reluctantQuant

Watch This Sector During the Upcoming Bear Market Rally

while I kinda like this approach...


On Mar 06 08:33 AM ferguson wrote:

> Altering the mark to market rule should be a subject for accountants,
> mathematicians and policy makers. Since I am none of the above, I
> have complete license to make a fool of myself by suggesting a direction.
>
>
> Here it is. Adjust the basic principle to read something like this.
>
>
> "The value of an asset on the books which is difficult to assess
> as a result of infrequent trades shall be no higher than the sum
> of the original value on the books of the owner and the most recent
> traded price divided by two."
>
> All better informed pundits can now explain why this is a stupid
> idea and would not work.

there's one problem that I can't reconcile - If the asset in question is really, really garbage - as if even my little old gray haired mother could see that it was worth absolutely zero (think Stanford CD)... one could still carry it at 50. And that's not OK for an investor trying to size up the current value of a financial company...

--rq

Watch This Sector During the Upcoming Bear Market Rally

This is a very good article (nice work, author). Two points to throw in:

In effect, it seems the "p/e above X eventually goes to p/e below Y" is mean reversion theory. As the Nobel-touting wizzards at LTC showed us ten-plus years, yes, Virgina, there is mean-reversion. But over what time frame? Noooobody knows the time component, Ginny.

The "recent" ride on the SPX P/E train, in context for this +100 year study, goes something like this:

1987 - when the spx p/e flirted up above 20, we know what happened - BUT it hasn't fallen below ten YET (darned close now, I know).

I've had a lot of ups and downs since then, but I've also harvested a lot of profits and had a good quality of life. Good thing I didn't follow that entry / exit strategy - I'd still be waiting for the bottom. Maybe the sidelines would have been better, but a rough calc says total return on SPX since 1Q87 to 4Q08 wa 7.75%annual and TBills was 4.74% annual. I'll take the extra 300bps over 21 years.

--rq