“What if perpetual credit expansion and its fertilization of asset prices and returns are substantially altered?” asked Bill Gross, founder, managing director, and co-chief investment officer at PIMCO, in an Investment Outlook letter published on Wednesday. “What if zero-bound interest rates define the end of a total return epoch that began in the 1970s, accelerated in 1981 and has come to a mathematical dead-end for bonds in 2012/2013 and commonsensically for other conjoined asset classes as well?”
The letter waxes philosophically over the definition of a great investor. There’s no denying that Gross, with as much as $1.9 trillion under management, is one of the most iconic and successful investors on the planet today. He includes himself in a pantheon of “old guys like Buffett, Soros, [and] Fuss” who — in the eyes of the public — represent investment’s highest echelon.
But is he a great investor? Gross begins the letter by asking this question, and immediately answers: “No, not yet.” The reason? To sum it up: Gross believes that the epoch, as he calls it, defines who is a great investor, not the other way around.
“Ex-Fidelity mutual fund manager Peter Lynch was certainly brilliant in one respect: he knew to get out when the gettin’ was good. How his ‘buy what you know best’ philosophy would have survived the dot-coms or the Lehman/subprime bust is another question,” writes Gross. He suggests that adapting to a new epoch “would be a test of greatness.”
Getting back to the “what if” question, Gross speculates that in the wake of aggressive monetary policy, championed by the U.S. Federal Reserve, a new epoch in the history of investment is beginning, and as a result the old pros my find themselves without a winning strategy.
“What if quantitative easing policies eventually collapse instead of elevate asset prices?” he asks. What made sense over the years of credit expansion may not work in the years ahead, rendering the strategies of today’s greatest investors at some point obsolete.
Gross’s letter is refreshing because it blatantly challenges the metrics that those in the money management business use to evaluate themselves. The title of the letter — A Man In The Mirror — refers to the idea that “when looking in the mirror, the average human sees a six-plus or a seven reflection on a scale of one to ten.” That is, the reflection does not reflect reality.
Gross goes on to suggest that the natural solution to this problem is to rely on more objective, quantitative metrics, such as “total return and alpha histories that purport to show how much better an individual or a firm has been than the competition, or if not, what an excellent return relative to inflation, or if not, what a generous amount of wealth creation over and above cash.”
However, he argues that these metrics tend to yield deceptively positive conclusions about those who use them. The net effect makes them almost as meaningless as the self reflection metric. The right numbers in the right light can make anyone look good.
“My point is this,” Gross writes. “PIMCO’s epoch, Berkshire Hathaway’s epoch, Peter Lynch’s epoch, all occurred or have occurred within an epoch of credit expansion.” The question left on the table is, how will investors change with the times?
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