Fri 20 Nov 2009
Gross: Anything but .01%
Posted by Prieur du Plessis under Investment, Markets, Money
Bill Gross, co-founder and co-CIO of PIMCO, is to my mind one of the shrewdest money men around. His monthly newsletter, this month entitled “Anything but .01%”, therefore always makes for thought-provoking reading.
The following are a few excerpts from the report:
“Almost all money market accounts - totaling over $4 trillion dollars, yield close to nothing, so close to nothing that I mistakenly did a double take when reviewing my monthly portfolio statement. “Yield on cash”, read the buried line on page 15 of the report, “.01%”.
“Well now, I say to myself, this is very interesting from a number of different angles. If I was hoping to double my money, it would take approximately 6,932 years to get there at that rate! Secondly, being a savvy professional investor and all, I knew that money market funds actually earned 20 basis points or so on my money, but in this case were allocating a paltry one basis point to me.
“Let me tell you what I’m doing. I figure, why not just buy utilities if that’s what the future American capitalistic model is likely to resemble. Pricewise, they’re only halfway between their 2007 peaks and 2008 lows - 25% off the top, 25% from the bottom. Their growth in earnings should mimic the U.S. economy as they always have, and most importantly they yield 5-6% not .01%! In a low growth environment, it seems to me that a company’s stock should yield more than its less risky debt, and many utilities provide just that opportunity. Utilities and even quasi-utility telecommunication companies now yield between 5 and 6%, whereas their 10- and 30-year bond yield less and at a higher tax rate to you the investor.
“Look at your monthly statement, zero in on that .01% yield and say to yourself, “I’m as mad as hell, and I’m just not going to take this anymore!” You can’t buy the Burlington Northern - Warren Buffett has scooped that up - and most other choices offer tempting returns, but potential bullets as well. Buy some utilities. It may not be as much fun as running a railroad, but at least you’ll know who to call if the lights go out.”
Click here for the full article.
Source: Bill Gross, PIMCO - Investment Outlook, December 2009.
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November 20th, 2009 at 8:58 pm
I am a fan of Gross (incidentally went to high school with his son) but wasn’t aware he had a newsletter. Thanks for the tip! This excerpt is brilliant - as sometimes the most seemingly obvious things are.
November 20th, 2009 at 9:58 pm
This is without a doubt the most reckless comment I’ve ever heard come out of the mouth of a supposed intelligent investor. It matches his bullish comments on GM debt from a few years back in its stupidity.
Buying something for its yield is probably the worst reason to make an investment. Buying a risk asset for the risk-free and liquid part of your portfolio would actually put a broker in jail with no defense if they had suggested it. It’s called the “Prudent Man rule”, Bill. Quite a few brokers who put their clients liquid assets in so called “money market preferreds” have found out what it’s like to be in the defendants box in a courtroom. Money market funds actually have a guarantee not to “break the buck”, lose any principal. Are you saying, Bill that Utilitiesa ren’t a can’t lose proposition?
Rates are low, and that’s a fact. Before fixed income and utilities went in to a multi-deacade bear market, they yielded about what they do today. Utilities were at 15% yields when I was young in the 70’s before this fixed income bear is over, they’ll be there again. Really dumb advice, Bill. want a good investment, Bill? How about the asset you scorned in Barron’s a few years and many hundred dollars cheaper- Gold. It yields nothing, but will probably double your money in about as much time as it takes for your comment to make you look like an idiot.