Meeting the “Bond King” Bill Gross

Meeting the “Bond King” Bill Gross  by David Merkel, CFA of The Aleph Blog

It was winter in early 1995, and I was wondering if I still had a business selling Guaranteed Investment Contracts [GICs].  Confederation Life had gone insolvent the August prior, and I noticed that fewer and fewer stable value funds wanted to purchase my GICs, because our firm was small, and as such, did not get a good credit rating, despite excellent credit metrics.  The lack of a good rating kept buyers away.

Still, I felt I needed to try my best for one more year or so, despite my feelings that the business was dying soon.  With that attitude, I headed off in January to sunny Southern California, to attend GICs ’95, something my opposite number at American International Group Inc (NYSE:AIG) referred to as a Schmoozathon.

Schmoozathon?  Well, you took your opportunities to ingratiate yourself with current and potential clients, across four days and three nights of meetings, with a variety of parties going on.  I was not the best salesman, so I just tried to play it as straight as I could.

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In the middle of the whole affair was a special lunch where Bill Gross was to be the Keynote Speaker.  Because I was talking with a client, I got to the lunch a little late, and ended up at a table near the back of the room.

Things were running a little behind, but Bill Gross got up and gave a talk that borrowed heavily from a recent Pimco Investment Outlook that he had written, comparing the current market opportunities to Butler Creek (see paragraph 6), a creek that he grew up near as a kid, which gently meandered, went kinda straight, kinda not, but didn’t vary all that much when you looked at it as a whole, rather than from a nearby point on the ground.

The point? Sell volatility.  Buy mortgage bonds.  Take convexity risk.  Clip yield.  Take a few chances, the environment should be gentle, and you can’t go too wrong.

After the horrible investment environment for bonds of 1994, this was a notable shift.  So he came to the end of his talk, and it was time for Q&A.  Suddenly, the moderator stormed up to the front of the room and said, “I’m really sorry, but we’re out of time.  We’ve got a panel waiting in the main meeting room to talk about the Confederation insolvency.  Please head over there now.”

Everyone got up, and dutifully headed over to the Confederation panel.  I was disappointed that I wouldn’t get a chance to ask Bill Gross a question, so as I started to leave, I looked to the front of the room, and I saw Bill Gross standing there alone.  It struck me. “Wait.  What don’t I know about Confederation? The best bond manager in the US is standing up front.”

So I walked up to the front, introduced myself, told him that I was an investment actuary, and asked if I could talk with him about mortgage bonds.  He told me that he could until his driver showed up.  As a result, for the next 15 minutes, I had Bill Gross to myself, asking him how they analyzed the risks and returns of complex mortgage securities.  His driver then showed up; I thanked him, and he left.

Feeling pretty good, I wandered over to the Confederation panel.  As I listened, I realized that I hadn’t missed anything significant.  Then I realized that the rest of the audience had missed a significant opportunity.  Oh, well.

As it turned out, I made many efforts in 1995 to resuscitate my GIC business.  It survived for one more year, and collapsed in 1996, with little help from senior management.  It was for the best, anyway.  It was a low margin, capital intensive business, and closing it enabled me to focus on bigger things that improved corporate profitability.  I never went to another Schmoozathon as a result, but the last one had a highlight that I would not forget: meeting Bill Gross.

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.