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Leader Board: I’m Still Standing

Editor’s Note: Bill Gross in 1971 co-founded Newport Beach’s Pimco. He became known as the Bond King, having built the firm into one of the world’s largest mutual fund companies. Gross’ wealth is estimated at $2.4 billion on this week’s Business Journal’s annual listing of Orange County wealthiest residents. What follows are excerpts from a book he published earlier this year: “I’m Still Standing; Bond King Bill Gross and the Pimco Express.”

In the first grade, my mom wanted to skip me from 1st to 3rd grade at our two-story, four-classroom brick schoolhouse in West Middletown, Ohio, because I had tested as having the highest IQ for a 6-year-old in the state of Ohio.

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I attended Duke where I tried out for the freshman basketball team but was cut in the first 15 minutes…I graduated without honors (2.8 GPA)…I joined the Navy where after basically spending five frustrating white-knuckle months training on propeller driven T-28’s, the Admiral cut me from his team too, and sent me to Vietnam as captain of a small PT boat transporting Navy SEALs upriver in the Mekong Delta.

“Mr. Gross,” he said, “if you think you’re going to be transferred to a cushy desk job, you’ve got another thing coming.”

And so, in a few short months I was shipped across the Pacific to an assignment more dangerous than that of a jet jockey spewing Agent Orange over the treetops. My two years nearly matched that of Martin Sheen in “Apocalypse Now,” including the surfing and gunboat episodes, but I escaped ‘Nam safely in 1969 and went on to the UCLA Anderson graduate school in finance, where I rediscovered Ed Thorp.

I had first learned about him from a blackjack book called “Beat the Dealer” in 1966 and had played professional blackjack before reporting to flight school. That time was to be the formative experience of my life because it taught me how to measure risk in the financial markets.

Thorp’s second book “Beat the Market” which was published just as I was entering graduate school at UCLA Anderson in 1971, was equally important. It got me a job!

Having read the book, which was a method of “beating the market” via convertible bonds, I used it as the basis for my master’s thesis. One month later, I applied for a job at Pacific Mutual Life in downtown Los Angeles and was hired.

Years later my initial boss at Pac Mutual, Ben Ehlert, admitted to me that it was this thesis that got me in. “At least,” he said, “we thought you were the one candidate who did any work in college on convertible bonds or even the bond market.”

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My one inspiration on publicity came from my 75-year-old next-door neighbor, whom I met while cutting the front lawn. I had just been divorced from my first wife of 12 years, and because of my shyness that I later was to learn was a mild case of Asperger’s syndrome, I was striking out with regularity.

“Bill,” she asked, “how’s it going with meeting new people?”

“Not so good,” I replied. “It’s hard to meet people.”

“Well Bill,” she said, “you can’t get laid unless you say hello!”

So, thank you neighbor! The advice was well applied on the Pimco marketing side.

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I learned to say hello from a business standpoint via a different monthly Investment Outlook than had ever been attempted. They were a little zany in the opening paragraphs, but my thought was to draw the reader in and then expand on the bond market.

I think some went too far, mentioning talking toilets or fat baseball umpires that lost us the umpires’ association pension account. But on the whole, I made a name for myself and Pimco as well, which was the objective.

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Having peaked at nearly 15% in 1981, the 30-year bond was producing double-digit annual returns that reflected not only high yields but significant capital gains as well.

Our investment philosophy that centered around a three to five year “secular outlook” was key in capturing these high returns for AT&T and other large pension fund clients.

The term “secular’ outlook was so little understood by clients that a few of them asked what “religion” had to do with it! Not much, but it did feature forecasting interest rates over a three-to-five-year horizon, which was blackjack-like in its time horizon of patiently waiting for opportunities over the long term.

In addition, the concept of “total return,” for which I was to become well known, sought to think of bonds much like stocks which earned a dividend but were also viewed as capital gains vehicles.

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Our performance was propelled by a long-term bull market from 1981 to 2014 when bonds were competitive with annual stock returns, especially after Pimco’s 150 to 200 annual basis points of alpha were added on top. Ten percent per year was typical.

We fertilized the willingness to explore new product areas before the competition did. We created a first mover advantage in mortgage pass-through, financial futures, foreign bonds and TIPS that produced significant alpha annually.

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Pimco economist Paul McCulley had long been a student of the writings of Hyman Minsky who warned that capitalism had inherent dangers in its structure by allowing potential extreme mismatches between the duration or maturity of debt and equity financing and the use of leverage. Paul taught this to the Investment Committee and me and warned much more strongly than Alan Greenspan had in 1996, about the irrational exuberance of markets in 2004 to 2007.

Our committee caught these excesses and began to shed housing-related subprime mortgages and levered CDOs and CDXs well before the crash of 2008.

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In the years after the 2007-2008 financial crisis, when assets doubled from $1 trillion to $2 trillion, Pimco was not only one of the largest financial institutions in the world (bigger than JP Morgan, Goldman Sachs, and any others you care to name), but probably the most profitable per person ever. Whereas Bank of America had 150,000 to 200,000 employees, Pimco had only 1,500 to 2,000. Pimco had not only more assets but near equal net profit margins (45 basis point fees) than BofA, but only 1% of the workforce.

At the end of 2014, I was making a scaled-back 20% of profits, or $300 million, and our executive assistants were paid upwards of a half a million dollars a year as well.

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The German insurer Allianz bought Pimco in 1999. Later I was to learn that you can’t give up control of a company without paying a price… In 2014, I had told Allianz CEO Michael Diekmann during a joint meeting over future bonuses, to “F*** OFF.”

I wanted to show that we were in control and we were the alphas at the table.

“No one speaks to me like that,” he said and a few months later I was gone.

At 72 years of age, I suspected I wasn’t indispensable, but it was the “F*** OFF” along with other issues that sealed my fate.

Guess he wasn’t indispensable either! I don’t think he resigned voluntarily, if you know what I mean. Firing Gross the way they did was costly to Allianz and to him. After I left, Pimco’s assets dropped $500 billion.

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After leaving Pimco, I moved to Janus Henderson. While I made money for clients over the next four years, the results were below par and below industry standards and medians. I missed the positive interaction of Pimco’s Investment Committee I suppose and my fixation with the overvaluation of German Bunds proved my undoing. I resigned in 2019.

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I am a happy man in retirement, still getting up at 6 in the morning, working five hours in front of a Bloomberg machine, with a workout and afternoon of golf to follow.

I’m still involved in philanthropy, having signed the Bill Gates and Warren Buffett “Giving Pledge.” I’ve already distributed over a billion dollars to worthy causes and to extremely needy individuals and families.

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