Bill Gross On Buffett, Soros And Himself: Is Great Investing Just Right Place, Right Time?

There is no Bond King.

So says Bill Gross, a man to whom the moniker has been ascribed over the years, in his April Investment Outlook at Pimco. There is no Stock King either, he adds.

The reality, Gross writes, is that many of the investing legends people flock to for pearls of wisdom — folks like Warren Buffett, George Soros and Loomis Sayles bond guru Dan Fuss (and yes, even himself) — may simply have won the chronological lottery by coming of age during the greatest stretch the investment world has ever seen and managing to avoid the massive blowups that claimed or blunted the careers of so many contemporaries.

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. Since the early 1970s when the dollar was released from gold and credit began its incredible, liquefying, total return journey to the present day, an investor that took marginal risk, levered it wisely and was conveniently sheltered from periodic bouts of deleveraging or asset withdrawals could, and in some cases, was rewarded with the crown of “greatness.” Perhaps, however, it was the epoch that made the man as opposed to the man that made the epoch.
via PIMCO | Investment Outlook – ​A Man in the Mirror.

The way Gross tells it, the incredible expansion of credit created a rising tide over the past 40 years. The most esteemed investors these days are the ones who managed to survive the inevitable swells that have occasionally rocked their boats in the interim. At those times, the Berkshire Hathaways and Pimcos of the world were able to skirt the withdrawals and redemptions that “clipped competitors at just the wrong time,” he writes.

                     
And having firepower to put to work when others are fleeing a particular market or asset class is a great way to capitalize years down the road — just have a look at Buffett’s crisis-era investments in Goldman Sachs and General Electric, or his 2011 bet on Bank of America.

The question Gross asks is whether the current class of investing legends will be able to adapt if a new paradigm is really in the offing — either because the future will feature repeated bouts of “2008 Lehmanesque volatility” or the scarcity of resources produces continual geopolitical conflict, or the massive injection of monetary stimulus by central banks fails to keep asset prices afloat.

In Christopher Nolan’s The Dark Knight, Harvey Dent tells Bruce Wayne, “You either die a hero or you live long enough to see yourself become the villain.”

Gross hits on a similar theme in his commentary, citing the particular brilliance of ex-Fidelity mutual fund manager Peter Lynch, who retired before seeing his “buy what you know best” strategy be tested by the stresses of the dot-cum bust and the 2008 financial crisis.

But even though the conditions that enabled the current crop of legends to burnish their bona fides may be eroding, Gross suggests they may never see the sun set on their epoch (or in the parlance of the Batman film, live long enough to become the villain):

The problem with the Buffets, the Fusses, the [Jeremy] Granthams, the [Howard] Marks, the [Ray] Dalios, the [Leon] Coopermans, and the Grosses of the world is that they’ll likely never find out.  Epochs can and likely will outlast them.

The next investing epoch is not likely to feature widespread credit expansion, Gross writes — he cites a book, “Triumph of the Optimistis,” which describes the 101 years up to 2002 as a period where “it paid to be an optimistic and a risk taker as opposed to a more conservative Scrooge McDuck” — but it is clear that he and the other investing legends he cites are not ignoring the potential paradigm shift.

Gross describes Pimco’s missteps in 2011, when the firm slashed its holdings in U.S. Treasuries just in time for a big rally. But Pimco quickly stopped swimming against that tide and enjoyed a comeback. Still, his concern about the end of an era of “perpetual credit expansion and its fertilization of asset prices and returns” is worth pondering and one plenty of top-flight managers are considering.

Bridgewater Associates founder Dalio is on the record saying there will be a massive opportunity to short bonds when the massive bull run over the past several decades finally unravels, but even he has said the timing is not yet clear.