In his 1992 memo, Howard Marks explained why, in investing, price is more important than quality every time. Here’s an excerpt from the memo:
The second factor determining whether something will be a good investment is price. Ceteris paribus, given two assets of similar quality, it’s better to pay less than more.
Lots of investors take the approach of searching out companies with better products, managements, balance sheets and prospects. Many say they will only buy top quality assets.
Our group does not have that luxury and, at any rate, pursuing museum quality assets would be antithetical to our philosophy. In convertibles, as in high yield bonds and certainly in distressed debt, our companies generally are not widely applauded or atop the ratings heap. Instead, they fall within a broad range in terms of quality.
We are less concerned with the absolute quality of our companies than with the price we pay for whatever it is we’re getting. In short, we feel “everything is triple-A at the right price”.
We have many reasons for following this approach, including the fact that relatively few people compete with us to do so. But we feel buying any asset for less than it’s worth virtually assures success. Identifying top quality assets does not; the risk of overpaying for that quality still remains.
You can find a number of Howard Marks’ memos here:
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