TOPIC • 20 CLAIMS
Valuation
What is being paid for a stream of cash, and against what history.
HOWARD MARKS/
Those software borrowers were financed at multiples and leverage that assumed durable growth.
- often acquired at EBITDA multiples of about 20x, with high leverage
HOWARD MARKS/
Private equity returns have already lagged the public index over the recent period, undercutting the premium the asset class is sold on.
- MSCI: US private equity funds annualized 5.8% between 2022 and Q3 2025, versus 11.6% for the S&P 500
HOWARD MARKS/
On the central valuation question he argues the historical comparison cuts the other way — today’s leaders trade cheaper than the 1999 leaders did.
- P/E ratios for Microsoft, Cisco and Oracle in 1998-2000 were much higher than current ratios for Nvidia, Microsoft, Alphabet, Amazon and Meta
HOWARD MARKS/
He cites private-market pricing as the clearer symptom of excess.
- Thinking Machines raised $2 billion at a $10 billion valuation with no released product, later valued at $50 billion
HOWARD MARKS/
He keeps the memo arguing that when vast sums arrive in an asset class, the fees available distort what managers are trying to do — alongside the position that no asset class is owed a return by birthright, since returns depend on mispricings existing and on the skill to find them.
THE BEST OF . . . →HOWARD MARKS/
On bubbles his selection pairs the psychology with the excuse: the dot-com boom rested on excessive belief in the new new thing, and the phrase by which soaring prices often get justified is that this time it is different — which he tested against a list of such theories rather than dismissing outright.
- nine such theories examined in This Time It’s Different
HOWARD MARKS/
The valuation position he restates most plainly is that growth in value supplies most of the impetus for returns over the long run and that value pulls price toward it, so a high starting valuation should be expected to presage low subsequent returns — with the corollary that the better recent equity returns have been, the less good the next ones are likely to be.
THE BEST OF . . . →HOWARD MARKS/
He roots value in earning power — the money an asset makes while you own and operate it, which means anything with no cash flow and none in prospect cannot be valued objectively at all — and treats price not as a calculation but as the outcome of a daily tug-of-war between optimists and pessimists. Since fundamentals barely move month to month while prices move constantly, short-run returns come almost entirely from changes in what people are willing to pay.
THE CALCULUS OF VALUE →HOWARD MARKS/
Value pulls on price like a magnet, but only over the long run: prices can go to crazy extremes in either direction, and that capacity is exactly what produces bubbles and crashes. He treats betting on convergence as intellectually sound and betting on it happening soon as dangerous.
THE CALCULUS OF VALUE →HOWARD MARKS/
The starting point of the arithmetic is a market already expensive before the year began, and the historical record of buying at that multiple is the memo’s sharpest single piece of evidence.
- the S&P 500’s forward p/e was around 23 toward the end of 2024, significantly above its historical average
- J.P. Morgan Asset Management: buying the index at 23 times forward earnings in 1987-2014 produced ten-year average annual returns between plus 2% and minus 2% every time
HOWARD MARKS/
He walks through the year’s round trip to show the calculus moving the wrong way: the tariff shock repriced the fundamental outlook downward, the relief rally more than took it back, and so prices rose while the outlook did not.
- declines of up to 10% in the first quarter, with the Nasdaq Composite falling the most
- the tariff announcement took the S&P 500 to a level 15% below where it ended 2024
- the 10-year Treasury yield got as high as 4½%, up from just over 4% before the announcement
- from its April 8 low the index rose 29%, leaving it up 9% for the year to date and 14% above April 1
HOWARD MARKS/
His aside on concentration inverts the usual complaint: the seven biggest names are not what makes the index expensive, because their multiples look defensible against their moats and margins — it is the multiple on everything else that he finds worrisome.
- a bit over half of the S&P 500’s 58% two-year total return in 2023-24 came from seven stocks
- those seven have grown to about one-third of the index’s total market value
- their p/e ratios average roughly 33
- the other 493 companies average a p/e of 22, against a mid-teens historical average for the index
- Nifty-Fifty stocks were selling at p/e ratios between 60 and 90 in 1969
HOWARD MARKS/
He stacks up the behavioral indicators alongside the multiple, including the credit market, where the compensation for giving up Treasury safety has thinned to near its historical minimum.
- the S&P 500 valued at more than 3.3 times sales, an all-time high (Financial Times, July 25, citing Bloomberg)
- a Barclays equity-euphoria indicator at twice its normal level, in territory associated with asset bubbles
- the ratio of US market capitalization to GDP at an all-time high, and understated because companies stay private longer
- yield spreads approaching all-time lows
HOWARD MARKS/
He states the bull case rather than caricaturing it — that today’s index is increasingly made of companies that grow faster, are less cyclical, need less capital to grow and hold stronger moats, and therefore deserve above-average multiples — and grants that the explanation makes complete sense. What he will not do is adjudicate: he says he cannot tell whether the greater error today is falling for "it’s different this time" or failing to notice when it is, and warns that in most new new things far too many companies, often the wrong ones, get treated as winners.
- Templeton put it at 20 percent of the time that things really are different; Marks would bet on more than 20 percent today
HOWARD MARKS/
The conclusion is a posture rather than a forecast: overvaluation can never be proved and implies nothing about timing, but he grades defensiveness on a six-step scale running from stopping buying to going short, says it is time for the second step — trimming aggressive holdings in favor of defensive ones — and holds that reaching the three most extreme steps would take a degree of certainty he calls essentially impossible.
- the last sustained market correction ended in early 2009, so no one under about 35 has experienced a prolonged bear market
HOWARD MARKS/
His conclusion is relative, not absolute: credit is no giveaway, but it out-yields equities and its returns are contractual.
- J.P. Morgan Asset Management: from p/e ratios like today’s, the S&P 500 has historically produced ten-year returns averaging between -2% and 2% a year
- the 10-year Treasury yield above the S&P 500’s earnings yield (Wall Street Journal, January 27)
HOWARD MARKS/
His own baptism supplies the evidence: the best companies in America, bought at any price, lost most of their value in five years.
- well over 90% lost by buying in September 1969 and holding five years
- p/e ratios falling from the range of 60 to 90 to the range of 6 to 9
- the market as a whole down about half in 1973-74
HOWARD MARKS/
A multiple in the 30s is a bet on persistence, and the churn in his own tables suggests change is more the rule.
- Nvidia at a forward multiple in the low 30s, double the post-war S&P average of roughly 16 but cheap against the Nifty Fifty
- only six of the top twenty S&P companies of early 2000 were still in the top twenty in early 2024
- of today’s Magnificent Seven only Microsoft was in that 2000 top twenty
HOWARD MARKS/
Starting valuation and the next decade’s returns are strongly related, with minor variations but no serious exceptions.
- J.P. Morgan Asset Management: just short of 324 monthly observations from 1988 through late 2014
- J.P. Morgan Asset Management: buying at a multiple in line with today’s 22 always produced ten-year returns between plus 2% and minus 2%
- today’s p/e well into the top decile of those observations
HOWARD MARKS/
Markets are not efficient in the sense of being right, so skill can pay — but many believed to have alpha turn out not to.
RUMINATING ON ASSET ALLOCATION →
Claims are restated; figures are the authors' own. Each links to the document it came from, which in turn links to the original in full.