The Investment U E-Letter: Issue # 338
Monday, May 17, 2004 Bill Gross on Investing in Bonds: They Look Horrible…Perfect Time to Buy?
Plus, three safe, simple investment tips from the $400 Billion Man
By Dr. Steve Sjuggerud, Advisory Panelist, Investment U "I recommend getting the hell out of Dodge City, U.S.A., and reinvesting in London and Frankfurt. Construct an A.B.T. portfolio - Anything But Treasuries, and hand those Old Maid Treasury bonds to the Japanese and the Chinese or any other country whose growth concerns dominate their investment commonsense." ~ "Bond King" Bill Gross, April 1, 2004 Bill Gross is a genius when it comes to investing in bonds… And he'd better be, as he's responsible for nearly $400 billion in bond money. The call Bill Gross made on April 1 was extraordinary… He basically said bond yields should rise by 100 basis points (1 percentage point) or more above their current levels. Gross probably wrote the article above at the end of March, when 10-year Treasury bonds were paying 3.7% interest. Today they're paying 4.7%. He got it exactly right, and his prediction unfolded quickly, too. Those numbers roughly translate into a loss of about 10% of your money in bonds in less than two months (because when interest rates go up, bond prices go down). In hindsight, getting the hell out of Dodge was the best thing you could have done had you been investing in bonds. But now what do you do? We'll start by looking at what Bill Gross and his colleagues in the "Big Money" world are saying now. Then we'll consider a bond play that could go against all of it-and make you some big money of your own. Investing in Bonds: Advice from Bill Gross…the $400 Billion Man I'd bet that Gross would stick with the advice he laid out in his April commentary. He said: "[2%] is a pretty good approximation for what an investor in U.S. bonds should earn over the next four to five years. Staring 2% returns in the face, what does someone who's investing in bonds do?" Bill Gross offered up three simple solutions: 1. Own some inflation protection. For his bond funds, Gross has been buying TIPS, which are inflation protected Treasury bonds. 2. Stay with short-maturity bonds. While long-dated bonds can fluctuate wildly in price, short-term investments like bank CDs won't. You won't make much, but you won't lose anything either. 3. Be choosy about WHERE you invest. Bill Gross recommends investing in bonds in countries like Britain, which are vigilant about inflation, stable, and pay higher yields (5%+) than U.S. bonds. Bill Gross has a few complicated answers for some of these questions, and why he expects the U.S. dollar to weaken. Gross is not alone in these beliefs… The Big Conundrum about Investing in Bonds Everyone, it seems, hates U.S. bonds. This of course, makes me wonder if there's a contrarian investing opportunity here… Said simply, there is more room for people to sell stocks and buy bonds than vice versa… Professional investors only have 14% of their money in bonds, according to the latest Barron's Big Money poll. And individual investors have even less, according to the latest AAII poll. Both pros and individuals have over 70% in stocks. When the people both decide to lower their exposure to stocks some day (and they will) where will they put that money? What? You don't think that the baby boomers will sell their stocks? Oh, they will… I remember how my grandfather was with his money. He lived through the Depression. He wouldn't consider touching stocks. Even into the 1980s, he was in U.S. Treasury bonds and CDs. He didn't buy the bonds because he knew anything about them. (He didn't know anything about them.) He simply bought them because he knew the damage that stocks could do-he'd lived through it, and he didn't want to subject himself and his family to that risk. Right now, individual investors have 70% in stocks and over 20% in cash. When they sell a portion of their stocks, will they keep piling up the cash? I don't think so. They'll probably end up partially investing in bonds, or bond mutual funds. The professional investors will do the same. This bond investing, of course, will drive bond prices higher. I couldn't believe it when I read that only 1.4% of professional investors were bullish on Treasury bonds (meaning 98.6% were either bearish or neutral). It astounded me even more that 0% of the big money was bullish about corporate bonds. It's not really possible to get any more negative about the prospects for an investment… which usually means it's the optimal time to buy that investment. Now that long-term interest rates have risen 100-plus basis points (over 1 percentage point), it may be time to start looking at investing in bonds once again. I haven't done it yet. But it is intriguing… Talk about a contrarian investing play… You'd be up against Bill Gross, Warren Buffett (who is betting against the U.S. dollar), and the entire "Big Money" world. Do you have the guts to bet against all the brains on Wall Street? In this case, I don't… yet. Today's IU Cribsheet - Bill Gross is the boss at PIMCO, which controls several of the world's largest bond and commodity funds. The quote I use in this broadcast came directly from the company's website (www.pimco.com). I recommend you check it out.
Good investing, Steve P.S., Interested in learning more about investing in bonds? I encourage you to take a look at these related Investment U articles featuring Bill Gross: Investment U Archives | 
