He realized that junk bonds were improperly valued, and that by aggregating enough of them, the diversification would reveal a misvalued low default rate and consequently yield above average profits. He then proceeded to become the largest trader in the market, as he traded on his own account and for many funds who relinquished investment decision making to him.
Now, not only were junk bonds mis-valued, but so were many publicly traded companies, which were making millions in operating profits, but trading at market valuations less than the sum of their parts. One just had to have enough money to buy them out. Milken's access/control of the junk bond market, provided would-be corporate raiders with the large amounts of money needed. The raiders would then either nicely or hostilely gain control of the company, sell off the assets they didn't want, and use the operating profits to pay off the junk bonds.
"Capital is not the scarce resource." -- Michael Milken (page 13).
The good thing about this strategy is that it works when the economy is beginning to turn around. Shareholders are peeved about lame performance in a downturn, and if there's any kind of management missteps, improved are the odds of convincing either the directors or the shareholders to ditch the current management.
Along the way, it didn't help that his brother, Lowell Milken, was a lawyer. Which made being sly that much easier (abusing the Garn-St Germain Depository Institutions Act by investing savings and loans assets in junk bonds, using section 3(a)9 of the 1933 Securities Act to replace registered paper with unregistered paper).
He also used constant R&D, bringing in the best new talent, and brainstorming with Cavas Ghobai.
In the end, his big problem was himself. Too much ego/greed/drive, not enough brain. Pretty sad for such a bright guy.
But the big lesson is that if several trends come together, make sure you ride that wave.