nice article from Gross-
Investment Outlook
Bill Gross | October 2001
Buying and Selling Hope
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All the interest of my reason comes together
in the following three questions:
(1) What can I know?
(2) What ought I to do?
(3) What may I hope?
Immanuel Kant
Critique of Pure Reason
Some twenty years ago I was summoned to sing for my supper at a seminar held by a large East Coast
institutional client. Surrounded by eight or nine fellow money managers at a rectangular dining room table,
we were asked en masse what the most important thing our respective firms "sold." It was a strange but
remarkably intuitive question and it threw most of the managers for a quick loop from which they - being
the "salesmen" that they were - immediately recovered and began pontificating on the strengths of their
various firms. The first opined that his company was selling research and the ability to pick and choose
between stocks and market sectors. Another pointed to his people, their experience, and the prospects for
continuity in future years. International contacts were mentioned by one, as was the inevitable reference to
quantitative modeling. Finally, and exasperatingly it was my turn. All of the good and seemingly obvious
things had been mentioned by the eight equity managers who had spoken before me. It seemed there was
nothing left that a poor bond guy could have for "sale" that could be anything other than redundant. Bonds
in 1981 were an afterthought in everyone's minds anyway, and here I was, the caboose behind an equity
train of brilliant strategists, who had managed to steal my thunder before I had even a chance to speak. I
thought quickly however, and irreverently as is my wont, and spewed forth the shocker of the night, at
least as far as yours truly was concerned: "We're all selling hope," I said. That was it. Like a nightclub
comedian, I paused just long enough to let the words sink in and to allow the audience to react, if only
with their eyes, which were sending signals of disbelief if not betrayal. Ten years from now, I continued,
very few of us will be sitting at this same table, if only because we'll have been replaced. Your research, I
said pointing to one manager, and your quantitative models, pointing to another, are probably good but no
better than anyone else's in this business. If so, then sometime in the future you'll hit an unlucky three
year performance patch just like the recent lucky one that has you seated here tonight - and you'll be
gone. Or perhaps it will be me - although like you - I prefer to think of myself as above instead of within the
pack. And what will our host have to show for it all? Market performance, less exorbitant fees - that's what.
Ten years from now, he or his successor will be sitting at this same table asking a similar question,
except it should be one that he turns around on himself. "What am I buying?" should be his (and other
investor's) primary query when it comes to their money managers. "What am I paying for? Am I receiving
good value?" No, will be the likely conclusion. There are very few customers' yachts, you see. You're
buying, we're selling - hope: come and get it.
Well that speech was a tad strong I suppose. Only P.T. Barnum could insult a client and get away with it,
although 20 years later, that East Coast dinner client is still a treasured PIMCO customer. Value in the
form of performance, not "salesmanship" must be the explanation. Seems PIMCO at least, has been
selling more than hope for sometime now. Still, any investor, anytime must ask the question "What am I
buying?" - not just in relation to the money manager but to the investments themselves. Am I buying hope
or am I buying value? That question is especially important in the wake of the September 11th attacks,
because it's only natural to combine patriotism, with hope for a better tomorrow, and come to incorrect
conclusions about valuations. But when it comes to investing, it pays to use one's head instead of one's
heart. The heart should be responsible for writing a check to the Red Cross to assist surviving families in
NYC, Washington D.C. and those killed in Pennsylvania. The head should be in charge of deciding
whether bonds or stocks make sense at today's prices in an increasingly risky global economic and
sociopolitical environment. To me, Fidelity's recent TV ad using hall of fame manager Peter Lynch falls
under the category of using your heart instead of your head. "Betting against America has been a bad bet
in the past," Mr. Lynch intones, "it will be a bad bet in the future." Well yes I think that too, but there is a
rational price for every bet, and an investor will be a sucker every time if he pays too high a one. The
question is not whether we should bet on America but in which markets and at what price we should place
our bets; because stocks, as well as bonds, are not always fairly valued, especially in an environment of
increasing risk.
Well hopefully this has been an honest, open, and not too mean-spirited entrée to answering that critical
question posed in last month's Investment Outlook: What should we buy now and what is the proper price
for hope? - especially in the aftermath of the attacks, and in anticipation of perhaps more horror to come.
Eighteenth century philosopher Immanuel Kant wrote in his Critique of Pure Reason some sage advice for
any investor, quoted at the beginning of this piece. His questions, at least for today will be my questions,
beginning with…
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