Rich Stamp Collector Makes a Bad Call

Guest posting by Fred Langan

Bill Gross learned to play the bond market at the blackjack table. Just out of college in the 1960s, for a while he made a living as professional blackjack player in Las Vegas. Not working for a casino, but betting his own money. It sharpened his mental reflexes. Soon he started his own bond trading firm, Pacific Investment Management Co., known simply by its acronym: Pimco. It is the world’s largest mutual fund.

The smartest bond trader in the world lost money last year, for the first time since 1994. Bill Gross is the Bond King, a legend in the investment world. He has an amazing track record, but 2013 was too much for him. He bet the farm on his take on the economy, and doubled down at the bond table.

Gross made his plans public last May. His idea: the American economy was going to limp along and the US Federal Reserve Board would keep interest rates low. Wrong, wrong, wrong. Instead of staying put, the 10-year US bond, the gold standard in the bond market, rose from 1.76% in January of 2013 to 3.03% at the end of December. A disaster. In early April it was about 2.75%.

Another big loser last year: Brazilian bonds. Gross said the Brazilian economy was strong and its currency, the Real, would protect investors. The Brazilian Real fell 13% against the US dollar. An expensive mistake.

This is the Bill Gross way of doing things. Use the big picture idea to make money. It worked in the past. An analysis by Bloomberg News said Gross was meditating during a yoga session in 2005 and started to worry about a housing bubble. He sent his employees out posing as buyers. Because of that he steered clear of bonds invested in subprime mortgages.

The Bond King is still super rich. Gross is worth an estimated $2.2 billion, number 258 on the Forbes 400 list of the richest people in the United States. Forbes lists him as the one of the seven most powerful financiers in the world. Unlike many of the other .001% he thinks he should pay more taxes. The title of his newsletter on the subject was Scrooge McDucks, saying his fellow billionaires were as lucky as they were smart and they should stop hoarding their cash.

“You did not, as President Obama averred, ‘build that,’ you did not create that wave,” he wrote. “You rode it. And now it’s time to kick out and share some of your good fortune by paying higher taxes or reforming them to favor economic growth and labor, as opposed to corporate profits and individual gazillions.”

Bonds aren’t his only obsession. Bill Gross is a stamp collector, only one of three people to collet every stamp issued by the United States in the 19th century. In 2005 he paid $3 million for a misprinted stamp from 1918 that shows a biplane flying upside down. He then traded that for an 1888 Benjamin Franklin stamp, completing his 19th century collection.

A wheeler-dealer extraordinaire. But even his trading sense couldn’t save him from a negative return in the bond market last year.