Wood putty might be a convenient way to fill nail holes and marks in wood but there are a few major drawbacks. First, as the wood ages and changes color, there is a good chance that the putty will not match. Second, wood shrinks and grows as the relative moisture levels in your home change with the seasons. This shrinking and growing can cause the putty to crack or become dislodged with time.
One of the best ways to get around these problems is to use a wooden plug. You can buy pre-cut wooden plugs or make your own with a plug cutter. The biggest advantage of cutting your own plugs is that you can get a close color match by using scraps from the same project.
A plug cutter cuts a tapered hole in the face grain of a board. The plug is then either trimmed or snapped off from the wood remaining in the center of the hole. Because of their tapered shape, these wood plugs can be coated with glue and then tapped firmly into a hole to form a snug fit.
Because plug cutters don't have a center spur, it's best to use them in a drill press. If you don't have a drill press you can get around this by drilling a hole in a piece of scrap plywood to hold the plug cutter in place. The hole should be slightly larger than the outside diameter of the plug cutter.
Note: You can find plug cutters at most hardware stores.