Bill Gross - Everything Youve Heard About Investing Is Wrong! : How to Profit in the Coming Post-Bull Markets

Copyright 1997 by William H. Gross

All rights reserved under International and Pan-American Copyright Conventions. Published in the United States by Times Books, a division of Random House, Inc., New York, and simultaneously in Canada by Random House of Canada Limited, Toronto.

Library of Congress Cataloging-in-Publication Data
Gross, William H.
Everything youve heard about investing is wrong! :
how to profit in the coming post-bull markets
William H. Gross. 1st ed.
p. cm.
eISBN: 978-0-307-81594-1
1. Investments. 2. Finance, Personal. I. Title.
HG4521.G745 1997
332.6dc21 96-50901

Random House website address: http://www.randomhouse.com/

v3.1

To my wife, Sue, who has been with me since my dawning and has given me the happiest thirteen years of my life. If there be a heaven, I have caught a glimpse of it through you. You have my constant love and enduring respect.

To Jeff, Jenn, and Nick, my three wonderful children, two of whom are now fully grown and one who thinks he is. Keep looking for that golden egg, but make sure not to pass by the chocolate ones. They add up and are the foundation of a life well spent. I have high hopes and endless love for each of you.

To my mom, Shirley Karpen: having kids, Ive learned, is a lot of work, and I was certainly a handful. Thanks for your devotion and love through all these years. You have mine as well.

An author needs many things, but above all he needs an audience, and I have been more than fortunate through these many years at PIMCO. I cant recall how many loyal readers of my Investment Outlook have said, You should write a book, you know. My thanks to all of youclients and associates alikewho have encouraged me for at least a decade.

An author also needs an able and enthusiastic assistant willing to put in long hours on the computer, revising graphs and correcting grammar as well as interfacing with insistent editors and the outside world. Danelle Reimer has done all of that and more for me and has left her footprints on this book along with many others too countless to name.

Weve been living in an age of high-octane financial markets. A bull market in stocks since the mid-1970s, combined with a dramatic performance for bonds since 1981 and the days of Paul Volcker, has convinced Americans that the way to get rich is to invest in the market. Such times have come before, of course: the South Seas Bubble, the Roaring Twenties, and the real estate frenzy of 19751985 were all times when investors and speculators thought they couldnt losethat all they had to do was belly up to the bar and slap their $2 down on the counter, and a beer and $4 change would come back before they had a chance to say Intel.

Im here to tell you that its just not that easy. This Era of Money has been almost unique. For one thing, the twenty-year bull market in stocks and the fifteen-year run-up in bonds have been longer than almost any comparable period in world history. Sure, we had our 1987 stock market crash and the 1994 debacle in bonds, but they were short and corrective as opposed to drawn-out and stagnant. Second, the conditions that produced these long bull markets will be difficult to duplicate in the future. They were caused by a sharp increase in corporate profits combined with a near-historic drop in inflation and interest rates. Since the mid-1970s, after-tax profits have increased by 10 percent annually. And since 1981, inflation has receded from double digits to a lowly 2 to 3 percent a year, while long-term Treasury yields plunged from 15 percent in 1981 to 6 percent in 1993. This performance will not be repeated in our lifetimes.

Therell be a lot of disappointed investors out there if they expect a repeat of the past two decades. The Era of Money is about to come to a close. Not in a dramatic way, though. This is not a book about the coming Depression of 1998 or the Crash of 99. Its not meant to scare you or to get you to rush out and sell your stocks and bonds and replace them with greenbacks, diamonds, or gold. Instead, this book will describe the coming new era, an era already dawning, during which youll likely compound your money at 6 percent rates as opposed to the 15 to 20 percent rates that have been synonymous with our rapidly maturing bull markets.

Humorist Will Rogers once said, Im more concerned with the return of my money than the return on my money. He made that crack during the Great Depression, the longest and worst period of business stagnation in our history. The future is not going to be quite as bad as that. Your investments will still offer a handsome return relative to inflationjust not what you may be used to. The next era will be the Era of 6 Percent. Still, getting that kind of return and keeping it, as Will Rogers might have encouraged, will not be easy. Purchasing high-flying stocks soon destined to fall, being too conservative by holding 4 percent CDs, and paying excessive fees for professional investment management are just three ways to ensure that you wont keep up with the Joneses in the battle for investment profits over the next decade. In order to excel, youll need an understanding of the global economy in the coming yearsan appreciation for what could produce disinflation as well as the accelerating inflation youre still probably afraid of and which type of environment favors stocks and which bonds. The old adage Stocks always outperform bonds is pure bunk, and you should know why bonds may be relatively good investments in the coming years. Youll also need to know which bonds to buy and how to reach for yield without sacrificing safety. Last, but certainly not least, you should know that you are an important part of the quest for 6 percent. Your psychological makeup, your patience or impatience, your need to play the game, or your willingness to sit back and let your profits run are all part of the equation that will add up to mediocre or exceptional returns.

I hope this book will help you grab the long end of the stick. It reflects what Ive learned in the past twenty-five years of investing for the clients of Pacific Investment Management Company. Its also a prediction of what lies ahead in the forecastable futurethe next three to five years, into the start of the twenty-first century. Each chapter begins with a personal commentary about this or thatthe meaning of life, how it feels to be scalped alive, and a host of other topics. Ive always felt that reading about investing should be fun, and my stories aim to entertain as well as instruct. I hope you like my book and learn something at the same time. It should be an enjoyableand profitableway to enter the Era of 6 Percent.

Ive never lived near a river. The closest I ever got, I suppose, was Butler Creek in the backwoods of Middletown, Ohio, when I was a boy. It was gentle and kind, and its surprises came in the form of crawdads and salamanders and all sorts of fun things that little boys dream pleasant dreams of. There were no nightmares on the banks of Butler Creekno floods, no levees, no sandbags, no shattered lives, and no presidents offering condolences. It was not the Mississippi of 1993. My summers were filled with running