“I would submit that there is another value standard that the industry should consider,” writes Mike Pellegrino (Pellegrino & Associates, LLC), also in response to last week’s item on alternative definitions. “Call it ‘fools’ market value.’"
By definition, a rational buyer—which is a basic tenet of the efficient market hypothesis and a foundation for the fair market value standard—should never pay higher than the intrinsic value for any asset. Yet, many ‘rational’ buyers overpay because they get caught up in the hype of a particular asset class or market segment. Further, by using relative valuation techniques, these buyers rely on the rushed judgment of other ‘rational’ investors who also paid more than the intrinsic value.
“This drives prices well beyond intrinsic value,” Pellegrino says. “Some may call this ‘fair’ value in the market. But in addition to becoming a self-fulfilling prophecy, such hyped buying also creates speculative bubbles. When the bubble bursts, the ‘rational’ buyers all scratch their heads and lament about how foolish they were.” There is strong empirical evidence to support this alternate standard of "fools’ market value," Pellegrino contends, and he’s currently analyzing the data for an article (stay tuned). Any further comments, insights, alternatives to this or any valuation-related topic, email the editor.
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