Investing in Fixed-Income Securities 145signif icant discount to par value, doubled in price while annually pay-
ing Berkshire a return of 15 to 17 percent tax-free. “Our WPPSS ex-
perience, though pleasant, does nothing to alter our negative opinion
about long-term bonds,” said Buffett. “It only makes us hope that we
run into some other large stigmatized issue, whose troubles have caused
it to be signif icantly misappraised by the market.”^2
RJR Nabisco
Later in the 1980s, a new investment vehicle was introduced to the f i-
nancial markets. The formal name is high-yield bond, but most in-
vestors, then and now, call them junk bonds.
In Buffett’s view, these new high-yield bonds were different from
their predecessor “fallen angels”—Buffett’s term for investment-grade
bonds that, having fallen on bad times, were downgraded by ratings
agencies. The WPPSS bonds were fallen angels. He described the new
high-yield bonds as a bastardized form of the fallen angels and, he said,
were junk before they were issued.
Wall Street’s securities salespeople were able to promote the legiti-
macy of junk bond investing by quoting earlier research that indicated
higher interest rates compensated investors for the risk of default. Buf-
fett argued that earlier default statistics were meaningless since they
were based on a group of bonds that differed signif icantly from the junk
bonds currently being issued. It was illogical, he said, to assume that
junk bonds were identical to the fallen angels. “That was an error sim-
ilar to checking the historical death rate from Kool-Aid before drink-
ing the version served at Jonestown.”^3
As the 1980s unfolded, high-yield bonds became junkier as new of-
ferings f looded the market. “Mountains of junk bonds,” noted Buffett,
“were sold by those who didn’t care to those that didn’t think and there
was no shortage of either.”^4 At the height of this debt mania, Buffett
predicted that certain capital enterprises were guaranteed to fail when it
became apparent that debt-laden companies were struggling to meet
their interest payments. In 1989, Southmark Corporation and Inte-
grated Resources both defaulted on their bonds. Even Campeau Corpo-
ration, a U.S. retailing empire created with junk bonds, announced it
was having diff iculty meeting its debt obligations. Then on October 13,
1989, UAL Corporation, the target of a $6.8 billion management-union