The Making of An Investment Superhero
by Dr. Steve Sjuggerud
July 26, 2006
During his senior year at Duke University, Bill Gross’ Nash Rambler skidded out of control on an icy road and crashed into oncoming traffic. It was a near-fatal accident.
As unlikely as it seems, this accident provided the platform for Bill Gross to become one of America’s richest men and the most famous bond investor ever.
In today’s edition, we’ll tell the story of how Bill Gross became a billionaire and look at the two investment ideas Bill recommends right now.
The story begins in a hospital bed...
To pass time during recovery, Gross started reading a gambling book called Beat the Dealer. The book intrigued him so much, Gross headed straight to Vegas as soon as he had recovered and spent upwards of 16 hours a day at the blackjack tables at the Fremont and Four Queens casinos.
Gross played meticulously. When others would get wrapped up in the emotions of the game, Gross would stick with his system, counting cards and only making big bets when the odds fell in his favor.
In essence, Gross learned the fundamentals of money management right there at the blackjack table. Within six months, Gross had parlayed his $200 grubstake into $10,000.
Gross had beaten Vegas. Now he was ready to take on Wall Street.
Unfortunately, nobody on Wall Street was ready to take on Bill. He couldn’t get a job. Finally he took a job as the “coupon-clipper” of bonds at an insurance company called Pacific Mutual – not exactly the sexy stock market work he was looking for.
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Just like in Vegas, Gross had an idea that no one else had really considered, and he was willing to do the hard work to make it happen. He recommended to the insurance committee at Pacific Mutual to set up a subsidiary for him (called PIMCO) to actively trade bonds. “Let me try to trade these things and see if I can do better than just holding them,” he said.
The rest is history. In a very ugly market, Gross made 17.6% in 1975, followed by nearly 18% in 1976. Gross started with $15 million. Today, Gross’ PIMCO is one of the biggest asset managers on the planet, responsible for over $600 billion in bond funds.
Recently, we found Bill Gross featured in the Barron's mid-year roundtable discussion. Right now, Bill is watching two broad investment themes:
1) U.S. investors need to diversify their assets away from the U.S dollar.
“I am still bearish on the dollar,” he old Barron’s. “If investors want equity exposure, they should get it outside the U.S. and dollar-denominated assets.”
Bill picked the iShares MSCI EAFE Index Fund (EFA), a basket of foreign stocks, as his specific investment recommendation for readers of Barron’s.
2) Municipal bonds are much more attractive than Treasury bonds.
This is a theme we covered recently in the June 20th issue of DailyWealth...
Local governments issue municipal bonds to finance public projects like highways, schools and sewer systems. To make them attractive to investors, they make the interest payments tax-free. When you take the tax break and a little leverage into account, these government-backed bond funds can generate returns as high as 8.5%, with little risk. Treasury bonds pay around 5%.
Bill picked the Pimco Muni Income Fund (PMF) as his recommendation to play the muni bond theme.
Bill Gross may not be right 100% of the time, but his fantastic three-decade track record shows his calls are nearly always pretty darn good. I always pay attention. You should too.
Good investing,
Steve
P.S. You can read Bill’s monthly commentary on PIMCO’s website. It’s a bit heavy for most people, but if you want a master’s perspective on the bond market, it’s a must read.
