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The Calculus of Value: Why Price Isn’t the Same as Worth
- Alpesh Patel
- 2 minutes ago
- 4 min read
When it comes to investing, one of the most powerful – and often misunderstood – distinctions is between price and value. They’re related, but not the same.
And as Howard Marks of Oaktree Capital lays out brilliantly in his recent memo The Calculus of Value, understanding this difference is essential if you want to navigate today’s markets with clarity rather than noise.
In a recent episode of my podcast, I explored these ideas in detail.
Let’s break them down here.
Value: What You Get
Value is the underlying worth of an asset – its intrinsic value. But here’s the kicker: it isn’t a fixed, obvious number you can look up. It’s subjective.
Marks defines value as coming from earning power: the money you can expect to make from owning and operating an asset. For a company, that means:
Tangible assets: land, buildings, machinery.
Intangibles: patents, brand reputation, management skill, company culture.
Balance sheet strength & competition.
Put simply: an asset’s value is about the cash flows it can generate today and in the future.
That’s why a diamond ring or a painting is so different from a productive business – they don’t create cash. Their “value” is purely what someone else will pay for them later. As Marks puts it: if it doesn’t produce income, its worth is essentially speculative.
Price: What You Pay
If value is fuzzy, price is crystal clear – it’s the number on your screen, the amount you hand over in a trade.
The textbooks tell us price should equal the discounted value of future earnings. But in reality, price is set by the tug-of-war between optimists and pessimists in the market.
Benjamin Graham’s metaphor captures it best:
In the short run, the market is a voting machine – swayed by popularity, fear, and FOMO.
In the long run, it’s a weighing machine – recognising true value.
That’s why you can have markets where prices soar far above value, or slump far below, purely on psychology.
The Magnetic Dance Between Price and Value
Over time, Marks argues, value exerts a magnetic pull on price. Prices above value are more likely to drift downward, and prices below value are more likely to rise.
But beware: in the short run, anything can happen. An undervalued stock can stay cheap for years. An overvalued one can get even crazier. As Keynes warned, “The market can stay irrational longer than you can stay solvent.”
So the real skill in investing isn’t just spotting value – it’s having the conviction (and patience) to wait for price and value to converge.
2025: Marks’ View of Today’s Market
When Marks wrote his memo in August 2025, the backdrop was anything but calm.
Start of 2025: the S&P 500 traded at a forward P/E of 23 – historically linked to mediocre 10-year returns.
Q1 correction: markets fell as inflation ticked higher and growth looked weak.
April tariffs: sweeping U.S. tariffs triggered a sharp selloff and bond yields spiked.
Relief rally: within months, the S&P rebounded 29%, ending up 9% for the year.
Despite fundamentals arguably deteriorating, prices were higher – classic psychology overpowering valuation.
Warning Signals Marks Flagged
By summer 2025, Marks saw the market moving from “elevated” to “worrisome.” Among his red flags:
P/E ratios: the S&P at 23, with the “Magnificent Seven” at ~33 – high but justified – while the other 493 companies averaged 22, well above historical norms.
Market cap-to-sales ratio: at 3.3x, an all-time high.
Equity euphoria index: double its normal level, consistent with bubbles.
Buffett indicator (market cap-to-GDP): also at record highs.
Narrow yield spreads: signalling complacency in credit markets.
In short: psychology was buoyant, but valuations were stretched.
Is It Different This Time?
Every bubble in history has been justified by the phrase “it’s different this time.” Usually, it isn’t. But sometimes, it actually is.
The bull case for today’s valuations is that the S&P 500 is dominated by stronger, faster-growing, less cyclical companies with higher free cash flow and wider moats. Perhaps they deserve above-average multiples.
Marks admits: maybe. AI and other innovations could genuinely change the game. But he warns against treating every company as a future superstar. Discernment is key.
Practical Takeaway: Investcon 5
So what do you do in a market that feels overheated but not collapsing? Marks suggests an Investcon 5 posture:
Reduce aggressive holdings.
Increase defensive positions.
Shift towards safer assets (such as credit with contractual protections).
Not panic, not extremes. Just a measured rebalancing to sleep better at night.
The Investor’s Challenge
In the end, the calculus of value boils down to three timeless truths:
Value is what you get, price is what you pay.
Most price moves are psychology, not fundamentals.
Over the long term, price and value converge - but patience is required.
For investors, the challenge is to see through the noise, weigh fundamentals carefully, and avoid being swept away by mood swings or hype.
So let me leave you with this:
How will you apply this calculus in your own investing? Will you focus on the daily popularity contest – or the enduring weight of real value?
Taking the Next Step
If this way of thinking resonates with you, that’s exactly what I focus on in the Great Investments Programme.
The programme is built on the principle of separating price from value - identifying world-class companies with real earning power, durable moats, and growth potential, while avoiding the hype that drives many investors off course.
It’s about applying Howard Marks’ “calculus of value” in practice: using data, discipline, and patience to invest where value and price align in your favour.
Disclaimer: This blog is for educational purposes only and does not constitute financial advice. Investing involves risk, including the potential loss of capital. Past performance is not indicative of future results. Sources & References
Howard Marks, The Calculus of Value, Oaktree Capital, August 2025the-calculus-of-value (1)
Benjamin Graham, The Intelligent Investor (on the market as a voting vs weighing machine)
John Maynard Keynes (quote on market irrationality)
John Stuart Mill, On Liberty (1859) - on knowing both sides of an argument
J.P. Morgan research on P/E ratios and long-term returns
Financial Times (July 2025), data on S&P 500 price-to-sales ratios and investor sentiment indicators Alpesh Patel OBE www.campaignforamillion.com