Howard Marks and The Calculus of Value Memo Notes
Ezra's Notes #2
Welcome to Ezra's Notes. Each week (hopefully) I share timeless insights from the most worthwhile content I’ve read, watched, or listened to.
Everything is condensed into clear notes you can read in minutes.
These are my notes from Howard Mark’s latest memo.
Enjoy!
Howard Marks - The Calculus of Value
Value is derived from fundamentals and earning power (current and future).
Price is what investors pay, largely determined by psychology, optimism vs. pessimism, and sentiment.
Investment success depends on paying the right price relative to true value.
Short-term market moves are driven more by sentiment than fundamentals.
Price tends to gravitate toward value in the long term, but can diverge wildly in the short term.
Bubbles and crashes are born when psychology pushes prices to extremes.
S&P 500 forward P/E near 23, well above historical averages.
Historical data suggests such valuations often result in weak (~0–2% annually) long-term returns.
Market cap-to-GDP ratio (Buffett Indicator) at record highs.
Stocks trading at 3.3x sales, another all-time high.
Signs of euphoria: high valuations, narrowing credit spreads, and “meme stock” activity (again).
Risk tolerance elevated; spreads on corporate debt near historic lows.
Relief rallies fueled by optimism despite tariffs, inflation risk, and debt concerns
Strong recent gains concentrated in the “Mag 7” tech stocks (Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia, Tesla).
AI enthusiasm and belief in U.S. market supremacy are reinforcing bullish sentiment.
Optimism and FOMO outweigh concerns about tariffs, inflation, and deficits.
Fundamentals have deteriorated (tariffs, inflation, U.S. fiscal concerns), yet asset prices are higher.
Compared to the past, today’s S&P 500 is increasingly made up of companies that (a) grow faster, (b) are less cyclical, (c) require less incremental capital to grow, enabling them to generate more free cash flow, and (d) have much stronger competitive positions or “moats.” Thus, they deserve above average p/e ratios.
See you next week with more timeless notes.
Until then, keep compounding knowledge.
— Ezra