April 29, 2014

Values hard to find

Prices are high, and values are growing scarce. Warren Buffett, based on the words of Benjamin Graham, teaches us that price is what you pay, and value is what you get. 

And my buddy Howard Marks, at Oaktree Capital Management, says that investing success is not a function of what you buy—but what you pay. Last year, the S&P 500's earnings were up only about 5% or 6%, but the index advanced by more than 30%. The difference in performance between earnings and investment returns was an outsize increase of 25% in market valuations, as animal spirits were awakened. 

Since 1990, the average annual increase in the multiple has been 1%. So last year's valuation rise borrowed and has taken away from future market returns.

Article originally published on http://online.barrons.com/news/articles/SB50001424053111904703704579507354252255452 on April 26, 2014