Bill Gross writes that he does not consider himself a great investor, though he plaintively quotes an Ernest Hemingway character in his latest monthly market commentary, “Wouldn’t it be pretty to think so?” (Those are the words, by the way, of one of Hemingway's many literary alter ego characters, Jake Barnes in "The Sun Also Rises.")
So is Gross, PIMCO’s chief, being falsely modest? Is he dissembling? No. In a commentary that many advisors would do well to read, he does question his own “greatness” as an investor.
He begins by quoting Michael Jackson’s song “The Man in the Mirror,” and suggests that when we all look in the mirror, we focus on our good points: “The brickbats come via the blogs and ambitious competitors, but the roses dominate one’s mental and even physical scrapbook.”
For folks in the money management business—he doesn’t spare himself—he argues that “time and longevity must be a critical consideration in any objective confirmation of ‘greatness’ in this business.” That's the case even if “everyone in their own mind is at least a six-plus or a seven,” out of 10, and if money managers are likely to judge their self-assessed "great" performance “if not for the most recent year, then over the last three, five, or 10 years. Investors thrive on the numbers and turn them in their favor when observing their reflections.”
He doesn’t excuse investors or advisors from this self-deception: “The investing public is often similarly deceived. Consultants warn against going with the flow, selecting a firm or an individual based upon recent experience, but the reality is generally otherwise.”
With a sly allusion to the mathematician Emile Borel's assertion about how long it would take a troupe of monkeys at typewriters to replicate Shakespeare, he cites the findings of a study at London City University's Cass Business School. As reported in the Financial Times, the study found that “a significant majority of computer-simulated monkeys beat the stock market between 1968 and 2011.”
So how to judge Gross and similar investing icons like Warren Buffett, Peter Lynch or Bill Miller?
To begin, he argues that “the longer and longer you keep at it in this business the more and more time you have to expose your Achilles heel—wherever and whatever that might be,” and that while investing success may be predominantly “viewed on a cyclical or even a secular basis, yet even that longer-term time frame may be too short.”
He argues that “If the numbers exhibit rather consistent alpha with lower than average risk and attractive information ratios then the Investing Hall of Fame may be just around the corner.” He steps back from the brink, however, warning that “there is not a Bond King or a Stock King or an Investor Sovereign alive that can claim title to a throne. All of us, even the old guys like Buffett, Soros, Fuss—yeah, me too—have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience.”
Calling himself a “marginal” or “measured risk taker,” he and our time's other ‘great’ investors prospered, Gross writes in his commentary, because he and they were investing in an epoch where “credit was almost always expanding.” He wonders, however, “What if perpetual credit expansion and its fertilization of asset prices and returns are substantially altered?”
That, he says would be a true test of greatness: “the ability to adapt to a new epoch,” which could run 40 or 50 years or more.
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