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The relevant thing would be shareholder equity (book value; assets minus liabilities) rather than market cap, in that impairment of assets at a financial firm i
by patio11 8y ago
The relevant thing would be shareholder equity (book value; assets minus liabilities) rather than market cap, in that impairment of assets at a financial firm is supposed to hit shareholders before it hits debt or depositors, that being a pretty major responsibility of equity in financial firms.
Book value doesn't necessarily march in lockstep with market value, which (as you point out) is set by actors' marginal propensity to buy the stock.
A more interesting thing to note would have been that financial firms trading at a marked discount to book value are effectively being judged by the market as being in distress. Financial firms can be analyzed as two things: an operating business and also as a big pot of money. The market is saying "Well, that certainly does look like an attractive pot of money, but you'd have to pay me quite a bit to own that operating business (and the attendant risks of it)."
Unexpected losses on a large life insurance portfolio seem very, very unlikely, absent a mass casualty event (in which case they're likely to get at least partially socialized).
- rocqua 8y agoHow exactly does a shareholder notice the 'book value' of a company? Sure, they have a 'claim' on a share of that, but that only really matters if the company defaults, in which case it would surprise me if the actual book value is payed back to shareholders. Perhaps it's also relevant in partial sales of the company?
- patio11 8y agoHow exactly does a shareholder notice the 'book value' of a company? Publicly traded companies are obligated to file quarterly reports which prominently list this number; Googling "$NAME book value" will bring it up for any publicly listed company in the US. A particular retail investor may not notice this, but this is approximately "What is the difference between a number and a string?" for professionals. In the majority of cases, shareholders don't attempt to extract book value. So-called "value" investors preferentially invest in companies which trade at a discount to book value; this tends to correct trading prices towards it, without the nuclear option of cracking open the company to sell off its juicy innards. (Which does happen, very occasionally, generally via private equity buyouts.)
- rocqua 8y agoObviously, the book value is public and not arbitrary. However, I don't see the direct reasoning behind a "value investor". By that I mean reasoning that doesn't involve guessing what other shareholders will do.