Ours at Goldman Sachs is an equilibrium approach. In any dynamic system, equilibrium is an idealized point where forces are perfectly balanced. In economics, equilibrium refers to a state of the world where supply equals demand. But it should be obvious even to the most casual observer that equilibrium never really exists in actual financial markets. Investors, speculators, and traders are constantly buying and selling. Prices are constantly adjusting. What then do we find attractive about an equilibrium approach to investing? There are several attractions. First, in economic systems there are natural forces that come into play to eliminate obvious deviations from equilibrium. When prices are too low, demand will, at least over time, increase. When prices are too high, suppliers will enter the market, attracted by the profitable opportunity. There are lots of interesting, and sometimes uninteresting, reasons why such adjustments take time. Frictions, uncertain information, noise in the system, lack of liquidity, concerns about credit or legal status, or questions about enforceability of contracts all can impede adjustment, and sometimes deviations can be quite large. But financial markets, in particular, tend to have fewer frictions than other markets, and financial markets attract smart investors with resources to exploit profitable opportunities. Thus, deviations from equilibrium tend to adjust relatively rapidly in financial markets. We need not assume that markets are always in equilibrium to find an equilibrium approach useful. Rather, we view the world as a complex, highly random system in which there is a constant barrage of new data and shocks to existing valuations that as often as not knock the system away from equilibrium. However, although we anticipate that these shocks constantly create deviations from equilibrium in financial markets, and we recognize that frictions prevent those deviations from disappearing immediately, we also assume that these deviations represent opportunities. Wise investors attempting to take advantage of these opportunities take actions that create the forces which continuously push the system back toward equilibrium. Thus, we view the financial markets as having a center of gravity that is defined by the equilibrium between supply and demand.