Empty Nesting, Successful Investing
The fund managers at Newport Beach-based Pacific Investment Management Co. are a prolific bunch.
Each month, they post market commentaries on the company’s Web site. Led by Chief Investment Officer Bill Gross, Pimco’s managers weigh in on interest rates, the economy, emerging markets and other topics. They’re not afraid to mix it up with personal anecdotes. Other times, they’re all business.
Below is an excerpted version of Gross’ October commentary and part of an interview with William Powers, managing director and senior member of Pimco’s portfolio management and investment strategy groups. Both can be found in their entirety at www.pimco.com.
My days of parenting have come to a swift conclusion,but I remain a dad. My son, Nick, went to college in early September and one night the house was full of young energy (albeit the negative teenage kind, thrusting to break ties that bind) and the next night there was a sense between Sue and I that whispered/screamed “What the hell just happened?”
It was our first night of empty nesting and with it came the realization that our days of parental instruction were primarily over, to be replaced by the lessons of other professors,university, street and worldly oriented,but not domiciled in Laguna Beach.
Having experienced the same trauma with our older kids, Jeff and Jenn,now in their early 30s,our personal version of an instruction book titled, “Learning to Live Without Kids and Enjoying It More,” has at least partially been written.
“Give them space,give yourself space”,would be one of my primary recommendations, but always remind them that you love them and that you remain a committed mom and dad if not a parent.
While my nesting views might not be universally accepted, I sense there is an internal logic to at least the thrust of them that is centuries old. Generation after generation, when confronted with life’s changes, think they have discovered pearls of wisdom when, in fact, the pearl has been out of the oyster and in plain view for civilization’s duration.
While investing is a rather recent art compared to the beginning of time, similar inevitabilities exist when it comes to making money. I was reminded of that when reading a comment by Legg Mason’s Bill Miller who in turn was passing on the wisdom of two-time world poker Champion Puggy Pearson when it comes to gambling. “Ain’t only three things to gamblin’,” Pearson said, “knowing the 60/40 end of a proposition, money management and knowing yourself.”
Those rules, I thought, looked incredibly similar to my own philosophy inscribed in “Everything You’ve Heard About Investing Is Wrong,” written 10 years ago, except mine were derived from blackjack and a UC Irvine mathematics professor, Ed Thorp.
I write this within the context of an Investment Outlook if only to focus myself, fellow Pimco professionals and interested readers on current strategies and portfolio weightings that are odds on to add alpha to portfolios now and over the context of a cyclical/secular horizon.
My investment keys in a sense beg the question as to how to identify a 60/40 bet, how to approach risk/reward, and how to master human psychology.
Currently, Pimco’s best 60/40 bet is a cyclical one that proposes that the Fed is done and ultimately will have to lower interest rates in order to restimulate an asset-based, housing-led economy that has been its primary growth hormone in recent years. With inflation leveling off at admittedly unacceptable levels and the domestic economy moving toward a 2% real growth rate or less in the next year or so, the Fed at some point in 2007 will be forced to cut short rates. Don’t ask us when or by how much yet.
A lot will depend on the evolution of the domestic housing market and the equally important maturation of the global economy sans U.S. consumer imports and perhaps sans hyper investment spending in Asia. We will monitor daily.
But with the ongoing uncertainty of why 10-year Treasuries should yield 4.65% in a 5.25% Fed Funds world, we feel more comfortable with the observation that the front-end of the U.S. curve is only valuing a 40 basis point cut in Fed Funds by September 2007.
Like I suggested above, we’re not sure how much it should be but we’re comforted by the fact that in effect we’re only paying a 40 basis point premium in the form of a lower 4.85% yield in order to find out what’s behind Monte Hall’s/Ben Bernanke’s door No. 2.
The U.S. bond bull market, which began almost two months ago, remains in its infancy but the best way to play it is via durations above index and concentrated in the front-end of the curve.
My next principle of successful investing alludes to the importance of determining how much moolah to put on the table at any one time. Texas hold ’em players are familiar with the gambit of “all in” but bond managers rarely come from Texas and never put it ALL on the table. Au contraire, actually. They hug indexes to the extreme and are generally content with minute amounts of positive alpha.
In a low-yield, single-digit-return world, increased daily volatility which with skill leads to increased alpha should be considered by bond managers and accepted by clients as a wave of the future should they choose to outperform in the same magnitudes as in prior years. The weightings of our front-end U.S. curve bets, therefore, as well as future durations, should be viewed in this light.
Change is an inevitable part of life, whether it comes in the form of empty nesting and learning to be moms and dads instead of parents, or an acceptance of new realities in investment markets. As Bill Miller, Puggy Pearson, Ed Thorp, and yours truly would suggest, investing well can be simplified into basic rules, which require an ongoing subjective analysis of changing market environments.
Today’s bond market environment suggests longer U.S. durations accented by the more volatile but potentially higher reward bet of the front-end of the curve. And while Pimco would never go “all in,” there’s no doubt that we’re recommending “raising” daily volatility in an effort to capture more chips.
