In August, 2010, I wrote about the opposite approaches that arguably two of the most successful investors of all time have taken related to bonds. Bill Gross not only sold all of the US government debt in the PIMCO Total Return Fund, he was so convinced that the price of US Government debt would drop he went so far as to sell the debt short. Warren Buffett, on the other hand, felt that US Treasury Bonds were a solid investment and increased his holdings. This week, Bill Gross came out very publicly and admitted he was wrong – for the most part. According the Financial Times, the PIMCO Total Return Fund is now in the bottom 15% of bond funds, ranking 501out of 589 funds.
Mr. Gross made two classic investing mistakes. First, he thought he could predict the future and bet the house that he was right. Second, he failed to diversify. In his interview and in later comments, he still feels that the U.S. faces long term problems with our debt load. However, compared with other governments around the world and problems in the equity markets, he now realizes that US Government debt can’t be ignored. US Government debt accounts for about 40% of all bonds traded. Ignoring 40% of any market is taking an all or none strategy. If he is right, he hits a home run. If he is wrong, he costs his investors a lot of money.
In my view, the cost of being wrong is too high a price to pay especially with bonds that are supposed to be the conservative portion of an investor’s portfolio. A much better approach would have been to reduce the holdings but keep some US Government debt in the fund. This being said, the PIMCO Total Return Fund is still one of the best performing bond funds over the