Hello everyone,

I’m excited to share my conversation with Mary Childs, author of The Bond King (and co-host at Planet Money) on the rise and fall of legendary bond manager Bill Gross.

You can listen to this conversation on your podcast player of choice: Spotify, Apple, at anchor, and via RSS.

You can also add the Substack podcast feed to your favorite podcasting app via the link on the bottom-right of the player. I didn’t realize this until Liberty showed me🙏 (except Spotify doesn’t allow RSS importing😪).

Mary and I talked about Bill’s breakfast habits (did low blood sugars end his career?!), his card counting days, the culture of paranoia at PIMCO, how he combined multiple sources of edge into “structural alpha” for long-term outperformance, the difficulty for a founder to leave their firm, Bill’s desire for fame, and how emotions ultimately got in the way of investing.

I really enjoyed the book and was struck by the combination of structural factors that Gross used to build his track record (early in new products and going outside the benchmark, selling volatility, being creative with cash equivalents, figuring out how to use leverage in the mutual fund). His big picture calls are interesting but the record seems mixed.

If you’re interested in Bill’s perspective, he recently appeared on this podcast. I liked how he framed what made a great bond manager: "One third mathematician, one third economist, one third horse trader. That certainly worked for me."

It seems that at some point after the financial crisis he got stuck in bearish thinking. As his track record and public image took some hits, his behavior became more erratic and even belligerent towards the new generation of portfolio managers at PIMCO. The story illustrates how contentious the transition from founder to institutional money management firm can be.

A few notes and quotes:

Bill got started card counting in Vegas:

"You have to have that gambling instinct. This business, if it's done properly, isn't gambling. But it entails some of the gambler's spirit.
Vegas taught me that I could beat the system with a combination of hard work, ideas that no one has thought of yet, and the ability to tolerate a constant routine that to many people seems monotonous. But to me, it's the most exciting thing in the world."

Perseverance:

“My life’s plan has always been to outlive and outlast ’em. To persist. To persevere. To land on my feet, keep on running, and never stop.
Excellence for most of us blossoms and flourishes for only a brief flicker of time. Either because of human frailty, maturation, or simple outright exhaustion, it’s difficult to perform at a crescendo for an extended period. Very few stay at the top for very long.”

The culture of anxiety at PIMCO:

For a Pimco trader, a day could easily be derailed by accidentally looking up from the screens and—disaster!—making fleeting eye contact with Bill Gross. No matter how well you were doing, it wasn’t good enough. Do more, better. Your ass was always on the line.
He tested them constantly. He used to pace the trade floor, quizzing underlings … What mattered was “owning” the risk. It was yours now. Defend it. What did you think and what were your justifications, with fresh data points and prices?

On the pain of being early in a trade (in this case bearish too early before 2007/2008):

"Every investor has an alarm clock. I wish I could get up at 6 every morning and time things just right. I probably get up at 4:30."

Some highlights from the conversation:

Opening the door to a story:

“If you're staring at a closed door … you just have to come up with a little piece of information to get that person to open that door, to crack it open. A little piece of gossip, a story that everyone's talking about. In and of itself that gossip is useless to you as a journalist, of course. But you can asking somebody, Hey, I keep hearing this ridiculous story. You have a little nugget of truth in there. You don't know what it is yet. … A lot of people want to help you understand and don't want to see the story misrepresented.”

Traits of a founder:

“The things that make someone capable of achieving the track record that Bill Gross did, building the kind of firm that Bill Gross was a part of, those personality traits are: you're going to be exacting. You're going to be really intense and focused. You're going to be a perfectionist, a micromanager. You're going to keep a really tight grip. These things, generally speaking help contribute to the success of the firm.
… For the most part, these are things you see very frequently among founders, and also that toxic culture that can often come along with some of those traits. Those traits also make it very difficult, if not impossible, to have a graceful transition away from that founder. Because the minute they start to loosen their grip, they freak out. … The tight grip is who they are. This firm is who they are.”

Being the house:

“Bill gross learned from Ed Thorp’s book called Beat the Dealer that you can count cards. … I think that this sensibility of both understanding the math but also feeling the pace of the table and knowing when you have that edge and when you don't, and also watching all the people around you who have no edge whatsoever and who were just flopping around taking dumb chances. All of that helped to inform how he approached the market and who he saw as his competitors. His competitors, aren't the dumb people doing the dumb stuff. His competitor is the market, is the dealer.
This shows up when PIMCO figured out that the US government wasn't going to let certain institutions fail in the financial crisis. That there was going to be a government backstop … If I know that the US government is the house, I'm going to be the house, I'm going to try to align my own interests. … The point was to do what the government's going to do, but do it first: buy what they're going to buy and then sell it to them or ride that wave as the news of their purchase causes the price of those assets to soar. And that's exactly what happened.”

Becoming number one over time:

“Ben Trotsky, this hilarious person who managed the junk fund in nineties, said, I want to be the best bond manager over a 10 year period. He ran a bunch of simulations. And every time he found that if you want to be the best manager over 10 years, you got to not be the best manager in any given year. If you're the best manager in one year, you probably took too much risk. You probably did something … that was not that informed of a risk. And you just got lucky. You're doing something that could blow you out. So the idea is to be in the top decile, top quartile, and just outlast everybody else who is taking too much risk trying to be number one.”

Emotion:

“What happened to Bill at Janus was he needed to prove to PIMCO that they had made the wrong choice by ousting him. This is a little my overlay. He told anyone who would ask that he was obsessively checking every day his performance against PIMCO’s. My read of that is that he was not emotionless. He was locked in this dynamic with PIMCO that became more his obsessive focus than pure performance. … I think he allowed emotion to cloud his investing.”

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Disclaimer: I write and podcast for entertainment purposes only. This is not investment advice. I am not your fiduciary or advisor. Do your own work and seek your own financial, tax, and legal advice before making any investment decisions.

The Bond King: How One Man Made a Market, Built an Empire, and Lost It All: Childs, Mary: 9781250120847: Amazon.com: Books

Neckar Substack.

🎙Mary Childs and her book The Bond King