WEBVTT - Masters in Business: Janus Capital Group Bill Gross (Audio) 0:00:03.240 --> 0:00:09.039 This is Masters in Business with Barry Ridholts on Bloomberg Radio. Okay, 0:00:09.080 --> 0:00:12.640 so I am very excited about this week's guest. There's 0:00:12.680 --> 0:00:15.680 a little bit of a backstory. Um, you're gonna hear 0:00:15.800 --> 0:00:19.840 this interview in two parts. This first part, for those 0:00:19.880 --> 0:00:22.320 of you who are either listening on Apple iTunes or 0:00:22.320 --> 0:00:25.360 at Bloomberg dot com, is about an hour. Part two 0:00:25.400 --> 0:00:28.080 will be posted next week or if you're listening to 0:00:28.160 --> 0:00:32.720 this at some point in the future, half an inch down. Um, 0:00:32.760 --> 0:00:38.360 this is really a fascinating interview with a fascinating character. Uh. 0:00:38.800 --> 0:00:44.720 A little backstory to how this interview came about. And 0:00:44.760 --> 0:00:47.800 I'm gonna make a really long story, not as short 0:00:47.840 --> 0:00:50.760 as some people would like, but it's really interesting and 0:00:50.800 --> 0:00:54.680 I like sharing this behind the scenes stuff with with listeners. 0:00:55.840 --> 0:01:00.880 So gross gets fired from Pimco or there's certainly a 0:01:00.880 --> 0:01:06.200 palace coup back in September, and lots of people are 0:01:06.240 --> 0:01:09.039 writing about it, and lots of people are piling on. 0:01:09.319 --> 0:01:12.319 You know, there was a whisper campaign to discredit him. 0:01:12.360 --> 0:01:16.759 Ever since Muhammed Hillarian left Pimco, there was a little 0:01:16.800 --> 0:01:21.240 bit of a sort of change in the air, and 0:01:21.280 --> 0:01:24.039 I think people got a little more bold. Some of 0:01:24.080 --> 0:01:26.720 the people who were the next tier below Gross and 0:01:26.800 --> 0:01:32.960 Hillarian began plotting to essentially depose the king, and effectively 0:01:33.000 --> 0:01:37.320 that's what what happened. But around that time September twenty 0:01:37.760 --> 0:01:41.760 early October, lots of stories came out. Everybody piled on. 0:01:42.760 --> 0:01:45.319 And you know, people sometimes say, hey, why don't you 0:01:45.319 --> 0:01:49.040 write about Bill Gross, And my answer was, I'm not interested. 0:01:49.040 --> 0:01:51.760 I have nothing to add. I think people are just 0:01:51.840 --> 0:01:55.120 ignoring a guy with a forty year track record. Look, 0:01:55.840 --> 0:01:59.160 he built a firm that and he I say this specifically, 0:01:59.520 --> 0:02:02.080 even though he gives credit to other people who worked 0:02:02.080 --> 0:02:04.400 with him and that it was a team effort, and 0:02:04.440 --> 0:02:07.880 there were thousands of people who work at PIMCO. The 0:02:07.960 --> 0:02:12.120 reality is the vast majority of the two trillion dollars 0:02:12.280 --> 0:02:17.960 let me repeat that, to trillion dollars that PIMCO raised 0:02:17.960 --> 0:02:22.280 over forty years came there because of Gross. End of story, 0:02:22.720 --> 0:02:25.919 And so I didn't want to pile on. We don't 0:02:26.000 --> 0:02:29.320 have any PIMCO funds. We don't, we're not a client 0:02:29.400 --> 0:02:34.079 of theirs. I just look at them and say, I don't. 0:02:34.120 --> 0:02:36.600 I don't need to add something if I'm not adding 0:02:37.360 --> 0:02:40.560 some value, And just to kick a guy when he's 0:02:40.600 --> 0:02:45.400 down despite a spectacular longtime track record seemed ridiculous to me. 0:02:46.480 --> 0:02:49.400 And I said this to one or two people, And 0:02:49.480 --> 0:02:53.680 sometimes these things travel around, and word gets to a 0:02:53.840 --> 0:02:56.240 friend of a friend of Bill, and we'll call it 0:02:56.280 --> 0:02:59.760 friends of Bill. And the friend of Bill reaches out 0:02:59.840 --> 0:03:02.440 to me, and I know him through other parties, and 0:03:03.520 --> 0:03:05.880 he says, so, I hear you're not interested in writing 0:03:05.919 --> 0:03:07.880 about Gross because you think it's not right to kick 0:03:07.919 --> 0:03:10.200 a guy with his track record when he's down. And 0:03:10.240 --> 0:03:14.000 my answer was yeah. He goes, well, what would happen 0:03:14.040 --> 0:03:16.280 if I shared with you a couple of bullet points 0:03:16.320 --> 0:03:18.600 about his exit? And I'm like, I'm happy to listen. 0:03:19.320 --> 0:03:22.040 And so he proceeds to give me one or two thoughts, 0:03:22.280 --> 0:03:25.200 and I say, you know, he's due to write a 0:03:25.200 --> 0:03:28.720 monthly letter and he left before he sent out is. 0:03:29.080 --> 0:03:33.840 They're called iOS, investment Outlooks. He's been publishing these for decades. 0:03:34.920 --> 0:03:38.120 I think I might want to write a monthly IO 0:03:38.200 --> 0:03:40.920 in the voice of Bill Gross. Now understand I've been 0:03:40.920 --> 0:03:44.280 reading him and Paul McCulley and Muhammad Allarian and the 0:03:44.320 --> 0:03:48.400 rest of the Pimco crew for a long time. Sometimes 0:03:48.400 --> 0:03:50.960 what they write resonates with me. Sometimes it doesn't. But 0:03:51.040 --> 0:03:54.520 I knew it didn't take much to get into the 0:03:54.520 --> 0:03:56.520 head of Bill Gross. All I had to do is 0:03:56.560 --> 0:03:59.040 download a dozen i os and read it on the 0:03:59.080 --> 0:04:01.680 train on the way home. And I did that. And 0:04:01.720 --> 0:04:04.680 after reading a few of these i os, you know, 0:04:04.720 --> 0:04:07.880 whenever they catch a forger of some great artwork, the 0:04:07.960 --> 0:04:10.760 guy says, you know, I had to get this stroke down. 0:04:10.840 --> 0:04:12.840 Once I had that stroke, I can anything I did 0:04:13.120 --> 0:04:15.440 looked like van Go or Picasso or whatever it is. 0:04:15.760 --> 0:04:18.080 Once you get Gross in your head, it's easy to 0:04:18.120 --> 0:04:22.080 write like him. It's easy to adopt his syncopations and 0:04:22.120 --> 0:04:24.880 his tones and his rhythms. And so that's exactly what 0:04:24.960 --> 0:04:28.680 I did, and I wrote this parody. You know, Gross 0:04:28.760 --> 0:04:32.440 is farewell letter, And I imagined, Hey, I built one 0:04:32.440 --> 0:04:36.960 of the most fantastic firms in the world, two trillion dollars. 0:04:37.560 --> 0:04:42.160 Less people have put um raised two trillion dollars and 0:04:42.240 --> 0:04:46.640 have hit five home runs in the in the major leagues. 0:04:46.640 --> 0:04:50.480 And so I thought I would parody that perspective. And 0:04:50.839 --> 0:04:53.599 apparently I did too good a job, because we got 0:04:53.600 --> 0:04:56.599 panicked phone calls. Hey is this real? People are upset 0:04:56.880 --> 0:04:59.240 Pimco is upset this one, screaming how did you guys 0:04:59.279 --> 0:05:03.640 get this letter? Astonishingly, it was on Bloomberg View. People 0:05:03.680 --> 0:05:05.599 didn't realize it was a joke, or at least some 0:05:05.600 --> 0:05:07.680 people didn't realize it was a joke. I got a 0:05:07.760 --> 0:05:10.279 lot of emails. But because of that, and I'm told 0:05:10.279 --> 0:05:15.320 through the grape vine that the parody farewell letter from 0:05:15.360 --> 0:05:19.279 Bill Gross amused the real Bill Gross, and so he 0:05:19.320 --> 0:05:21.479 reached out at a certain point and said I thought 0:05:21.520 --> 0:05:24.920 that was kind of interesting, as did other friends of Bill, 0:05:25.480 --> 0:05:28.440 other people who were still at Pimco when not happy 0:05:28.480 --> 0:05:33.120 with his being deposed. Eventually led to my getting my 0:05:33.240 --> 0:05:38.200 hands on a copy of a uh set of bonuses, 0:05:38.279 --> 0:05:41.159 a spreadsheet of all the bonuses that went out to Pimco. 0:05:41.320 --> 0:05:44.720 And I wrote a column that talked about Gross is 0:05:44.760 --> 0:05:49.680 two million dollar bonus and and and then allarians and 0:05:49.720 --> 0:05:51.880 everybody else is down the road. It was a billion 0:05:52.000 --> 0:05:55.800 five in Pimco bonuses. And I got an email from 0:05:55.839 --> 0:05:58.760 Gross who doesn't say anything about the bonus, but says, 0:05:59.240 --> 0:06:02.520 you know, you guys keep misrepresenting my track record in 0:06:02.520 --> 0:06:07.240 in total returns. It's much better than is claimed. And 0:06:07.520 --> 0:06:09.680 I as well as the same as true for the 0:06:09.720 --> 0:06:12.600 closed end funds, and so I said, send me the data, 0:06:12.720 --> 0:06:15.760 I'll end research and independently and if it's correct, I'll 0:06:16.839 --> 0:06:19.400 pony up in a minute. Was correct, and it turns 0:06:19.400 --> 0:06:23.640 out that he was more or less right, absolutely right 0:06:23.680 --> 0:06:27.200 about the closed end funds there were. The performance was spectacular. 0:06:27.480 --> 0:06:29.920 According to morning Star, there were one to three, four 0:06:29.920 --> 0:06:33.760 and six in the universe of multisector fixed income funds. 0:06:33.800 --> 0:06:37.200 That's just, you know, just swept the It's like winning 0:06:37.279 --> 0:06:40.560 Laman's one, two and three e race team takes all 0:06:40.880 --> 0:06:45.000 three pole positions and and amazing set of numbers. He 0:06:45.160 --> 0:06:48.520 was kind of right about total returns. It wasn't nearly 0:06:48.560 --> 0:06:52.719 as bad as people had depicted. He had been top ten, 0:06:53.240 --> 0:06:56.359 top desk isle and often top one percent. And in 0:06:56.360 --> 0:06:59.200 the years that followed he had a bad year after 0:06:59.240 --> 0:07:02.599 two thousand eleven was he underperformed two thousand twelve, he 0:07:02.640 --> 0:07:07.080 did really well about flat relative to the benchmark. Underperformed 0:07:07.120 --> 0:07:12.920 a little bit about points uh fourteen until until the 0:07:13.000 --> 0:07:17.000 end of September, but he essentially didn't put in the 0:07:17.080 --> 0:07:19.840 sort of numbers that leads to, you know, a founder 0:07:19.840 --> 0:07:24.240 getting deposed. And so I ran the story and but 0:07:24.800 --> 0:07:28.760 along the course of having this conversation with him, said, 0:07:28.840 --> 0:07:30.880 you know, I would love to have you sit down 0:07:30.920 --> 0:07:33.880 and just you tell your story. I'll throw some questions 0:07:33.920 --> 0:07:37.520 at you, but you say what happened. And and I 0:07:37.560 --> 0:07:39.440 know you don't trust people in the media, and I 0:07:39.520 --> 0:07:44.360 know you are fearful of filters and and spin. This 0:07:44.400 --> 0:07:46.240 is pretty and varnished. You get to say whatever the 0:07:46.280 --> 0:07:48.960 heck you want to say. And so for two hours 0:07:49.000 --> 0:07:51.520 we spoke and he said whatever the heck he wanted 0:07:51.560 --> 0:07:54.600 to say. So this is the first hour of the interview. 0:07:54.680 --> 0:07:59.360 It's essentially him describing the creation of PIMCO. What it 0:07:59.440 --> 0:08:02.720 was like, was early mentors were, how things developed, what 0:08:02.760 --> 0:08:05.560 it was like running money in the flashnary periods of 0:08:05.560 --> 0:08:09.040 the nineteen seventies, uh the seven crash. He talked about 0:08:09.080 --> 0:08:12.360 a lot of really fascinating things. And I've now babbled 0:08:12.360 --> 0:08:16.000 for over five minutes, So let me stop now and 0:08:16.120 --> 0:08:24.120 with no further ado, Bill Gross, this is Masters in 0:08:24.200 --> 0:08:28.360 Business with Barry Ridholts on Bloomberg Radio. Today. We have 0:08:28.440 --> 0:08:32.440 a very special guest. You probably have heard his name 0:08:32.480 --> 0:08:35.359 once or twice if you're involved in the world of investing. 0:08:36.240 --> 0:08:39.360 His name is Bill Gross, perhaps the most famous bond 0:08:39.400 --> 0:08:43.240 investor in history. A quick background on who he is. 0:08:43.400 --> 0:08:48.520 Born in Middletown, Ohio, moved to San Francisco ten years later, 0:08:48.840 --> 0:08:53.480 ended up going to Duke University as a Duke scholar 0:08:53.760 --> 0:08:58.400 with a degree in psychology, which is quite fascinating. And 0:08:58.600 --> 0:09:01.960 UM served during the Vietnam War in the navy. Is 0:09:01.960 --> 0:09:05.840 that correct? Unfortunately, that is correct, and thank you for 0:09:05.880 --> 0:09:08.920 having me very oh my pleasure, sons long a long 0:09:08.960 --> 0:09:11.840 time ago, not not really, not not too long, just 0:09:11.920 --> 0:09:16.120 long enough to have developed some wisdom and experience. So 0:09:16.120 --> 0:09:19.240 so let's we're gonna cover a lot of different material, 0:09:19.240 --> 0:09:23.080 a lot of of um areas. But I really want 0:09:23.080 --> 0:09:27.880 to start out with your backgrounds in the early days, 0:09:27.920 --> 0:09:31.040 because you mentioned you've been doing this for forty years. 0:09:31.520 --> 0:09:34.600 You have some history and some perspective. But what I 0:09:34.720 --> 0:09:38.640 find fascinating is that you essentially began as a c 0:09:38.920 --> 0:09:42.640 f A at Pacific Life, at an insurance company. How 0:09:42.679 --> 0:09:46.600 did you go from being an analyst to saying I 0:09:46.679 --> 0:09:48.680 have an idea, let's set up a bond shop in 0:09:49.440 --> 0:09:53.079 v one or so. Well, it was serendipity. Perhaps I 0:09:53.920 --> 0:09:57.640 did private placements for Pacific Mutual life insurance companies. A 0:09:57.640 --> 0:10:00.760 matter of fact, I made two private placements to the 0:10:00.800 --> 0:10:04.480 eventual too richest people in the world, Sam Walton and 0:10:04.520 --> 0:10:08.720 Warren Buffett unbeknownst to me, and Pacific Mutual at the time. 0:10:08.760 --> 0:10:11.400 But that's how I got started making five and ten 0:10:11.440 --> 0:10:16.480 million dollar loans. At time, downtown Los Angeles, there was 0:10:16.520 --> 0:10:23.559 a budding development of bond trading. UM Traders actually put 0:10:23.600 --> 0:10:27.800 their bonds physical bonds in a box UH, the ones 0:10:27.880 --> 0:10:30.240 that they wanted to trade, and when they sold them, 0:10:30.240 --> 0:10:32.640 they would shift them up by career and then they 0:10:32.679 --> 0:10:36.480 get some new bonds in to the box US that 0:10:36.559 --> 0:10:38.520 they would be trading on a weekly basis. So it 0:10:38.600 --> 0:10:41.600 was very rudimentary and fundamental. And as a matter of fact, 0:10:41.679 --> 0:10:45.600 Pacific Mutual bonds were held in a vault down below 0:10:45.600 --> 0:10:48.240 in a basement, and one of my first assignments was 0:10:48.320 --> 0:10:51.880 to go down and clip coupons, to send those coupons 0:10:51.880 --> 0:10:54.960 and get the interest and UH and earned Pacific Mutuals 0:10:55.000 --> 0:10:59.640 some some premiums. So you started and as an analyst, 0:11:00.000 --> 0:11:04.079 literally clipping bond coupons. But how do you go from 0:11:04.120 --> 0:11:07.360 that too? Here's an idea. Let's set set up a 0:11:07.400 --> 0:11:11.400 standalone bond shot. Well, there was a setup, and at 0:11:11.679 --> 0:11:15.160 the setup was basically developing inflation. In the early seventies, 0:11:15.200 --> 0:11:19.960 after the the Vietnam War, um, you know, became apparent 0:11:20.040 --> 0:11:22.120 that bonds could go down in price as well as up. 0:11:22.160 --> 0:11:24.400 A matter of fact, I've been going down for ten 0:11:24.520 --> 0:11:27.680 or fifteen years. And uh, there came a time when 0:11:27.720 --> 0:11:30.360 someone thought, and there were some early people. I was 0:11:30.440 --> 0:11:33.520 one of them, that thought that perhaps some bonds down 0:11:33.520 --> 0:11:37.800 in those vaults should be sold in order to preserve principle. 0:11:37.960 --> 0:11:41.760 And so uh in Los Angeles, and I'm sure to 0:11:41.880 --> 0:11:45.000 some extent in New York and Chicago and Detroit, which 0:11:45.000 --> 0:11:48.040 were the hubs back then. You know, some early young 0:11:48.360 --> 0:11:53.600 individuals like myself began trading and selling bonds primarily in 0:11:53.679 --> 0:11:57.400 order to keep them from going from a hundred to 0:11:57.760 --> 0:12:00.319 sixty five and sixty and some of was a T 0:12:00.440 --> 0:12:02.840 and T buns in the seventies actually with the two 0:12:02.880 --> 0:12:05.760 and three eights coupons got as low as thirty three 0:12:05.800 --> 0:12:07.920 cents on the dollar. Oh my god. And what was 0:12:07.960 --> 0:12:10.400 the net So if anybody bought that, what sort of 0:12:11.200 --> 0:12:15.160 yield are they looking at? Practically nine percent at the time. Well, yes, 0:12:15.559 --> 0:12:18.360 you know, at the peak in one with the Volker 0:12:18.440 --> 0:12:22.280 peak um long treasuries for fourteen and a half percent, 0:12:22.360 --> 0:12:24.439 and so a T and T was probably trading at 0:12:24.480 --> 0:12:27.199 sixteen sixteen and a half percent. And um they had, 0:12:27.320 --> 0:12:29.599 believe it or not, some Gennu May mortgages with a 0:12:29.840 --> 0:12:34.079 twenty percent coupon. So really for two of his timing, 0:12:34.240 --> 0:12:38.160 when you you began right with the right call and 0:12:38.240 --> 0:12:40.280 at the right moment more or less, yeah, I think so. 0:12:40.320 --> 0:12:41.960 When I came out of u c l A. With 0:12:42.000 --> 0:12:44.640 my master's degree having done a thesis on a book 0:12:44.679 --> 0:12:47.680 called Beat the Market by Ed Thorpe, but I had 0:12:47.720 --> 0:12:52.400 studied black jack. You were sort of professional black jack player, 0:12:52.559 --> 0:12:54.360 well was for three or four months, not a big 0:12:54.440 --> 0:12:57.160 hitter like Ed Thorpe. But I proved that the system 0:12:57.240 --> 0:12:59.240 could work, and I went to u c l A. 0:12:59.320 --> 0:13:03.080 Did my master is on Beat the Market, which was 0:13:03.120 --> 0:13:07.360 a book on hedging, warrants and convertible bonds, and that's 0:13:07.360 --> 0:13:10.120 how I got my job at Pacific Mutual. And um, 0:13:10.200 --> 0:13:14.520 so there was just the beginnings, um of option types 0:13:14.559 --> 0:13:20.400 of theories and and arbitrage types of trades that you know, 0:13:20.480 --> 0:13:23.400 somebody like myself that had studied it usually had done 0:13:23.400 --> 0:13:26.520 a master's you could could begin to take advantage of 0:13:26.520 --> 0:13:29.079 a trading atmosphere in which you could compare a value 0:13:29.080 --> 0:13:32.480 of one bond versus another. Back in those days, mostly 0:13:32.640 --> 0:13:35.160 utility bonds, but there'd be a Detroit five and a 0:13:35.240 --> 0:13:38.120 Detroit six, and the Detroit six would be trading at 0:13:38.120 --> 0:13:41.520 a yield of the fifteen basis points less than the 0:13:41.600 --> 0:13:44.880 Detroit five. And uh so, some of the early trades 0:13:44.880 --> 0:13:47.480 were easy trades in which you could just clip ten 0:13:47.559 --> 0:13:50.040 or fifteen basis points. But you didn't have the same 0:13:50.080 --> 0:13:53.920 technology we had today. It was much harder to do 0:13:53.960 --> 0:13:55.760 the compare. It's not like if you just punched something 0:13:55.760 --> 0:13:58.760 into the terminal and say, all right, here's the expected 0:13:58.800 --> 0:14:03.800 returns for these similarly graded bonds. It was really interesting 0:14:03.840 --> 0:14:07.080 and really different. Um. The first time I saw a 0:14:07.120 --> 0:14:10.800 tolerate machine was in nineteen seventy five. I came back 0:14:10.840 --> 0:14:13.840 to New York to do a speech and uh at 0:14:13.840 --> 0:14:16.920 the Hilton they had this fabulous machine that showed ongoing 0:14:16.960 --> 0:14:19.200 prices for treasuries. I said, we've got to get one 0:14:19.240 --> 0:14:23.160 of those, and barely could convince my boss at the 0:14:23.200 --> 0:14:26.240 time in terms of private placements, to to do one. 0:14:26.280 --> 0:14:30.760 But yeah, you know, very few screens and very little technology. 0:14:31.080 --> 0:14:35.160 Everything was done by phone, which was interesting because if 0:14:35.240 --> 0:14:38.160 if although don't I don't have a great phone voice, 0:14:38.200 --> 0:14:40.880 I have a great trader demeanor on the phone, and 0:14:40.960 --> 0:14:44.720 I can get the best price frequently, or could in 0:14:44.760 --> 0:14:47.520 my early days. And so the ability to deal by 0:14:48.320 --> 0:14:51.560 phone back and forth was much different, I think than 0:14:51.600 --> 0:14:54.520 it is today with electronic trading. So you had to 0:14:54.600 --> 0:14:58.760 sell your bosses on the idea of a toll rate machine. 0:14:59.160 --> 0:15:02.120 How did you sell them on the idea of let's 0:15:02.160 --> 0:15:05.880 spin out a fixed income division and this way we 0:15:05.920 --> 0:15:08.480 can attract other clients and other capital. And hey, you 0:15:08.520 --> 0:15:10.240 own most of it anyway, so what do you care. 0:15:10.600 --> 0:15:12.960 There was a chairman of the board, Walter Girkin. He's 0:15:12.960 --> 0:15:17.320 still alive. He's five miles away from Newport Beach up 0:15:17.320 --> 0:15:22.120 in the hills. UH. I revere him because of his 0:15:23.880 --> 0:15:28.400 UH Walter Walter came from Northwestern Mutual, came out to 0:15:29.400 --> 0:15:33.240 Pacific Mutual about the same time I came to Pacific Mutual. 0:15:33.280 --> 0:15:37.080 But he had this attitude, this aggressive attitude that um 0:15:37.560 --> 0:15:40.160 was expressed I think in our building in Newport Beach. 0:15:40.240 --> 0:15:43.160 They moved a year later from downtown l a to 0:15:43.600 --> 0:15:47.120 Newport Beach with his fabulous new building and expressed an 0:15:47.120 --> 0:15:51.840 attitude towards the future. Um we and when I say 0:15:51.880 --> 0:15:55.720 we've Jim Muzzy who is the marketing person, and Bill Publick, 0:15:55.800 --> 0:16:00.280 who is the the business person. We three the uh 0:16:00.520 --> 0:16:03.800 we three kings of um not orient Are but the 0:16:03.800 --> 0:16:08.160 Newport Beach got together and said, hey, um, yeah, that 0:16:08.320 --> 0:16:10.960 we've got the potential here for a business. And we 0:16:11.080 --> 0:16:15.960 walked into the chairman's office scared as uh baby ducks 0:16:16.480 --> 0:16:20.440 and um with with leg shaking, said we'd like to 0:16:20.480 --> 0:16:23.760 start a company called Pacific Investment Management, and we'd like 0:16:23.840 --> 0:16:27.560 a piece of the action. Um. He didn't kick us out. 0:16:28.200 --> 0:16:30.880 He thought about it. Uh he said, it sounds like 0:16:30.960 --> 0:16:34.200 a good idea, even though within twelve months we were 0:16:34.200 --> 0:16:37.320 making more than he was, and and on and on 0:16:37.400 --> 0:16:40.080 and on it it went. We we started with our 0:16:40.080 --> 0:16:43.600 first client, the Southern California Edison, which to be fair, 0:16:43.720 --> 0:16:49.840 was a local board related um win so to speak. 0:16:50.560 --> 0:16:53.320 We uh got a second client, A T and T, 0:16:53.560 --> 0:16:56.680 which was the the beginning of it all because at 0:16:56.720 --> 0:16:58.680 the time H T n T was the biggest of 0:16:58.720 --> 0:17:03.120 the big and they chose us. The young kids we 0:17:03.160 --> 0:17:06.720 were still in our twenties as the their first West 0:17:06.760 --> 0:17:12.000 Coast manager. At the time, Bury there was this legislation 0:17:12.040 --> 0:17:17.720 called Arissa in which pension funds were being nudged, forced, 0:17:18.080 --> 0:17:22.800 you know, basically to open u their choices for managers. 0:17:22.840 --> 0:17:26.359 Typically they've been Chicago Banks, Detroit Banks, New York Banks, 0:17:26.400 --> 0:17:29.320 but now they had to choose amongst the different set 0:17:29.440 --> 0:17:35.320 and so PIMCO became their first West Coast independent investment manager. 0:17:35.359 --> 0:17:38.000 And boy, once you get a ten T, your your 0:17:38.359 --> 0:17:42.600 on and up. So you start out, you garner a 0:17:42.640 --> 0:17:45.760 few clients. Did you have any clue when you first 0:17:45.840 --> 0:17:50.160 launched the shop what the future held or did you think, hey, 0:17:50.200 --> 0:17:52.399 we can make a nice living doing this. No, we 0:17:52.440 --> 0:17:56.960 thought we could. I I thought unbelievably And I told 0:17:57.080 --> 0:18:00.480 my parents, Uh, when they came down the shin Via, 0:18:00.720 --> 0:18:04.760 which about twenty miles south of the Newport Beach. First 0:18:04.800 --> 0:18:09.040 house was a thirty one tho dollar house. UM, so 0:18:09.119 --> 0:18:13.800 we weren't making much um. But I told my parents 0:18:13.880 --> 0:18:16.600 about the bond business. They didn't know what a bond was, 0:18:16.680 --> 0:18:18.439 but I told them that I was going to be 0:18:18.520 --> 0:18:23.160 the best bond manager in the world. Um. At age 0:18:23.160 --> 0:18:27.119 twenty something, at age twenty eight. They looked at me quizzically. 0:18:27.480 --> 0:18:31.320 UM weren't quite sure whether I had gone up to 0:18:31.400 --> 0:18:34.320 deep end, but in any case, that was my goal. 0:18:34.480 --> 0:18:38.560 And UM, I think by that time my mom passed 0:18:38.600 --> 0:18:42.560 in two thousand and two, that I was UM pretty 0:18:42.600 --> 0:18:48.000 well in that direction. That that's quite fascinating. Um. Initially, 0:18:48.160 --> 0:18:51.560 you guys began with twelve million dollars. Is that urban 0:18:51.680 --> 0:18:54.960 legend or is that accurate now that it is twelve million? 0:18:55.080 --> 0:18:58.080 So the early days is the three of you, when 0:18:58.119 --> 0:19:02.000 did you start inning employee ease at a rapid clip? 0:19:02.200 --> 0:19:04.800 I mean it was it was it a small three 0:19:04.840 --> 0:19:06.840 man shop for a while? Or how soon will you 0:19:07.400 --> 0:19:11.480 adding analyst, traders, bodies, etcetera. It took three or four years, 0:19:11.560 --> 0:19:14.400 and we were stelling in a little wing of the 0:19:14.520 --> 0:19:19.120 Pacific Mutual Building. Yeah, the business expanded from ten fifteen 0:19:19.359 --> 0:19:24.240 twenty people. We developed the marketing staff, we developed obviously 0:19:24.320 --> 0:19:28.720 accounting and internal staffs, and we developed importantly what we 0:19:28.840 --> 0:19:32.879 call account management, where the account management would connect with 0:19:32.960 --> 0:19:37.080 clients and where the portfolio managers Gross and uh now 0:19:37.320 --> 0:19:40.720 Christal and us Um would be able to stay at 0:19:40.760 --> 0:19:43.679 home and manage money as opposed to travel all around 0:19:43.680 --> 0:19:47.080 and talk to clients. So in the early eighties, we 0:19:47.080 --> 0:19:51.600 were a company of forty fifty people. We were close 0:19:51.600 --> 0:19:56.639 to a billion dollars. Are are the theoretical? Boss Thompson, 0:19:57.160 --> 0:20:00.080 who was head of the investment division and this have 0:20:00.160 --> 0:20:03.920 a mutual, promised the company a trip to Hawaii if 0:20:03.920 --> 0:20:06.800 we could ever reach a billion dollars in assets, And 0:20:07.240 --> 0:20:11.240 when we finally did, he found a way to uh, 0:20:11.480 --> 0:20:13.840 to put off or to reneg on the promise. We 0:20:14.119 --> 0:20:18.240 never got to Hawaii. On Twitter, I did hashtag ask 0:20:18.320 --> 0:20:22.760 Bill Gross, Hey, bill y bonds instead of equities. I 0:20:22.800 --> 0:20:25.840 thought that was kind of an interesting I don't think 0:20:25.880 --> 0:20:29.360 I've ever heard you anyone ask you that question. For me? Yes, 0:20:30.440 --> 0:20:33.280 because I couldn't get a job in the stock area. 0:20:33.520 --> 0:20:35.399 Really yeah, No, I came out of U c. L A. 0:20:35.480 --> 0:20:37.920 I thought it was pretty smart, but nobody else did. 0:20:38.000 --> 0:20:41.800 And Pacific Life gave me a job, like I said, 0:20:41.800 --> 0:20:46.040 clipping those coupons and doing private placements for prospective people 0:20:46.080 --> 0:20:50.639 like Walton and Buffett and uh yeah they by the 0:20:50.680 --> 0:20:53.200 way of those the sort of names they give to hey, 0:20:53.600 --> 0:20:55.760 those guys, or nobody give it to the kid. Is 0:20:55.800 --> 0:20:58.320 that how that works? You know? It's it's sort of 0:20:58.359 --> 0:21:01.040 like at the you know, the meat counter at the 0:21:01.040 --> 0:21:03.800 grocery store. Take a number, and just like uh, just 0:21:03.840 --> 0:21:06.200 like it popped up. And and Sam Walton, by the way, 0:21:06.359 --> 0:21:08.879 was not like I said, he had two stores. I 0:21:08.920 --> 0:21:11.960 traveled to Bentonville. He picked me up in his pickup 0:21:11.960 --> 0:21:14.440 truck with his two sons and his dog and took 0:21:14.480 --> 0:21:18.360 me round to the stores. And that was Walmart at 0:21:18.359 --> 0:21:22.480 the time, and two stores, two stores. And when when 0:21:22.480 --> 0:21:24.600 Buffett came in, he came in with Charlie Munger, and 0:21:24.640 --> 0:21:27.879 they were much younger people, and they had this dilapidated 0:21:27.920 --> 0:21:31.639 company called Berkshire Hathaway it uh it consisted to seize 0:21:31.680 --> 0:21:35.439 candy blue chips stamps in this industrial complex in the 0:21:35.480 --> 0:21:38.920 east that they were gonna, um, you know, close down anyway. 0:21:39.000 --> 0:21:42.520 But they wanted five million dollars. And I can't recall 0:21:42.600 --> 0:21:45.160 why I thought it was a good investment, but obviously 0:21:45.760 --> 0:21:51.320 Buffett and Munger impressed me, and they got they got 0:21:51.320 --> 0:21:56.080 ten million bucks. Not not that Pacific Investment or Pacific 0:21:56.160 --> 0:22:01.240 Life was the beginning for them, because the it it 0:22:01.359 --> 0:22:03.000 helped them on their way. But if you're still in 0:22:03.040 --> 0:22:06.880 touch with either of them, yeah, Warren. I talk a lot, 0:22:06.920 --> 0:22:11.240 and did talk considerably during the crisis, the Layman crisis 0:22:11.280 --> 0:22:13.080 in two thousand and eight and two thousand and nine, 0:22:13.080 --> 0:22:16.160 putting together plans and so on. Of course, Sam Walton's dead, 0:22:16.200 --> 0:22:20.840 but um, yeah, for a while there it was interesting. 0:22:21.119 --> 0:22:24.640 Let's talk a little bit about what else helped form 0:22:24.760 --> 0:22:27.720 your views on investing. Do you did you have any 0:22:27.800 --> 0:22:31.639 early mentors? You know, a business mentor, Walter Gerkin, certainly 0:22:31.640 --> 0:22:35.080 because he at the foresight to give us a start. 0:22:35.119 --> 0:22:39.560 But from the standpoint of investing, um, certainly at Thorpe. 0:22:39.840 --> 0:22:42.720 And it sounds strange why a book called Beat the 0:22:42.760 --> 0:22:46.400 Dealer could serve as that initial example, but but it did. 0:22:46.520 --> 0:22:51.159 It taught me the principle of Gambler's ruined, basically the 0:22:51.200 --> 0:22:53.359 fact that even if the odds are in your favor, 0:22:53.480 --> 0:22:56.080 and you can do that in blackjack by counting the cards, 0:22:56.119 --> 0:22:58.960 and at some point in time you know, instead of 0:22:59.000 --> 0:23:06.280 the house being favored, the client can be favored seven, etcetera, etcetera. 0:23:06.320 --> 0:23:09.120 But it taught me at the time that even when 0:23:09.720 --> 0:23:11.920 odds and your favorite, you can only be a small 0:23:12.000 --> 0:23:14.640 portion of your principle because you have streaks of bad 0:23:14.720 --> 0:23:18.040 luck and uh, and you can experience what they call 0:23:18.080 --> 0:23:20.840 gamblers ruined. So it's the same thing and investing. You know, 0:23:20.920 --> 0:23:24.639 even with a very significant confident bet, you don't want 0:23:24.680 --> 0:23:26.200 to put all your chips on the table. You want 0:23:26.200 --> 0:23:29.359 to hold it back. And the theory of gamblers around 0:23:29.520 --> 0:23:32.600 was that you needed at least fifty times your your 0:23:32.680 --> 0:23:35.760 maximum bet at any time, no matter what your confidence level. 0:23:35.800 --> 0:23:38.760 And so that was a two you know, a type 0:23:38.800 --> 0:23:41.719 of maximum bet. It's held pretty well in terms of 0:23:41.720 --> 0:23:44.959 corporate credits and sovereign credits. And it gave me a 0:23:44.960 --> 0:23:48.480 sense of risk taking and when to take risk, when 0:23:48.480 --> 0:23:50.399 not to take risk, and how much to take Uh. 0:23:50.680 --> 0:23:56.680 It was perfect for uh marko Witz uh diversified genre 0:23:56.920 --> 0:24:00.040 of portfolio management that was budding in the seven and 0:24:00.080 --> 0:24:03.720