|
|
By Opalesque: In his latest memo, entitled "The calculus of value", Howard Marks, co-chairman of Oaktree, looks at the critical relationship between investment value and price. 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, investors may consider going to an "Investment Readiness Condition" in which they shift their portfolios somewhat in the direction of increased defence.
The nature of value
Marks begins by defining investment value as derived from an asset's "fundamentals" - particularly its earning power. For companies, this encompasses current earnings, future earning potential, management quality, competitive position, and both tangible assets (buildings, equipment) and intangible ones (patents, reputation, talent). The key insight is that a company's total earning power typically exceeds the sum of its individual parts when skilfully combined by management - creating synergy.
Crucially, Marks distinguishes between assets with earning power (like productive companies) and those without (like gold or art), which can only generate returns through price appreciation. The former can be valued analytically; the latter cannot.
Price vs. value dynamics...................... To view our full article Click here
|
|
RSS
