Thoughts on pricing & fair valuation

The fair value of any financial security is driven by 3 critical factors:

1. What are you going to get from it? Coupon for fixed income, interest for currencies, dividend/earnings for equities.
2. When are you going to get it? Coupon - half-yearly/annually, interest - monthly, dividend/earnings - annually but not certain to be received
3. What is your desired rate of return from the investment? Yield for fixed income, Cost of equity for equities.

A rational investor would evaluate & determine each of the above 3 factors before deciding to invest. And then there are many who gamble in the name of investments.

Also adds another aspect to pricing - how would you price commodities that do not really 'earn' anything except possible capital gains. That strategy is defined by many as the "Bigger Fool Theory" - you will necessarily need someone to buy it from you at a much higher price than what you bought at!

Banks & their mischief!

Past few years post 2008 have been arguably the toughest phase for global banks. Crumbling credit opportunities, tougher regulations, ailing financial markets and the inevitable drying up of liquidity have all impacted the bottom-lines of some of the largest banks. These reasons, though not justified, may have perhaps motivated some of these financial powerhouses to get scandalous! Not sure whether the management and shareholders turned away after seeing what was happening.

The following chart explains the regulatory fines levied on the top banks since 2009.

If you are wondering how is BankAm still surviving that hit, some of their retail banking acquisitions were really value adding deals for their profits. And Merrill Lynch added up numbers too.

Many are also surprised to see Goldman Sachs sitting much lower in that list. Well, now you know!