On a Behind The Memo podcast last year, renowned value investor Howard Marks stated that: “What I learned from my first 10 years of experience is that good investing doesn’t come from buying good things but from buying things well. The difference is more than grammatical.”

​
So what are Marks’ thoughts? His most influential experience was the contrasting views and performance of both high-yield bonds (otherwise known as “junk” or “non-investment grade” bonds) and the so-called “Nifty Fifty” at the beginning of his career. Back in 1978, one of the major ratings agencies Moody’s defined a B-rated bond as “fails to possess the characteristics of a desirable investment.” This definition was based on the fact that the company issuing such bonds was viewed as low credit worthiness. However, it  included no assessment of the price an investor was paying to buy the bond or the yield the investor was receiving to compensate for the higher risk. It was simply an assessment that because the company was of low quality that it was a poor investment. Marks, however, started investing in these securities and has generated attractive returns on a consistent basis–in the bonds of some of America’s riskiest public companies. Conversely, the wisdom of the time was that the Nifty Fifty were so great, their market positions so strong, and their growth prospects so compelling and certain, that there was no price too high to pay for these businesses. Perhaps similar to the Magnificent 7 today (to use a loose analogy), the Nifty Fifty were a group of 50 companies on the New York Stock Exchange with exceptional market positions and financial metrics. Many of these truly great businesses of the era are still around and flourishing today, such as Coca-Cola (NYSE: KO), American Express (NYSE: AXP) and Texas Instruments (NASDAQ: TXN), while others have entered bankruptcy or languished into obscurity, such as Sears and Xerox. More significantly though, if you purchased a basket of the Nifty Fifty in 1969 and held them until 1974, you were sitting on losses of more than 90%–owning portions of the best companies in America. This juxtaposition of events had a profound impact on Marks and led to an incredible career investing in high-yield bonds.

Marks’ advice goes hand-in-hand with that of the so-called father of security analysis and value investing, Benjamin Graham. As well as being known as the mentor for famed investor and chairman of Berkshire Hathaway (NYSE: BRK.B) Warren Buffett, Graham was a highly successful hedge fund manager in his own right and the author of Security Analysis (1934) and The Intelligent Investor (1949). One of Graham’s key concepts in these books is what he calls “Margin of Safety.” This is the concept of buying a security at a significant discount to its intrinsic value–that is, what you believe it is worth. This increases the chances of a profitable trade and minimises the risk of a significant loss in the event that something unexpected occurs.
​
While this might seem like a simple idea, investors don’t always seem to put it into practice. The share price fluctuations that you see every year, month and even day are a testament to the swings in investor psychology that can heavily influence the prices people pay for various investments. Graham described this phenomenon as “Mr Market”, an imaginary investor who was prone to erratic swings of pessimism and optimism. There’s no shortage of examples of these mood swings, including the extreme optimism surrounding the Nifty Fifty in 1969. Graham’s advice was to take advantage of these ups and downs–to use prudence and fundamental analysis to evaluate the company in terms of its true underlying value, and to buy when the share price represented an overly pessimistic scenario and to sell when it is overly optimistic.
Graham also provided a framework for analysing the value of companies listed on the share market, with specific details on evaluating a company in terms of its assets or earnings power.  Perhaps more importantly, though, he also encouraged investors to consider their temperament and capabilities (which he called “enterprising investors” and “defensive investors”). Rather than technical ability, this is likely one of the most important aspects of investing. There are countless stories of people not achieving their investing goals, even in outstanding mutual funds (such as those managed by Peter Lynch) and index funds. Morningstar’s “Mind the Gap” study has shown that investors in an index fund on average have returned 1.7% per year less than the fund’s performance–purely from buying and selling the fund at inopportune times (that is, attempting to “time the market”). Or as Graham put it: “the investor’s chief problem–and even his worst enemy–is likely to be himself.”

Similar to Howard Marks, Ben Graham was notorious for looking to buy a dollar for fifty cents. His disciple Warren Buffett, on the other hand, has evolved from this belief under the influence of the late Charlie Munger. Buffett is well known for stating that: “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Buffett maintains that it would be best for most investors to think of using a punchcard of 20 slots for their entire history of investing, while Graham had a huge amount of turnover in his portfolio.
​
There are undoubtedly many ways to approach the field of investing. Yet what all highly successful investors appear to have in common is that they take a fundamental approach, understand what they own, and are firm but flexible with their strategy. Most importantly, they do not let the market tell them at which prices they should be buying or selling–they don’t let FOMO cause them to overpay and they don’t lose faith in their analysis simply because the share price is down.

Disclaimer:  Texas Instruments ​(NASDAQ: TXN) is currently held in TAMIM portfolios.