Discuss Buffett’s analysis of the junk bond failures of the 1980s.What is Buffett’s view of the role to be played by investment bankers?
In regards to investing in stocks, bonds, currencies, or other investment products, it has always been a normal emotion to be happy when a stock price rose and upset when a stock price fell. Yet for Warren Buffet and his team at Berkshire they welcome these declining prices because of the opportunities it brings. According to Warren Buffet, a true investor would be buying stocks and businesses for their entire life, and “with these intentions, declining prices for businesses benefit us, and rising prices hurt us.” Understanding that the investor is going to be a buyer for eternity an investor should welcome these declining pictures. A common cause that brings these low prices is the pessimistic thoughts of the businesses, industry, or surrounding environment. Even though being pessimistic is not a healthy environment to work and operate in, the pessimistic attitude brings low prices to the market and benefits the buyer of stocks. “It’s optimism that is the enemy of the rational buyer.” A junk bond can be defined as a high yield or non-investment grade bond that carries a high default risk in comparison to investment grade bonds. According to Investopedia.com, “Companies that issue junk bonds typically have less-than-stellar credit ratings, and investors demand these higher yields as compensation for the risk of investing in them.” Junk bonds are rated lower on the grading scale by S&P and Moody because the success of the companies issuing these bonds is so low. To compensate for this low success rate higher yields are issued to reward the large risk. Those bonds that use to be part of the investment graded bonds that dropped due to poor execution are referred to as Fallen Angels. In the 1980’s these Fallen Angels and junk bonds took over the investment scene and fooled unintelligent investors into thinking there was a...
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