Yesterday I saw news that the market has fallen so much that its price/book ratio is now at all time low. In other words, market is "undervalued". Actually, many fund managers are saying that. In fact, everybody always say that samething that market is "undervalued" regardless of market conditions.

I remembered in year 2007 and 2008, fund managers keep on singing that tune that market is undervalued. Also they keep on saying there will be a decoupling between Asia and US. We now know it is a big piece of rubbish. Why is it that fund managers like to say market is undervalued all the time? That's because if they say the market is overvalued, they are implying that investors must sell their positions. So the AUM for the funds will drop and hence management fee will drop. This kind of vested interest is everywhere. Back to the price/book being very low. The news didn't say this: What is book value? It is Asset minius Liabilities. However, what is Asset? Asset can consists of cash, property, receivables, deferred tax, goodwill, inventory. If the current market situation hasn't taught of anything, here is what everybody should know: Assets can be impaired. "Cash" can disappear overnight if the cash placed in the bank collapsed (ok, this is not easy because these days most government guarantees the deposits in the bank. Govt can always print money to replaced lost cash if the bank collapse). Property - well we all know it is plunging like nobody business. Receivables are cash not yet collected when sales of goods have already being made. So if the customer default, receivable disappeared too. How about asset deferred tax? These arises due an accounting concept, meaning a future tax liability or asset, resulting from temporary differences between book (accounting) value of assets and liabilities and their tax value. A future reduction of income will impair this asset deferred tax. Take citigroup for example, if continues to have poor profit performance, it will suffer a write down in its asset deferred tax (see HERE). Finally goodwill arises due to someone's imagination when an acquiring company pay more than the acquired company's fair value. In otherwords, "Assets" could just be an imagination. The "book" value - especially in today's economy - could simply be as real as your imagination. Is Price/Book cheap? Yes to that answer because fund managers always say that regardless of market conditions. What should we do? Just buy beta and forget about alpha. Alpha - like "Assets" - is just an imagination in our brain.