A pile of junk is still junk no matter how you stack it – Margin of Safety, Seth Klarman
The book I'm currently
reading is Margin Of Safety by Seth Klarman. This book is widely described as
a value investing classic and now I know why. It's a coincidence that the current book I started reading would have a section dedicated to junk bonds. As you may
have read my previous post discussed Michael Milken and
the height of the high yield / junk bond era.
About
halfway through the book now, so wanted to share a few thoughts and quotes by
Seth Klarman on high yield / junk bonds:
"Prior to the 1980s the entire junk-bond
market consisted of only a few billion dollars of "fallen angels."
Although newly issued junk bonds were a 1980s invention and were thus untested
over a full economic cycle, they became widely accepted as a financial
innovation of great importance, with total issuance exceeding $200 billion.
Buyers greedily departed from historical standards of business valuation and
creditworthiness. Even after the bubble burst, many proponents stubbornly clung
to the validity of the concept." Page 27
"As we shall see,the legitimate opportunity in a virtual handful of distressed securities that were overlooked by others was carried to excess when Milken extrapolated from a historical relationship to an entirely new type of security." Page 70
"All
the parties who stood to benefit from junk bonds-individual and institutional
investors, underwriters, and brokers-"got religion," praying that
junk bonds would turn out to be as miraculous as
Milken preached. At the same time the sermon shifted from the low historical
rate of default to a new theme: junk bonds as the economic salvation of
America. Our country's nagging problems
of slow growth, declining productivity, and diminished international
competitiveness would quickly be solved through increased junk-bond issuance." Page 74
In the next blog post I'll add a few more quotes from the book that I found interesting such as institutional fund managers having 'skin in the game' when investing on behalf of their clients.
"Economist Paul Rosenstein-Rodan has pointed to the "tremble
factor" in understanding human motivation. "In the building practices
of ancient Rome, when scaffolding was removed from
a completed Roman arch, the Roman engineer stood beneath.
If the arch came crashing down, he was the first to know.
Thus his concern for the quality of the arch was intensely personal,
and it is not surprising that so many Roman arches have
survived."?
