Bill Gross: Should You Still Bet on the Bond King?

Bill Gross: Should You Still Bet on the Bond King?

REUTERS/Robert Galbraith

Let’s all confess that we’re addicted to our pundits: those financial market pros with a knack for making the right calls enough of the time to be frequent guests on CNBC and end up being quoted, respectfully, in all kinds of other media. The sometimes simple yet elegant arguments that they put forward save us from having to wrestle with complex ideas and concepts ourselves.

The problem? They’re not infallible, so following them blindly with the expectation of beating the broader market is a recipe for disappointment, if not disaster.

Take Bill Gross, the Pimco bond fund manager who has parlayed a series of excellent and well-timed investment decisions into guru status. Not that he set out to do so; Gross is a thoughtful and intelligent investor who (in contrast to someone like CNBC’s Jim Cramer) doesn’t seem to feel the need to be recognized and appreciated by the general public.

Nonetheless, his name is known and his investment decisions avidly monitored. And right now, that’s not good news for his imitators: Gross’s flagship fund, the Pimco Total Return Fund (PTTAX), placed its biggest bet on Treasury securities in three years, boosting the weighting to 39 percent of the fund’s assets. That was just in time for the May selloff in bonds that took yields back above 2 percent, and Morningstar calculates that investors pulled some $1.3 billion from the Pimco fund in response to its poor performance.

Gurus and pundits have one big advantage that the rest of us don’t: a bully pulpit that they can use to tell policymakers what they should be doing and to try and convince the rest of the investment universe that their view of reality is the correct one. Gross took to that podium this week to do exactly what one of the most-often cited market mantras says you shouldn’t do: pick a fight with the Fed.

Monetary solutions alone won’t suffice to get the U.S. economy – or, indeed, the global economy – back to “normal” growth levels, Gross argued in his monthly letter to investors. Comparing the economy to a “wounded heart” (the title of the piece), Gross suggests that “there comes a time when no matter how much blood is being pumped through the system as it is now, with zero-based policy rates and global quantitative easing programs, that the blood itself may become anemic, oxygen-starved, or even leukemic.” The somewhat muddled metaphor aside, Gross’s argument is an interesting critique of the Fed’s approach – but it doesn’t offset the fact that he has been on the wrong side of the market of late.

Pundits sometimes offer great critiques, and because they often are so reflective and well-informed – and because they frequently think out of the box – they are almost always worth listening to and considering. But they aren’t always right, and it is too easy to boil down what they are saying to a few quick soundbites.

Take Meredith Whitney’s now-infamous “60 Minutes” interview back in 2010, in which she predicted large and widespread defaults among municipal bonds. Whitney, who won her status as pundit by being one of a tiny handful to anticipate the financial crisis of 2007/2008, actually made a much more nuanced critique of muni bonds than the interview that aired suggested. Essentially, she argued that a fiscal crunch at national and state governments would work its way down to municipalities, where local governments would find themselves unable to cope with cutbacks at those higher levels, the needs of their communities – and their existing debt obligations.

That hasn’t happened yet in any kind of general way – although there have been a handful of high-profile community bankruptcies and defaults – but the problem certainly exists. The risk exists, and it’s worth taking a hard look at the muni bonds you may have in your portfolio to make sure that your quest for higher yield hasn’t led you into a high-risk situation. What it doesn’t mean is that you should interpret Whitney’s words as a recommendation to shun all muni bonds in anticipation of a debacle throughout the asset class.

Pundits also can “talk their book,” or promote stocks or sectors in which they are heavily invested while dissing those they have sold short in hopes of making a profit when share prices dip. That’s a big reason to be wary when hedge fund managers like David Einhorn or Bill Ackman discuss the companies they like or don’t like.

Ackman, founder of Pershing Square Capital Management, has now made two big blunders in a row, investing heavily in Borders (and losing some $230 million when the bookstore chain filed for bankruptcy in early 2011) and now J.C. Penney (NYSE: JCP). The latter company is still alive, but far from being as revitalized as Ackman had promised it would be when he and fellow board members first named former Apple exec Ron Johnson to the CEO spot. Johnson is now gone, and Ackman has gone from being the company’s biggest booster to acknowledging that the original strategy was “close to a disaster.”

Nor has Einhorn’s widely trumpeted affection for Apple (NASDAQ: AAPL) translated into an improved stock performance. But Einhorn, of Greenlight Capital, has done one thing that many of his fellow pundits rarely do: publicly told the rest of us that the last thing we should be doing is trying to follow in his footsteps. Not because we shouldn’t try to outperform, or because he thinks we don’t have what it takes, but because there really isn’t any such thing as a reliable, infallible market guru. “It doesn’t make sense to blindly follow me or anyone else into a stock,” Einhorn told attendees at last month’s Ira Sohn conference – an event designed to raise money for charity and that revolves around pundits putting forth their favorite investment themes for public consideration. “Do your own work.”

I’d go one step further. Listen to what the pundits say and evaluate their arguments and their theses. Look for holes in their analyses, and consider ways in which they might be wrong: Are they trying to fight the Fed? Are they underestimating the power and value of a brand name?

Use their thoughts as your starting point, not as a “buy” or “sell” signal.