Bill Gross on investing

In my thinking about investments, I’ve tended to give short shrift to bonds. When I can invest, I try to do it for the long haul, and over most periods of ten years or longer, stocks tend to trounce bonds. (Right now is an exception, when the average annual S&P 500 return for the ten years that ended on June 30 actually stands at -1.59%.)

Bonds seemed incredibly complicated compared to stocks, and because they were subject to some of the same risks (like higher interest rates) it didn’t seem worth the trouble to figure them out. Peter Lynch and other investment gurus appeared to have no use for them either.

But in an effort to give the bond approach a fair chance, I recently read Everything You’ve Heard About Investing is Wrong!, a 1997 book by Bill Gross of PIMCO, who is accurately described on the cover as “the Peter Lynch of bonds.” (I figured out—fortunately before I bought both books—that Bill Gross on Investing is just the paperback version of the same book.)

Like his letters to PIMCO shareholders, Gross’s book is marked by offbeat analogies and some fresh insights. In 1997 as in 2010, Gross expected an era of low growth and low investment returns—at least in the “secular period,” or three to five years out.

Today he and co-CIO Mohamed El-Erian call this “the new normal.” Back then Gross called it the era of 6%, or the Butler Creek era, after a meandering stream of his childhood.

Gross admits (though not until page 133) that “stocks are definitely the best bet for the long haul,” but because not everyone has the stomach to invest exclusively for the long haul, he suggests measures such as investing in longer-term bonds, foreign bonds, corporate and mortgage bonds (because the risk of prepayment was low at the time), and the inflation-indexed bonds (now called TIPS) that were about to be introduced.

Everything You’ve Heard includes many nuggets of practical advice. Gross, for instance, reveals how his company eked out a little extra return on its cash, by buying “near cash” in the form of short-term callable corporate bonds. And despite some conservative talk about moral decay and how “JFK was no friend of mine,” he also makes this surprisingly progressive suggestion:

The only real government solution that incorporates the positives of a free-market economy while alleviating the plight of the bifurcated have-nots of our society would be to eliminate the taxes of all Americans earning less than, say, $25,000 a year. What could be simpler or more efficient and better rectify, in one giant step, the decline of the after-tax wages of the lower half of American society? Forget about a capital gains reduction; stockholders have more than their fair share already.