The Intelligent Investor: The Definitive Book On Value part 17. The purpose of this book is to supply, in a form suitable for laymen, guidance in the adoption and execution of an investment policy. Comparatively little will be said here about the technique of analyzing securities; attention will be paid chiefly to investment principles and investors’ attitudes. We shall, however, provide a number of condensed comparisons of specific securities - chiefly in pairs appearing side by side in the New York Stock Exchange list in order to bring home in concrete fashion the important elements involved in specific choices of common stocks | 146 Commentary on Chapter 6 A WORLD OF HURT FOR WORLDCOM BONDS Buying a bond only for its yield is like getting married only for the sex. If the thing that attracted you in the first place dries up you ll find yourself asking What else is there When the answer is Nothing spouses and bondholders alike end up with broken hearts. On May 9 2001 WorldCom Inc. sold the biggest offering of bonds in . corporate history- billion worth. Among the eager beavers attracted by the yields of up to were the California Public Employees Retirement System one of the world s largest pension funds Retirement Systems of Alabama whose managers later explained that the higher yields were very attractive to us at the time they were purchased and the Strong Corporate Bond Fund whose comanager was so fond of WorldCom s fat yield that he boasted we re getting paid more than enough extra income for the risk. 1 But even a 30-second glance at WorldCom s bond prospectus would have shown that these bonds had nothing to offer but their yield-and everything to lose. In two of the previous five years WorldCom s pretax income the company s profits before it paid its dues to the IRS fell short of covering its fixed charges the costs of paying interest to its bondholders by a stupendous billion. WorldCom could cover those bond payments only by borrowing more money from banks. And now with this mountainous new helping of bonds WorldCom was fattening its interest costs by another 900 million per year 2 Like Mr. Creosote in Monty Python s The Meaning of Life WorldCom was gorging itself to the bursting point. No yield could ever be high enough to compensate an investor for risking that kind of explosion. The WorldCom bonds did produce fat yields of up to 8 for a few months. Then as Graham would have predicted the yield suddenly offered no shelter WorldCom filed bankruptcy in July 2002. WorldCom admitted in August 2002 that it had overstated its earnings by more than 7 Commentary on
