Edward Quince's Wisdom Bites: The Human Calculus of Value – Beyond Prices and Pundits

Welcome back, discerning investors, to Edward Quince's Wisdom Bites! In our fast-paced world, where markets swing on every headline and narratives shift quicker than a meme coin's price, it's easy to get lost in the "noise and false stimuli". But as this blog consistently reminds us, true understanding comes from looking beyond the superficial, embracing uncertainty, and focusing on timeless principles. Today, we dive into a recent memo from investment titan Howard Marks, "The Calculus of Value", a piece that, despite its August 2025 publication date, offers profound insights perfectly aligned with our core investment philosophies.

Marks, known for his incisive market observations, opens his August 2025 memo by reflecting on the 25th anniversary of his "bubble.com" memo. He updates his perspective on asset values, building on his previous conclusion that while U.S. stock market valuations were "lofty but not nutty", they didn't necessarily signal a bubble due to a lack of extreme investor psychology.

Marks distinguishes between value and price, a fundamental concept for any investor:

• Value is subjective – what an asset is "worth" at a point in time, and it cannot be definitively found, "not even by AI, as far as I know".

• Price is concrete – it's simply the amount you pay to obtain something.

The essence of good investing, Marks asserts, is accurately estimating this subjective value and then purchasing it at a reasonable price. He notes that while his education at the University of Chicago taught a purely mathematical discounting process of future cash flows and earnings to determine a fair price, "in the real world, price is set by a different discounting process, which consists mostly of people applying their subjective opinions and attitudes about what the asset and its earning power are worth".

This brings us to Benjamin Graham's enduring analogy, which Marks also highlights: "in the short run the market functions like a voting machine, reflecting assets’ popularity. But in the long run, it’s a weighing machine, assessing assets’ value". Marks himself refers to a "calculus of value" that seems "entirely logical and almost mathematical," but crucially, it's "applied by people who aren’t". This human element – the subjective opinions and attitudes – is what truly drives pricing in the market.

Marks observes several factors currently "firing investor imaginations" and contributing to bull markets:

• The positive psychology and "wealth effect" from recent gains in markets, high-end real estate, and crypto.

• The belief that, for most investors, there's "no alternative" to U.S. markets.

• The excitement surrounding "today’s new, new thing: AI".

A central theme in Marks' memo, and a powerful warning, is the "this time is different" cliché. He quotes Sir John Templeton, who said that "20 percent of the time things really are" different. Marks struggles with this paradox, stating, "I just have no idea which of those two concerns is more valid today" – whether it's the cliché always bearing scrutiny, or the failure to recognize when things actually are different. He emphasizes that failing to recognize genuine shifts "stands between the average investor and superiority".

Marks' "The Calculus of Value" deeply resonates with this blog's core investment philosophies, particularly its emphasis on intellectual humility and filtering noise. Marks' admission that he has "no idea" which side of the "this time is different" paradox is more valid exemplifies the very "I don't know" mentality this blog advocates. It reinforces that "Nobody knows anything, and that's okay", particularly when it comes to complex market dynamics.

His distinction between objective value and subjective price underscores the importance of focusing on underlying fundamentals rather than getting swept up in market popularity or "fleeting narratives". The "calculus of value" being logical but "applied by people who aren't" perfectly illustrates how human nature and behavior "matters more than your forecast". It's a reminder that emotions and psychology, rather than pure logic, often dictate short-term market movements.

Marks' call to understand "the other side of the issue," as per John Stuart Mill's quote ("He who knows only his own side of the case knows little of that"), aligns with the blog's promotion of critical thinking and seeking diverse perspectives beyond mere "group think". This intellectual rigor helps cut through the "noise bottleneck" that bombards investors daily.

Ultimately, Marks' memo, like the timeless wisdom shared here, urges investors to move beyond the "daily deluge of financial 'news'" and the "constant pressure to do something". Instead, cultivate patience – because "the big money is not in the buying and selling, but in the waiting". It reinforces the wisdom that "Never interrupt compounding unnecessarily" by reacting to every "new, new thing".

In a world constantly seeking instant answers and quick gains, Howard Marks' "The Calculus of Value" serves as a powerful reminder of enduring investment truths. It reaffirms our belief that true success in finance, and in life, comes from embracing intellectual humility, discerning value from price, filtering out the pervasive noise, and adhering to patient, long-term principles. As always, "Clarity comes from subtraction, not addition". So, understand the human element, scrutinize every "this time is different" narrative, and let your discipline triumph over market drama.