Or not, because at this point in time most owners will be lucky just to find a good home for Old Lucky, and that has to be worth something.  If you bought your current horse as an investment, count yourself fortunate that Bernie Madoff didn’t have you on his to-do list as well.  If you have to sell, look for a safe buyer regardless of the price you’ll get.  Consider how much the horse is going to cost the buyer over the long haul, and be grateful he’s not charging you for him to take the horse.  We’ve reached a point in human history (not unlike the cavemen) when peace of mind has an intrinsic value all its own.   There’s no program for that.

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