No. of Recommendations: 2
Not only am I buying low quality issues, but I’m picking off the 1 and 2 single lots that other investors consider too small to bother with. I’ll take anything that looks cheap.


What you said about “low quality” needs restatement.

Yeah, I know. I’m being picky about language again, but bear with me. As Uncle Ben describes value investing –which is what you are doing, no matter what you call it-- the following paradox emerges. If a putatively “low-quality” asset can be bought cheaply enough, it becomes a high-quality investment decision. I don’t remember the page, but Graham is quite clear about the point that price --relative to intrinsic value— determines the quality of the investing decision. The greater the discount, the higher the quality. Thus, a further paradox emerges. “High-quality” assets for which too much is paid become low-quality investments. So the so-called “flight to quality” that bids up prices actually has the opposite effect for the purchasers. All they done is to increase their risks.

You’ve chosen to limit your investing universe to triple-BBB and lower. So, yes, you’re digging though what is customarily consider to be “low-quality”. But what you’re buying isn’t necessarily low-quality assets. It’s assets that your research suggests are under-valued/mispriced. If the sellers are right about prices, then you’ve made a bad investment decision for paying a higher price than the asset merited. At some price that asset should have been bought, but not at the price you paid.

On the other hand, if the sellers are wrong about their prices and have set them too low, then they’re the ones who made the bad decision about the quality of those assets, for failing to value them properly.

So, who are the true “junkmen”? Them who throw away good value for not recognizing it, or them who buy good value wherever they find it? That’s why I think the terms “high-quality” and “low-quality” should be applied to the investing decision not to investment assets. Admittedly, it is useful to call certain bonds “junk”, because it scares away the potential competition. But it is more useful to use the term as a measure of one’s thinking. A successful investor in “low-quality" bonds has to be making very high-quality decisions if he expects to survive in this game.
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