Investing in Fixed-Income Securities 149would have had a healthy cash f low. The company’s most valuable asset
was the 14-state local phone service franchise, but Buffett had faith that
with former Ameritech CEO, Dick Notebaert, at the helm, the com-
pany would solve its problems.
Amazon.com
In July 2002, only one week after Buffett wrote CEO Jeff Bezos a let-
ter praising him for his decision to account for stock options as an ex-
pense, Buffett bought $98.3 million of Amazon’s high-yield bonds.
Buffett clearly appreciates managers who exhibit integrity and
strong values, and he has long advocated for expensing stock options,
but he certainly was not on a goodwill mission when he bought the
Amazon.com bonds. The Government Employees Insurance Company,
the auto insurance unit of Berkshire, stood to make $16.4 million prof it
on the investment in high-yield bonds, a 17 percent return in nine
months if Amazon repurchased the $264 million in 10 percent senior
notes that were issued in 1998. Later that summer, Buffett bought an
additional $60.1 million of Amazon’s 6^7 ⁄ 8 percent convertible bonds.
Assuming a price of $60.00 per $1,000 bond, the yield would have been
a healthy 11.46 percent and the yield to maturity would have been even
higher once interest payments were calculated in.
It is well known that Buffett sticks with things he understands and
shies away from technology. His involvement with the Internet is limited
to three online activities: He buys books, reads the Wall Street Journal,
and plays bridge. Buffett even made fun of his own technology avoidance
in his 2000 letter to shareholders: “We have embraced the 21st century
by entering such cutting-edge industries as brick, carpet and paint. Try
to control your excitement.”^6
So why was he attracted to Amazon’s bonds? First, he said, they
were “extraordinarily cheap.” Second, he had faith that the company
would thrive. Buffett may also have observed that Amazon.com had a
similar profile to many of his other investments in retail companies.
Amazon.com generates its revenue through huge amounts of sales for
low prices and although it has low margins, the company is eff icient
and prof itable. Buffett admires the way Bezos has created a mega-
brand and the way he has pulled the company through some very dif-
f icult times.