I’m Still Standing: Bond King Bill Gross and the PIMCO Express
William Hunt Gross
I’m Still Standing
Bond King Bill Gross and the PIMCO Express
First published by William Hunt Gross 2022
Copyright © 2022 by William Hunt Gross
All rights reserved. No part of this publication may be reproduced, stored or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise without written permission from the publisher. It is illegal to copy this book, post it to a website, or distribute it by any other means without permission.
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Talent is helpful in writing, but guts are absolutely necessary
— Jessamyn West
The time has come, ' the Walrus said,
To talk of many things:
Of shoes — and ships — and sealing-wax —
Of cabbages — and KINGS
— Lewis Carroll, “The Walrus and the Carpenter”
I am leaving, I am leaving
But the fighter still remains
— Simon & Garfunkel, “The Boxer”
Contents
This Is My Story
PIMCO’s People
Incredible Profits
Allianz Acquisition
Financial Crisis
Leaving Reluctantly
Off the PIMCO Express
PIMCO’s Secret Sauce
PHOTOS
Janus and Beyond
About Investing
A Virus in Modern Day Capitalism
Epilogue
APPENDIX
Selling the Noise
Echoes From Africa
Billy’s Last Mile
Back to Butler Creek
The Story of How I Was Scalped and Lived to Tell the Tale
Mr. Lynch, I Presume
BOYZ II MEN MEN II BOYZ
Half Brainer
Ticker Tape Charade
Dow 5,000
The Hours
“Bon” or “Non” Appétit?
Privates Eye
Wall Street Food Chain
Pimco’s Bill Gross on How to Play “Credit Supernova”
A Man in the Mirror
Wounded Heart
How time in Navy, Vietnam shaped a budding billionaire’s life
This Is My Story
This is my story. This is PIMCO’s story. The story of the world’s first and likely last “Bond King”, at one time the world’s greatest philatelist, and the luckiest pro-am golfer ever. But I go too far too soon – it’s mainly about my 43 years at and the building of PIMCO. I want to tell you how PIMCO became the largest bond manager in the world and describe our “secret sauce” that led to its incredible success. I want to describe leaving PIMCO reluctantly in September of 2014 and what’s happened since. But why now you might ask? Like they say on TV these days, “That’s a good question.” It may seem like a story told by a 19th century railroad man in the age of SpaceX and it likely is. The bond and financial markets have changed so much since my retirement in 2019 that readers may probably think my time has come and gone. And of course it has. But then it’s still a good story.
A friend of mine, when missing a putt on the golf course sometimes says, “a billion and a half Chinese don’t care.” Same case here, but for those Chinese that might be persuaded to think of me and wonder, “Whatever happened to Bill Gross and how did PIMCO become so successful?, ” it’s for them that I’m writing this story. If not them, at least my kids might (might!) care.
But I also write to set the record straight. There never was a Bond King but there was a passionate leader of a bond management firm called PIMCO which dominated market performance for nearly four decades and made “more money for more people” as one investment consultant wrote “than any firm on Earth.” I stood tall then and come to think of it, while my posture is now a little stooped – I’m still standing!
Let me start with a few brief pages about my personal history before we get into the juicer PIMCO stuff, and then some things about what’s been happening with me and the markets since 2014. Maybe a little bit about what might happen in 2022 and beyond as well!
Let’s get started. I was born in 1944, a child of Dr. Spock, a child of the Cold War. My parents were cold too, and non-huggy, but devoted to their kids and their education. 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 six year old in the state of Ohio. Must have been a mistake, because while I was smart, I was only close to Mensa caliber and my Duke undergraduate grades finally proved it in the early 60’s. If I had a high “Q” it was a “CQ”, a Mensa equivalent “common sense quotient” enhanced by a for-years undiagnosed mild autism commonly called Asperger’s syndrome.
I did not skip 1st grade, but instead the family skipped a town that was later labeled “Middletucky” in the famous book and movie “Hillbilly Elegy”. My father, Sewell Gross, must have sensed the necessity for a better education because he sacrificed a blossoming career at Armco Steel to move us all to San Francisco on the California Zephyr – a bubble-glass passenger train departing Chicago and arriving in San Francisco in the summer of 1954. In the Zephyr’s tiny passenger compartment we put down newspapers for our German shepherd “Budgie, ” along with Mom, Dad, brother Chip, and 2-year-old sister Lynn. Luxury in transportation was to come 40 years later with a private plane!
California was much different than Middletucky. New schools, gyms, swimming pools, even, and the teachers were good, as was the class competition in the early days of Silicon valley. I did great, got an academic scholarship to Duke, tried out for the basketball team in the summer of 1962 and was cut in the first 15 minutes. I was six feet tall and endowed with speed, but only average coordination. After a great pass in high school, my high school basketball coach told me in the ensuing huddle, “Gross, if you could only shoot.” So true, I couldn’t shoot, but my ferocious ambition was allowed to move in a more productive directive because of it. My Duke tryout, though, was to lead to long-term friendships.
Thirty years later, Bucky Waters, the freshman coach who wisely cut me, had become a host for philanthropic guests at Duke. Reaching his hand out as he got out of his rickety Ford station wagon, he said, “Nice to meet you Bill.” I said, “Nice to meet you as well Bucky but we’ve met before. You cut me in freshman tryouts in 1962.” Whoops – it was awkward for just a few minutes. He was a wonderful man, as was his wife Dottie, and we’ve corresponded with portfolio ideas ever since.
I graduated without honors from Duke (2.8 GPA) and was about to be drafted and sent to Vietnam. My draft deferment excuse of “flat feet” was immediately rejected so I enlisted as an officer in the Navy flight program at Pensacola, Florida. 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 think 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 experience there is detailed in a lengthy “Stars and Stripes” article published in July 2015.
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, and his second book, “Beat the Market”. 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 experience was to be the formative experience of my life because it taught me how to measure risk in the financial markets. But first a little story about how I got there and spent an incredible three months in Las Vegas at the ripe old age of 22.
Fate would have it that I ended up in a head-on collision in college while driving to pick up donuts for a fraternity rush. Instead of donuts I received a long stay in the hospital and multiple surgeries to reattach my scalp, among other extremities. To pass the time, I studied Ed Thorp’s “Beat the Dealer”, then headed to Vegas after graduating from Duke in June 1966.
My journey from Durham, North Carolina, to Las Vegas was not exactly in the luxury to which I’ve now become accustomed. I hopped a freight train, then traveled to Vegas by way of Atlanta with $200 sewed to the inside of my pants to prevent robbery. When I got to Vegas I stayed in a motel that cost $6 a night, and played the tables 16 hours a day.
As recounted in my prior book “Bill Gross on Investing”, my goal was to win some money playing blackjack without any clue that my four months at the tables in Vegas were to lay the foundation for a successful career on Wall Street, or the West Coast version of it. What happened in Vegas didn’t stay in Vegas, I learned several important principles of investing that I employed throughout my career. And I parlayed that modest bankroll of $200 into $10, 000 to pay my way through graduate school.
Although frowned upon by the casinos, professional blackjack utilizes a system of counting cards. I
f you know what cards are left in the deck, you can determine whether the odds are in your favor or lean toward the house. Most of the time the casino is favored, but there are times when the deck favors the player, and it’s at those times that making large bets will tilt the overall long-term odds toward the player. Knowing when to place a large bet, however, is no guarantee of success, because even when the odds favor the player, they still only lean in his or her direction. If you are aware of that reality, it would be foolish to shove all your chips on the table for any one play of cards. Fifty-two percent of the time you might double your money. Might. But 48% of the time you’ll be wiped out. Casinos thrive on that type of gambling because it typifies poor money management.
When the odds are in your favor, your bet has to be large, but not so big that it jeopardizes your bankroll, or the rent money, as the case may be, The theory is formally labeled “gambler’s ruin” but it might well be called “portfolio diversification”. Long before Harry Markowitz at UCLA came up with the theory of diversified risk that eventually won him a Nobel Prize in economics, blackjack players were onto the same principle: you must not bet all your chips at the same time, because the results will be disastrous if you’re wrong.
Applied to the investment arena, it means that you don’t want to own just one stock, one bond or even one piece of real estate (unless it’s your home and that’s what you can afford). An investment portfolio should consist of an appropriate mix of stocks, bonds, and possibly real estate, or bitcoins these days. Despite the perception of many hopeful investors, stocks do not always move upward. Recent annualized stock market returns of around 10% cannot continue forever, because our economy and corporate profits can’t grow that steadily that fast. There are also traumatic periods of time – recessions – that produce sharp, sudden downturns in equity prices. If all you own are stocks, be prepared to have a very long time horizon, and psychological stamina to withstand a lot of short-term and even medium-term pain when the next recession inevitably arrives.
But while Thorp’s “Beat the Dealer” was formative in my later career at PIMCO, 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, and graduation. 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”.
Thorp’s new book was a forerunner to the Black–Scholes option model, and came in handy later in my career with the understanding of optionality and concepts of duration and convexity. I owe my mother for that job and other things as well. She read the Pacific Mutual ad in the LA Times one Sunday morning and said, “Bill, would this interest you?” It did, even though it was for a security analyst, because at the time I had no job offers and my first baby, Jeff, was on the way.
I reported to Pacific Mutual and was partially assigned to clip bond coupons in the basement vault, but then came Howard Raykoff, a bond salesman from Weeden & Co., who informed me and my boss, Ben Ehlert, about the joys of trading bonds, just like stocks.
Back in those days, there were very few computers, only the old IBM 360’s and Pacific Mutual and Wall Street firms were lucky to own even one. Electronic trading and executions, therefore, were not yet practical. A phone on one ear and one on the other were the necessary tools of the trade and if bonds were to be bought, sold and then settled, it was a laborious process that discouraged activity. But there was a bond trader at Occidental Insurance in Los Angeles that Raykoff informed me of. He would put his firm’s bonds in a cardboard box next to his desk and send them back and forth to New York for settlement. It sounded better to me than going down to our vault a few days a week, so Ehlert agreed to my early proposal to take $5 million of Pacific Mutual’s bonds and set up a trading account which would establish a performance record relative to an early Salomon Brothers bond index, and then hopefully market our expertise to small pension clients.
PIMCO was born a month later. I owe mom, Ben Ehlert, and Howard Raykoff. Ben is retired in Colorado. Howard lives in Beverly Hills now with his family, and is usually despondent about anything you can name. Not too long ago he wrote me about ticks in his bedroom and I told him to at least “don’t let the bedbugs bite.” I thank Howard endlessly, and he thanks me endlessly for the years’ ensuing bond trades that set him up in Beverly Hills for life. Symbiosis at its finest.
Anyway, PIMCO began, but was about to be canceled by the Pacific Mutual board in its first few years because of too few clients and increasing losses. Just at the last hour, however, Congress created ERISA, a law that mandated diversity for pension funds in their employment of investment managers, including “geographical diversity”. Fledgling PIMCO was obviously non-diverse, with three white men at the core, but was fortunately located “West of the Mississippi”.
AT&T’s fund was totally invested by New York, Chicago, and Detroit banks at the time, so PIMCO was a good geographical diversity candidate for them, and I guess we impressed them, despite our early thirties youthfulness. We were hired by the largest pension fund in the world. The rest would be history.
The 80’s and 90’s flashed by quickly with much success for PIMCO and for me as well as an increasingly visible personage on Wall Street Week and with my monthly Investment Outlooks. We were also assisted by a brilliant young management consultant named Rodger Smith from Greenwich Associates in the early 80’s. Having begun the Outlooks in the late 70’s, I knew that most potential clients trashed any brokerage firms’ boring one-page forecasts and I determined to do better. 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. Personally, I never learned how to say hello with people and certainly not with women at bars.
So 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. One such Outlook, “Back to Butler Creek”, a reflection of my 10-year childhood in Middletucky, was especially well remembered. Another, a poem by me titled “Out of Africa”, about my reflections on life in a forgotten continent was memorable as well and drew lots of client letters. They and 15 others are included in this appendix.
The TV appearances began with a fortunate guest appearance in 1982 on “Wall Street Week” with Louis Rukeyser. The producer, Rich Dubroff, had seen me on a brief CNN market update and decided to take a chance on me and another relative unknown rookie by the name of Peter Lynch. Lynch was to be the expert on stocks and yours truly on bonds. Frightened to death by the prospect of answering questions from the ruler of financial TV – Louis Rukeyser – I rehearsed for four hours in the woods of Owings Mills, Maryland, before finally arriving at the appointed hour. I never did meet Lynch, as the show was shot in two different segments, but I was later to be compared to him as the “Peter Lynch of Bonds”, which I humorously described in an Investment Outlook included in the appendix. I wanted to think he was the “Bill Gross of Stocks” but that was more ego then than reality. Now? Who knows, but 1.5 billion Chinese don’t care.