4 ms·

Can you expand on this to me a layman? What does it mean, written down? And why does it say whatever it does about management?

• roymurdock 11y ago
  Let's say I take my entire net worth, $500k in cash, and buy a house straight up for $500k, thinking it will be worth $600k a year from now. If someone were to come along and audit me right now, we would see -$500k in cash, and +500k in assets (my new house). A week after I buy my house, the housing market crashes. Now, the highest anyone is willing to pay for my house is $250k. If an auditor were to come along and examine my personal wealth balance sheet, they would see that I reported assets of $500k a week ago, but that my house is only worth $250k now. Now I have to "write that purchase down" by $250k on my personal balance sheet so that it matches its true value on the market. I lost half my paper net worth in a week due to a poor investment decision. (Individuals are generally not required to do this type of accounting, but public firms are so that investors can make informed decisions about which companies to fund.) If you make risky bets, you're usually going to have to "write down" or "write off" (take a 100% loss) what you were once counting as valuable assets. Some write offs are inevitable, but if you let them get out of hand its definitely a sign of shoddy investing methodology and poor risk management.