THE VALUE ADVANTAGE

Howard Marks says long-term investment success comes from valuing an asset's intrinsic worth over its market price and acting patiently

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In a world where market prices swing on a whim and investor sentiment can shift in an instant, the foundational principles of sound investing are more crucial than ever.

Howard Marks of Oaktree Capital Management, in his recent memo ‘The Calculus of Value,’ lays out a timeless framework for separating the signal from the noise: the essential relationship between an asset's price and its intrinsic value.

This framework is not an algorithm for market timing, but a philosophical guide for investors seeking to build wealth over the long term. It teaches us to look beyond the fleeting popularity of an asset and focus on its true, underlying worth.

“The price of an asset means nothing in isolation. You can’t tell whether a car is a good buy at $40,000 unless you know about the things that determine its market value: its make, model, age, mileage and condition. It’s the same in investing; what matters is the relationship between an asset's price and its value,” states Howard Marks’ Memo.

VALUE: THE CORNERSTONE OF INVESTING

In investing, everything begins with value. Marks defines value as the intrinsic worth of an asset, which is derived from its “fundamentals.” Unlike price, which is simply what buyers and sellers agree on in the marketplace, value is an estimate based on careful analysis and judgement.

The fundamentals of a company are a complex tapestry of many things. They include its current earnings, its future earning potential, the stability of those earnings, the market value of its tangible assets (such as land and machinery), and its intangible assets (such as patents, trade secrets, and reputation).

The skill of its management, its potential for new product development, its competitive landscape, and the strength of its balance sheet all play a role. Ultimately, the totality of an asset's fundamentals constitutes its earning power, which, in turn, is the source of its value.