Fair Value 
Wednesday, August 19, 2009, 04:38 PM
Posted by Richard Senior
An interesting article in the FT this week ("Disclose the fair value of complex securities") written by a bunch of academics, including one Robert Merton, who on the one hand is a Nobel prizewinner, and on the other has his name written all over the debacle which was Long Term Capital Management, which almost brought down the financial system in the 1990s.

The premiss [sic] seems to be that markets are efficient. This 'picking up nickels in front of bulldozers' approach proved disastrous in the case of LTCM, and even more so in the last 2 years.

'Fair Value' is an emotive term-implicitly, any other price is 'unfair'. What is really meant is 'market price', which is often in and of itself a function of emotion rather than logic. I have recently been putting together a portfolio of high-quality AAA assets with an IRR of 20%. Is that 'fair value'? Maybe not 'fair' to the academics, but it's a rattling good deal!

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