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 

The Life Expectancy Variance Monster

After 'age', what would be the most important explanatory factor with regard to mortality rates or constructing life tables?

As actuaries we've demonstrated our innovation capabilities by developing life tables not only based on 'age' and 'gender', but also (two dimensional) on 'time', 'generation' and 'year of birth'. This helped us to extrapolate future mortality rates in order to predict future longevity with more accuracy.

However, despite our noble initiatives, these developments turn out to be insufficient to put the Longevity Variance Monster back in his cage.

Modern 'life expectancy at birth' predictions for periods of 40 to 50 year ahead, lead to 95% confidence intervals of 12 years or more. Unusable outcomes .....

Let's not even discuss more necessary accurate confidence intervals of 99% or more ....

In our attempt (duty?) to moderate and diminish future life expectancy variance, we'll have to develop new instruments.

The more we know which risk factors 'are responsible for the increase in 'life expectancy', the better we can estimate and diminish future variance.

One of those new approaches is to calculate life expectancies on basis of postcodes.

This new insight can be helpful, but there's a much more important risk factor that has to be included in our life expectancy predictions to definitely kill the Longevity Variance Monster:

Self-perception of aging

In a 2002 research "Longevity From Positive Self-Perceptions" by Levy ( et al.) it became undeniable clear that:

• negative self-perceptions diminish life expectancy;
• positive self-perceptions prolong life expectancy.
  

Older people with more positive self-perceptions of aging, measured up to 23 years earlier, lived on average (median survival) 7.6 years longer than those with less positive self-perceptions of aging. This advantage remained after age, gender, socioeconomic status, loneliness, and functional health were included as covariates.

Top 6 Life Expectancy Risk Factors

Here's Levy's top 6 list of risk factors on life expectancy (ordered from greatest to least impact on life expectancy):

1. Age
2. Self-Perceptions of aging
3. Gender
4. Loneliness
5. Functional health
6. Socio-economic status

As we can not change 'age' nor 'gender', let's put some more research on the other risk factors.

Once we achieve to 'explain' the cause of increase of life expectancy on basis of 'new' (soft) risk factors, we - as a society - will also be able to manage life expectancy better (information, education, training, coaching, etc.).

In this way actuaries can help society so that people live longer and stay happy in good health. All on basis of of a sound financial pension and health system, as predicted life expectancy will show a smaller variance.

Help to kill the Life Expectancy Variance Monster.....

Happy 2011, with better expectations and smaller variance!

Sources/related Links:

- Why population forecasts should be probabilistic
- On line Postcode Life Expectancy Tool
- Longevity From Positive Self-Perceptions
- Predicting successful aging (2010)

2011: Happy Risk Year!

Life is full of Risk..  We can not deny or totally exclude risk. Have you ever thought about living a (professional) life without taking any risk? What kind of life would that be?

There's this great actuarial risk quote of the famous economist John Maynard Keynes that states:

On the long run, we are all dead.....

So if you want some 'return' in life, you might as well take 'somewhat' risk before you 'certainly' die.

A nice illustration of total risk aversion is the 2004 movie "Along came Polly" were Reuben Feffer (actor Ben Stiller) is an actuary who, since his job involves analyzing risk for insurance purposes, likes living life in complete safety and free from any unnecessary risk.

This movie urges to ask yourself a simple question:

What's the risk of a riskless life?

Living life without risk if for dummies! Optimize the risk-return in your life.

Risk Guidelines

At the end of 2010 some simple Maggid 'Risk Guidelines' for 2011:

1. As long as there are no risks that'll kill you on the 'middle' or 'short' term: Take risk if you like the return outlook.
   
   
2. Think about how much bad luck or suffering you're willing to accept for a desired return.  Key question here is:
   Why does a marathon runner punish his body every day for weeks on end for an individual race?
   
   
3. Take a small risk every day! Invest small 'good things to do' by helping others without expecting a return. Soon you'll harvest some of your sowed investment seeds.....

Riskless Investment
Remember..., the only one riskless investment in life is.....

YOU

Anyhow, make 2011 a happy and healthy risk year!

Related Links:
- "Watch the movie 'Along came Polly' online !
- Learning about Risk and Return: A Simple Model of Bubbles and Crashes