Finding Value
Volume 13, Number 21
Issue 621
My longtime friend and ally Gary and I share a passion for similar collecting interests. In fact, several times in the 65.12% of my life that I have known him, we have often been the top two bidders at auction for the same item. However, at an antique auction--just like in any situation where there are unique items for sale (like an opportunity to purchase a valuable business)--there is only one person who ultimately deserves to be standing at the end. It's always the person who has done their homework in the most detailed and well thought-out manner AND--most importantly--remembered that if you let it get away, it's gone forever and you'll never forget that you lost it.
On one Saturday morning about ten or so years ago, I stood with my wife and Gary stood with his during the viewing of lots to be auctioned out in Powhatan County. Gary and I are always glad to see each other-except for one recurring situation-when there are things to be auctioned. When we see each other, I think we are usually saying "Drat! He's, here," as we are shaking each other's hand. That morning we walked around together, but each of us took pains to not let on to the other what we were interested in. I later found out that both of us had come along to buy a painting alleged to have been painted by the Flemish master Peter Paul Reubens who lived from 1577 to 1640.
Though I thought I knew Reubens' work, I was unprepared other than to see that it was in his style, definitely an old painting and only able to assess that it was something other than modern. Gary had actually-I later found out-taken steps to see the painting before that Saturday morning by working with the auctioneer. Gary had already seen the painting out of the frame, had a chance to assess the age of the frame and had taken the time to do his own "due diligence" by locating and consulting with noted art experts by telephone in advance of the bidding. Gary had done his fact-gathering homework; David had not.
Gary already had theories about the alleged authenticity of the painting-among them that it was a smaller painting cut from a bigger one. He also had a fallback theory: the frame was a solid wood frame that was at least 200 years old and worth thousands in and of itself. Gary had also priced the emotion, and that price was substantial.
David had simply figured there wouldn't be any competition at the old country auction. He figured he'd pay a price based on it NOT being genuine and then be surprised if it was. David had set a limit based on this. David didn't have a fallback theory about the frame or anything else; he was factually unprepared. Though I had the emotion and I really wanted it when I saw it, I didn't have the facts to use to fine-tune my emotion.
Needless to say, on that sunny Saturday in Powhatan David and Gary were the last two with their hands up: Gary's informed hand (the same one he used to dial the telephone and locate a Reubens expert at the National Gallery to help him interpret the facts he had found) and David's uninformed one (the same one that had been steering the lawn mower the night before when he should have been gathering facts). There was no point to running my friend Gary up just for the sake of it; Gary had won by being prepared. He knew the value-whichever way it was-and I quickly lost my confidence to proceed because I was unprepared to make a decision based on emotion only. Gary won because he had the facts AND the emotion.
Facts aren't worth anything in a business transaction unless you have the emotional keys to interpret them. On the other hand, emotions will only get you into trouble without substantial facts to control your reaction. In a business transaction, you need lots of both: facts and emotion.
Each business transaction has a price based on (1) knowledge of and based on hard facts-the numbers that make it work or not work: the true market value, and (2) the factor of emotion-the premium are you going to pay because it is a unique situation that will never come again and that will haunt you forever if you mess it up by not being the last one standing. Both of these factors have tremendous value and are integral to making a successful deal happen. I can't say enough that you need lots of facts AND lots of emotion.
I see people in the businessworld who are completely unprepared to handle transactions because they didn't do their homework in advance to identify underlying value-just like I was that day bidding on the "Reubens" painting. Then I see others who are 180 degrees the opposite-they become so prepared with research and facts that they talk themselves out of the deal by looking at numbers only. They forget that it is the emotion that ties the numbers together to create both the perception of value and the "hype" that surrounds the presentation and actual determination of value to and by third parties.
If the facts ONLY say something is worth $100 and you know it is a truly unique opportunity that will never come along again, shouldn't a premium of 20-25% be reasonable as an insurance policy to make sure that you will never be haunted by regret? Is it even more? How much more? In my opinion, usually lots more-"lots" depending on how unique the situation really is.
Personally, I'll never know whether or not that painting was actually painted by the Flemish master Peter Paul Reubens who lived from 1577 to 1640 or by Paul "Pee-Wee" Reubens (a/k/a "Pee-Wee Herman"), and maybe Gary still doesn't either, but I have to see it hanging over the mantle in Gary's study each year when Cynthia and I go to his lovely home for their annual Christmas party. When the subject comes up, Gary just smiles and tells me another story about another art historian's opinion.
The Ghost of Opportunities Lost haunts me every day about the painting and how I didn't properly price the facts or the emotional premium.
David B. Robinson, CPA
Index of Previous Issues of Tax Fax
