First, all marketable securities should be valued at cost and not at market value, because values in the stock market as a whole can greatly influence the returns on shareholders’ equity in a particular company. For example, if the stock market rose dramatically in one year, thereby increasing the net worth of a company, a truly outstanding operating performance would be diminished when compared to a larger denominator. Conversely, falling prices reduce shareholders’ equity, which means that mediocre operating results appear much better than they really are.
