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Bill Gross, The king of bonds

At sixty-seven years old, the founder of Pimco is one of the most acclaimed financiers. His secret lies somewhere between Vietnam, blackjack and yoga.

Article also available in : English EN | français FR

A simple story could best illustrate this man’s personality. In the case of the American, Bill Gross, the story can be told using his passion for stamp collecting. More specifically, the way in which he became a major collector during the last forty years. In order to finance his studies at Duke University (North Carolina), his mother invested in stamps. This was a popular English hobby in the early seventies and was instrumental in establishing Bill in his professional life. This somewhat special speculative bubble finally finally came to fruition . Twenty years later, Gross started a collection which only ever increased in value, and which today, is worth hundreds of millions of dollars. He is one of three major American stamp collectors. This passion "would not surprise a psychologist wanting to delve into my personality which is that of a man obsessed by success", he explained in 2005.

Philately forms only a very small part of the Empire that Bill Gross has created in the last four decades.
Pimco - Pacific Investment Management - is one of the largest investment funds in the world, with 1200 billion dollars-worth of assets under management. Bill Gross is directly responsible for Pimco Total Return, created in 1987, which is the largest bond investment fund in the world
Pimco, which is located on the west coast of the United States, has adopted a very - should we say - Californian method of operation.

The portfolio managers are paid according to their contribution to the overall performance of the firm and not just according to the figures generated by the funds that for which they are personally responsible

The portfolio managers are paid according to their contribution to the overall performance of the firm and not just according to the figures generated by the funds that for which they are personally responsible, as is the case almost everywhere else.

Any weak link, within the company, is rapidly identified and removed. Its hardly surprising that two thirds of the managers have been there for only five years. Within the group, this is reassuringly known as "constructive paranoia"

It is difficult to know exactly which part the two years Bill Gross spent in Vietnam have played in this style of management when half of America’s youth were reveling in Joe Crocker’s voice at Woodstock only two years before the creation of Pimco.
Since then, the firm has always operated on the basis of reason, constantly trying to avoid the sudden outbursts which characterise the financial markets, particularly since 2008. Bill Gross has continually explained that Pimco is based on permanence, on "long term forecasts of three to five years, allowing the investor to avoid the emotional ups and downs of fear and greed." Such a culture, he writes, will fatally lead the investor into making bad decisions during irrational times in the markets.

Philately, Vietnam, certainly, but also, often Blackjack!

It’s on this green carpet, whilst still studying, that this graduate psychologist, it is said, discovered, both his predilection for financial speculation and several techniques which would form the very DNA of Pimco.
What one sees here is either the total rejection of all emotionality, or controlled management of emotions , an entire debate in any decision making precess and extreme caution in the use of euphoric language.

Pimco has been most successful in its ability to avoid the financial pitfalls which come with strokes of genius. For example, the firm did not fallen prey to any of the main failures during the past fifteen years : the collapse of the LTCM, the technology bubble in the early 2000’s and the sub-prime debacle of 2007-2008.

Having said this, the year, that is just drawing to a close, has seen Bill Gross’ activities suffer one of their most spectacular declines. The exception that proves the rule established for twenty years, which has seen fund manager, the over-performer, Bill Gross almost infallibly providing the industry benchmark.

In addition, some of his opinions - which have been the real benchmark for the markets - have contributed in sowing the seed of panic in the markets, without in the end being even relevant. Two years ago in the United Kingdom, his excessive language ("The United Kingdom is lying on a bed of nitroglycerine") have come back to haunt him today. As far as bond yields are concerned, the country is almost a safe haven.

However, this doesn’t prevent Bill Gross from being one of the market’s main forecasters.

At first impression one sees a cold exterior which he himself recognises. Bill Gross lives the life of an ascetic - he gets up at 5 o’clock each day, arrives at the office at 6 o’clock attends yoga at the end of the morning, plays an hour of golf in the afternoon, to be home by 1800 and in bed by 21h00.

This perfectly pure existence allows him to see what others do not see. In 2005, it was in the middle of a yoga session, that he had the idea to dispatch some of his employees disguised as potential homebuyers out into the country in order to judge the housing market. This enabled him to predict, two years before the event, that the market was going to fold.

JH January 2012

Article also available in : English EN | français FR



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