Everything You've Heard About Investing Is Wrong! : How to Profit in the Coming Post-Bull Markets
by Bill Gross of PIMCO; Rating: 9.5 of 10; REVIEW by Davy Bui 07/22/2007
- What I Liked About It
- Shows how to THINK ABOUT INVESTING as opposed to providing rote formulas that will probably be misused
- Good brief overview of the yield curve and what that means for bond investing
- Great discussion on strategies for investing in low-volatility rate environment
- Enlightening discussion of the implicit "put" options in mortgages and corporate issues and how to take advantage of them
- One of the most human and enjoyable financial books I've read
- What Needed Work
- Will disappoint those looking for a bond investing "playbook" or formula
- Doesn't discuss in-depth strategies for high-volatility rate environments
- A bit dated in some aspects.
- Retail investors may not be able to apply these strategies without significant capital.
It's hard to argue that a man known as "The Bond King" in the investment world is not given enough recognition but Bill Gross' track record at the helm of PIMCO suggests this may be the case. Unfortunately for him, bonds are not as glamorous as stocks and so while names like Buffett and Lynch are household names, Gross isn't in the same category. He should be.
All the great investors share some common characteristics -- an elegant simplicity, an ability to cut through to the essentials and an approach that integrates other disciplines or perspectives. Furthermore, the great investor-writers like Buffett, Greenblatt or Pabrai have that extraordinary ability to distill complex material into a comprehensible explanation that the average person can grasp. Bill Gross has all of this in spades and displays some of it throughout this book.
Writing in 1997, Gross posits that a combination of high debt levels, expanding globalization and shifting demographics would mean slow-growth GDP numbers. As a result, investors should expect bond/stock returns of 6% and 8%, respectively, since corporate returns should eventually track economic output. He lays out a basic lesson in the yield curve, the case for disinflation and strategies for investing in a world of 6-8% returns.
Along the way, Gross treats the reader to the pros and cons of corporate issues, mortgage-backed issues, emerging-market debt as well as more general concepts like macro-economic analysis, the famous PIMCO total return strategy and the plankton theory (especially pertinent in today's [2007] housing bust). As he discusses these potentially dull topics, he weaves real-life analogies into his explanations and as such, the book is entertaining to read while you're learning. Some of these analogies fit better than others (the Plankton Theory working best) but Gross turns a book about boring bonds into an investing page-turner -- an admirable feat.
Highlights for me include the discussion of corporate and mortgage-backed issues. He outlines their inherent drawbacks and then illustrates why and how to use these features to your advantage in a low-volatility rate environment. I also liked his discussion of stretching short-term yield maturities so that you get a nice bump in yield with marginally increasing risk.
While this book is not a step-by-step playbook, Gross does give us the gameplan for high-yield, low-risk bond investing in a 6-8% return world. If we enter a period of steady interest rates, take advantage of the low volatility by selling "puts" in the form of mortgage-backed securities and corporate bonds. Stretch your short-term investments out a few more months and pocket that extra premium while knowing that you'll be getting your capital back shortly. And maybe even dabble in some higher-yield issues like emerging markets as long as the engines of economic growth are full speed ahead.
What if we don't find ourselves in a low-rate environment? Well, Gross doesn't discuss that much. As often stated, history doesn't repeat; it rhymes. As investors, we need to master the tools and learn to survey the situation and apply the correct strategies. Invest on autopilot at your own risk.
I imagine that some may find fault with some of his predictions. Predictions are notoriously difficult and any inaccurate forecasting doesn't detract from the efficacy or validity of the investment strategies he lays out. His methods are sound and his record proves it -- it's up to you to know when to apply them.
Others may gripe about the non-linear nature of Gross' musings. These people are probably looking for a playbook on bond investing -- a no-nonsense, how-to treatment on bond investing. If that's what you're looking for, I would point to Cohen's Bond Bible. I would also suggest that you are doing yourself a disservice. There is no hands-free formula for successful investing. I can't speak for him but I imagine that Gross takes the long, winding path because for him, investing successfully is as much about surveying all of the societal landscape as it is about crunching numbers. Ultimately, an investing education is more than just how to invest -- it's about how to approach investing. The first path will always see you fighting the last war; the latter allows you to prepare for the war ahead.
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