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Memos from Howard Marks
2025-08-14T07:00:00.0000000Z" pubdate title="Time posted: >8/14/2025 7:00:00 AM (UTC)">Aug 14, 2025
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The Calculus of Value
On July 28, I flew to South America on a plane without Wi-Fi, leaving me without email or entertainment. What was I to do but start in on a memo? Interestingly, the things I wrote during that flight turned out to be the answers to many of the questions I received from clients after I landed, so writing what follows served me well. I hope it’ll do the same for you.
January 2 of this year was the 25th anniversary of my memo bubble.com, the one that put my writing on the map, and I marked the occasion by publishing another memo, called On Bubble Watch. While the title may have raised concern for readers, my main conclusion was that the elevated U.S. stock market valuations at the time didn’t necessarily signal the existence of a bubble, mainly because I didn’t detect the extreme investor psychology I associate with bubbles. Security prices were “lofty but not nutty” is how I put it. Because a lot has taken place in the seven months since then, it’s time for an update on asset values.
Before I start, please note that I’m talking about investing in general. My specific reference will be to public U.S. corporate securities – stocks and bonds – since they mark to market regularly and are the assets that most enter my consciousness. But since investors’ actions toward one group of assets and the resulting price movements influence other assets and other markets – and since they ensue largely from investor psychology, which is highly contagious – I think my comments are probably applicable to other asset classes, to private assets as well as public ones, and possibly to markets outside the U.S.
I’ll start by laying out where I think investment value comes from and how it should be assessed. I don’t think I’ve ever done this before in this form. It’s a big topic, but I’ll try to cover it briefly.
Value
Investment assets – things such as stocks, bonds, companies, and buildings – have a value, which is sometimes referred to as their “intrinsic value”: what the asset is “worth” at a point in time. This value is subjective. It can’t definitively be found anywhere – not even by AI, as far as I know – and opinions will differ as to what it is.
In my parlance, the value of an asset is derived from its “fundamentals.” The fundamentals of a company, for example, encompass a great many things. These include its current earnings, its earning power in the future, the steadiness or variability of its future earnings, the market value of its component assets, the skill of management, its potential to develop new products, the competitive landscape, the strength of its balance sheet, and the myriad additional factors that will influence the company’s future. Ultimately, the totality of an asset’s fundamentals constitute its earning power, which in turn is the source of its value.
A company may own land, buildings, machinery, vehicles, and natural resources such as mineral deposits or forests, and even facilities that allow it to derive electricity from river water or sunshine (which it obviously doesn’t own). These are tangible assets, and there’s often a market for them and a realizable price. But a company may also have assets that are intangible, such as patents, trade secrets, knowhow, research capability, reputation and image, human talent, management skill, and culture. Some of these may be transferable and salable, but others are not.
All the assets mentioned above have earning power individually, and in combination they create a company’s overall earning power. A company’s earning power almost always exceeds the sum of the earning power of each of its individual assets taken in isolation. Combining individual assets to maximize a company’s overall earning power is the top job of management. When successful, the result is synergy: the benefit gained from skillfully combining things.
But not all assets have earning power (as I define it), and thus not all have calculable investment value. I describe earning power as the money you can make by owning and operating an asset – that is, I omit from “earnings” the possible gains from simply holding an asset and ultimately selling it. A diamond ring, painting, or classic car doesn’t produce earnings for its owner (short of...