Investing in Fixed-Income Securities 143bonds outstanding would have suffered far greater losses. An insurance
company heavily invested in bonds in a hyperinf lationary environment
has the potential to wipe out its portfolio.
Even though thinking of Buffett and bonds in the same sentence may
be a new idea for you, it will come as no surprise that he applies the same
principles as he does in valuing a company or stocks. He is a principle-
based investor who will put his money in a deal where he sees a potential
for prof it, and he makes sure that the risk is priced into the deal. Even in
f ixed-income transactions, his business owner’s perspective means that
he pays close attention to the issuing company’s management, values, and
performance. This “bond-as-a-business” approach to f ixed-income in-
vesting is highly unusual but it has served Buffett well.
BONDS
Washington Public Power Supply System
Back in 1983, Buffett decided to invest in some bonds of the Washing-
ton Public Power Supply System ( WPPSS). The transaction is a clear
example of Buffett’s thinking in terms of the possible gains from buy-
ing the bonds compared with those if he bought the entire company.
On July 25, 1983, WPPSS (pronounced, with macabre humor,
“Whoops”) announced that it was in default of $2.25 billion in munic-
ipal bonds used to f inance the uncompleted construction of two nuclear
reactors, known as Projects 4 and 5. The state ruled that the local power
authorities were not obligated to pay WPPSS for power they had previ-
ously promised to buy but ultimately did not require. That decision led
to the largest municipal bond default in U.S. history. The size of the
default and the debacle that followed depressed the market for public
power bonds for several years. Investors moved quickly to sell their util-
ity bonds, forcing prices lower and current yields higher.
The cloud over WPPSS Projects 4 and 5 cast a shadow over Projects
1, 2, and 3. But Buffett perceived signif icant differences between the
terms and obligations of Projects 4 and 5 on the one hand and those of
Projects 1, 2, and 3 on the other. The f irst three were operational util-
ities that were also direct obligations of Bonneville Power Administration,