The Calculus of Value

In his latest memo, Howard Marks sets forth the essence of value and price, as well as the critical relationship between the two. He posits that value exerts a “magnetic” influence on price, meaning the relationship of price to value should be expected to strongly influence investment performance in the long run, with high valuations presaging low subsequent returns, and vice versa. In the context of today’s elevated U.S. equity valuations and widespread investor optimism, he advises us to consider going to an “Investment Readiness Condition” in which investors shift their portfolios somewhat in the direction of increased defense.