Monday, March 17, 2008

Forgive Us Our Sins: The Fallacy of Mark-to-Market

excerpts from this week's report:

"Price does not equal fair value.

For traditionalists, this is a sacrilegious statement. Rooted in the principles of the 1950’s modern portfolio theory (MPT) and its bastard, the efficient market hypothesis (EMH), traditionalists still insist on the rational investor fantasy applying at all times. The strong form of the EMH. And it is this principle that provides the theoretical, academic cover for the mark-to-market madness that is supporting the graveyard spiral of asset values infecting the markets of today.

Interestingly, more than a decade of advances in capital market theory, specifically behavioral finance, has not produced an advance in accounting rules as it relates to what constitutes fair value..."

"Lest one think that those caught in the maelstrom are innocent, let me be clear – they are not. For when bankers decided to securitize certain assets, they subjected themselves to the accounting rules of mark-to-market. Then, adding fuel to the asset value fire, certain bankers leveraged themselves in multiples of 10, 20, even..."

Investment Strategy Implications

"In Christendom, this is holy week. A time of faith. Therefore, let us pray that the powers that be realize that mark-to-market, in the form of price, does not equate to fair value at all times and for all assets."

also in this week's report:

* Expected Return Valuation Model
* Moving Averages Scorecard
* Model Growth Portfolio
* Sectors and Styles Market Monitor
* Key US Economic Indicators

*To gain access to this week's report (and all reports), click on the subscription information link to your left.

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