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The Most Important ThingUncommon Sense for the Thoughtful Investor$
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Howard Marks

Print publication date: 2011

Print ISBN-13: 9780231153683

Published to Columbia Scholarship Online: November 2015

DOI: 10.7312/columbia/9780231153683.001.0001

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The Most Important Thing Is … The Relationship Between Price and Value

The Most Important Thing Is … The Relationship Between Price and Value

Chapter:
(p.24) 4 The Most Important Thing Is … The Relationship Between Price and Value
Source:
The Most Important Thing
Author(s):

Howard Marks

Publisher:
Columbia University Press
DOI:10.7312/columbia/9780231153683.003.0004

This chapter describes a very important expectation for successful investing: establishing a healthy relationship between price and value. A fundamental premise of the efficient market hypothesis is that if the investor buys something for its fair value, they can expect a return that is fair given the risk. However, active investors are not in it for fair risk-adjusted returns; they want superior returns. To be sure that the price is right, a prospective buyer should be looking at the underlying fundamental value, but most of the time a security's price will be affected at least as much—and its short-term fluctuations determined primarily—by two other factors: psychology and technicals. Whereas the key to ascertaining value is skilled financial analysis, the key to understanding the price/value relationship—and the outlook for it—lies largely in insight into other investors' minds. Investor psychology can cause a security to be priced just about anywhere in the short run, regardless of its fundamentals.

Keywords:   price, value, efficient market hypothesis, investors, psychology, technicals, price/value relationship, fundamentals

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