Twitter Fair Value Accounting

Do you still believe in 'Fair Value Accounting' or 'Market Value' as an excellent accounting principle?

After reading this blog you'll probably have developed a more distinguished view....

Yes...,Fair Value is hard to define...

Probably 'The Fair Value' as such, doesn't exist.

What's 'fair', is often subjective. Therefore 'Fair Value' must be imaginary.


How to earn $9 million by investing '50 cent'?
Answering this question is easy. Look at the next example:

According to 'Business Insider', rapper and business man 'Curtis James Jackson III', alias '50 Cent', promoted the almost worthless HNHI shares during the first weekend of 2011 on Twitter with success!
In no time HNHI shares, including Curtis' 30 million own shares, went up by $.29 a share. Result: almost $ 9 million gain in market cap for just one weekend of tweeting. Not bad!

What actually happened, was:

Don't replicate these kind of dangerous investment marketing jokes...

It's like playing with fire and (therefore) not without risk.

The SEC's attention for Curtis James Jackson's discussable marketing promotion has already been drawn...

Twitter is great, but use it for social activities. Always 'Mind your Steps' at Twitter, especially with regard to financial issues.


Fair Value
This controversial simple Twitter-Investment example shows the weakness of our accounting system. 'Fair values' are of course by definition 'fair', but can be easily influenced by major media players like celebrities or large investment companies in the financial markets.

Controversial Investment marketing
The wrong receipt (Fraud?) to make profit in the investment market is:

1. Select a listed company XYZ in your portfolio that didn't perform well during last years and is clearly undervalued.
2. Hire a celebrity (on basis of a limited fee) to promote XYZ on Twitter.
3. Wait for the shares to go up
4. Cash out before shares go down, ahead of a total collapse. 

Large Investment Companies
Of course - just like me - you might think: large companies don't get mixed up in these matters.  But what to think of the next, slightly changed, approach where large investors makes use of the effect that a lot of small investors follow (or try to outperform) a large investor by flocking (following) or anticipating a large investor's investment strategy without an own investment policy or model (Fair or Fraud?).

A large investor can easily use this flocking effect in a kind of double trick:

1. As a large investor: Select a listed company XYZ in your portfolio that didn't perform well during last years and is likely undervalued.
2. Simulate in the market that your large investment company is interested in buying XYZ shares (spread the rumor, place a non binding call, etc.) or invest a small amount in XYZ.
3. Wait for the shares to go up.
4. Cash out before shares go down on their way to a total collapse.

Case 'Deutsche Bank'
Again, if you don't believe these kind of methods are applied, just go to sleep early tonight and please don't read the 2010 introduction in FT of new computerized trading model called 'Super X' by 'Deutsche Bank'. This new model is all based on 'dark pools'. Nobody really knows or fully understands what is happening in these dark pools and their corresponding algorithms. What about transparency rules? Unfortunately you'll find not a single word about Super X ethics in press articles by Deutsche Bank.

Understandable, because Deutsch Bank doesn't have to worry about transparency or ethics at all. Despite of its ethical code, ominous named 'Passion to Perform', Deutsche Bank admitted criminal wrongdoing over fraudulent U.S. tax shelters by the end of 2010.  Instead of firing those who where responsible, DB simply agreed to pay $554 million to avoid prosecution. After that it was business as usual......

How far does 'passion' go? What seems 'fair' to you and what can we actuaries, learn from this?????

Ethical?

Like in the example(s) above, large investors are able to influence and manipulate the market (price) by acting, fake-acting or non-acting.

From an ethical point of view it gets more and more complicated to earmark such actions as unethical.

Computer programs simply register effects as "if I (computer) do (invest or not-invest or disinvest) 'so', 'this effect' will be 'the result'.

As a consequence these computer programs simply apply and execute these found market principles and structures in the financial markets without a 'moral view' or any form of perception: Fair!, so to speak(??).

Monetary Policy Influence 
Another form of influencing financial markets is by the monetary policy  (read:intervention) of the central Banks. The 2010 Fed intervention could be such an example.

Conclusion

It's clear that the financial markets can be easily influenced by short term media effects, indirect value related investment strategies of large investment companies and Central Bank's monetary policy.

Irrespective from the question wetter it's "Fair Value or Not Fair Value", we'll have to deal with 'temporary unfair market effects' that can have a major impact on a company's value.

As a consequence it's not 'fair' nor 'wise' to base a company's value on the 'fair value' on December 31th 24.00 hours. Temporary market volatility should - one way or the other - be excluded in valuations (moving average?).

With regard to your own private investments or life, keep in mind:

If something sounds too good to be true …
it probably is...

Related Links/Sources:
- How To Make $10 Million From Just One Weekend Of Tweeting
- "If it's good enough for Buffet, it's good enough for me"
- "No Amount Of QE Will Be Able To Keep The Current Stock Market Bubble From Bursting"
- Fair Value or Not Fair Value
- How Much Influence Does The Fed Have?
- Fraudwatchers
- The Latest Celebrity Stock Promoter / Pump and Dumper? 
- CurtKoCool 
- Cartoon '50 Cent' 
- MarketWatch HHI
- FT: Deutsche Bank unveils new trading model (2010) 
- Daffy Duck