The very good news that RIAs can take away from the whole Bill Gross imbroglio

I don’t get it. We had a thirty year period that pretty much coincided with the life of PIMCO under Bill Gross during which interest rates rather consistently fell. Mr. Gross apparently made the <shocking> discovery that if one leverages longer term bonds to about 40% above the underlying holdings in a falling interest rate environment, there will be enough total return amplification to pay high commissions, charge high fees, and have enough left over to still outperform his more conservative peers. He was even smart enough to create that leverage by using sophisticated directives so complex that he could deny that he was leveraging those bonds because no one but him could grasp his secret formula. Anyone remember Bernie Madoff?

Then when interest rates finally turned in the other direction, albeit only for a short period, his funds were slammed. From there he started dumping leverage, and made the discovery that high expenses and commissions on bonds in a low interest rate environment make for lousy returns. At that point he apparently became really, really grumpy and ran off his heir apparent. Today, as interest rates are poised to make a real turn, he jumped ship. That way he can blame the new management for the coming crunch that will make Magellan’s decline look pretty.

I believe the saying that follows is original, and from my mind, but I might have heard it somewhere in the last three (+) decades I have been in this circus, “A bull market makes geniuses out of all of us, but a bear shows us for the fools we really are.”

The irony here is that he jumped to Janus. Anyone remember Tom Bailey (Janus’ founder) and Tom Marsico (his heir apparent)? In the equity bull market of the late 1990s, they were hailed as geniuses too. As the market began to turn, first Tom Marsico suddenly departed after rumors of arguments between the two Toms. Then, as things actually began to head south, Bailey was gone after the new owners determined that having an old, skinny grouch around was not good for business. Were the two Toms really geniuses? No, they were just a couple of guys who knew how to buy the hottest, most overpriced large cap growth stocks and make it into a good story about secret formulas.

It is like Mark Twain is reputed to have said, “History doesn’t repeat itself, but it rhymes.”

Your points are made very clearly Jeffrey, and it all sounds reasonable. As for Brooke, you have a way of stetching out a few simple points into an exhaustive essay.

David,

I agree. It is always a treat when Jeff weighs in.

I also accept your criticism in the spirit it is delivered and seek greater brevity.

Brooke