We’re currently in one of the greatest rallies the U.S. economy has seen in years. Long positions in the S&P 500 hit a record high in March. As long as you “go with the flow,” you’ll get it right most of the time. Other investors hang on the words of “really great” investors like Peter Lynch or Warren Buffett because they take the time to really dig in and study the markets.
But is there any such thing as a truly great investor? PIMCO’s Bill Gross believes there’s more to being a great investor than just getting things right most of the time. In his view, it’s all about epochs, and he’s not sure any investor qualifies as truly great right now.
He starts his blog with a question: “Am I a great investor?” And his answer is: “No, not yet.”
According to Bill Gross, all of the currently well-known investors have had their opportunities “during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience.”
“Perhaps, however, it was the epoch that made the man as opposed to the man that made the epoch,” he wrote.
There are plenty of signs that times are changing. In the current epoch, investors are just starting to have a difficult time finding value in the markets. There are now fewer and fewer stocks that are undervalued. Former Regan budget director David Stockman also warns that we’re in a bubble that will burst soon. So when will the next epoch start and which investors will prove their greatest when it does?
Bill Gross makes a number of important points in his post. In fact, it’s pretty honest, especially in an industry where a third of hedge fund workers admit to witnessing first-hand other workers breaking regulatory laws. He even seems to question the integrity of the business in his post.
He wrote, “How many coins do you have to flip before a string of heads begins to suggest that it must be a two-headed coin, loaded with some philosophical / commonsensical bias that places the long-term odds clearly in a firm’s or an individual’s favor?”
He also says that he’s not sure if any well-known investor, including himself, the Oracle of Omaha Warren Buffet, Peter Lynch, Bill Miller, or anyone else, qualifies as truly great. The reason for his view is simple. The investment world is very cyclical. Markets change, and a string of good investments isn’t likely to continue without a bad investment being sprinkled in somewhere—even for well-known investors whose advice everyone seeks.
But what he calls “a true test of greatness” is being able to adapt to a new epoch. In his view, an epoch could last 40 to 50 years or even longer in some cases. He said in order for any investor to be considered truly great, he must be able to pull off several good investments in two or more epochs. He used Bill Miller as an example.
“Bill Miller may in fact be a great investor,” He wrote. “But he’ll need 5 or 6 more straight ‘heads’ in a future epoch to confirm it.”
Bill Gross seems to believe that the current epoch started in the 1970s, so if it lasts 40 or 50 years, then we could be due to start a new one soon. Maybe then we will see what he’s talking about when it comes to discovering truly great investors.