Back in April, Bill Gross called shorting long-term German Bunds the “short of a lifetime.” Gross was basically saying the ~0.95% yield on the 10-year German Treasury was at an unsustainable low, and that an inevitable yield reversal was the biggest “no-brainer” he saw. And he was right! Just shortly after his call yields did rise, albeit not just for German Bunds.
Yet somehow, the “Bond King” who got it right, still wasn’t able to capitalize on this trade of a lifetime. According to Janus Capital, Gross’s unconstrained bond fund actually lost 2.5%. The disparity was apparently due to poor implementation. Instead of placing an outright directional wager, Gross bet that rates would stay in a certain range. This was done with a combination of derivative contracts, a common practice among portfolio managers who want to participate in price movement while also hedging against adverse moves.
The important takeaway here is that a good idea, even the biggest-no-brainer type, is worthless if it can’t be executed at a profit. Investors often overlook this simple fact. Infatuated with an idea, they rush into a position even if it doesn’t really fit the idea, to begin with. Whether that was the case with Gross or not, it happens to the best of us, more often than anyone cares to admit.
Victor K. Lai, CFA
This blog is for informational purposes only. Nothing on this blog represents advice. Investing is inherently risky and involves the potential for loss. Victor Lai does not own any of the securities referenced in this posting. Clients of Bellwether Capital Management LLC may own shares of the securities referenced in this posting.