I have been in the investment business for about thirty-eight years, and in that time I’ve acquired an invaluable commodity: humility. Portfolio managers tend to lose this commodity when their success leads the media to refer to them as “gurus.” (I have been called a “swami,” among other names, but never a “guru.”) Sometimes, when one of these gurus gets caught up in the public conversation, he proffers opinions on markets where he literally has no competence. He simply feels compelled to demonstrate the innate superior analytical skills that are implied by the guru title. But when he fails to maintain what is perceived to be superior performance, he is subject to losing the guru status he has earned. Worse, he is sometimes forced to eat humble pie.
Recently, the Wall Street Journal offered an update on the performance of one of the grand gurus of our time: William H. Gross, manager of the Pimco Total Return Bond Fund. The Journal stated that his reputation had earned him the title of the “savviest bond manager around” — guru status, to be sure. Unfortunately, Gross’s recent performance has called his illustrious ranking into question.
Last year Gross decided to place a few bets on falling interest rates. These wagers led his bond fund to underperform most of its peers, pushing it down to the fourth quartile of performance. In its commentary, the Journal noted that Gross might be losing his touch, although it did hint that established gurus are due a little leeway: “Despite the current woes, observers and clients say it would be a mistake to count Mr. Gross out.”
Would it? Gross’s more recent bond-market blunder pales in comparison to his gaffes in stock market forecasting. In September 2002, Gross delivered his clients this preposterous forecast: the Dow Jones Industrial Average was headed down to a level of 5,000.
At the time, the Dow was 7,592. As of today, the Dow is riding above 13,500. In just five years, the bellwether index has gained 78 percent.
Gross’s forecast actually timed very well with the bottom of the stock market decline. Not coincidentally, in November 1992, I wrote an article for NRO called “Bye, Bye Bear,” in which I referred to Gross’s commentary as one sure indicator that the bear market was over. I was playing the swami, staring down the gurus from my humble columnist’s corner. But the gurus were so far off the reservation, they made my work easy.
Here are just a few “insights” from Bill Gross’s September 2002 analysis:
… My message is as follows: stocks stink and will continue to do so until they’re priced appropriately, probably somewhere around Dow 5000, S&P 650, or NASDAQ God knows where …
… Now I guess I’m on somewhat of a rant here but come on people get a hold of yourselves. Earnings have been phonied up for years and the market still sells at high multiples of phony earnings. Dividends and dividend increases have been miserly to say the least for several decades now and you’ve been hoodwinked into believing the CORPORATION should hold on to them for you so that they can convert them into capital gains and save you taxes …
… Come on stockholders of America, are you naïve, stupid, masochistic, or better yet, in this for the “long-run?” Ah, that’s it, you own stocks for the long run …
… The crux of the valuation argument is this: Stocks historically return more than almost all other alternative investments but only when priced right when the race begins. If you start from day one with P/E’s too high or importantly, dividends too low, you will not obtain equity returns in excess of bonds.
Gross offered a bit more than a whiff of pessimism in that commentary. And if you bought into that gloom and dumped your stocks for some bond fund, here’s how you might have done: Over the past four-and-a-half years, bonds have provided an annual total return of just 4 percent, as measured by the Lehman Brothers Aggregate Bond Index, versus the 15 percent annual return for the S&P 500.
More recently, Gross the Guru has been caught trying to play catch-up with the optimistic crowd: “We see the next 12 months as shifting from the glass is half-empty to a glass half-full,” he announced at his bond fund’s twentieth-anniversary barbecue. “For the rest of the world, it looks pretty darn strong.”
But that’s “the rest of the world.” This guru still retains plenty of pessimism for his own backyard: “given economic strength elsewhere, it won’t be ‘a roaring bull market’ in the U.S … It’ll probably be more stunted.”
Gurus keep talking, even while they’re eating humble pie.