{"id":23941,"date":"2011-09-19T09:30:02","date_gmt":"2011-09-19T13:30:02","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2011\/09\/19\/even-the-greats-make-mistakes-part-ii\/"},"modified":"2011-09-19T09:30:02","modified_gmt":"2011-09-19T13:30:02","slug":"even-the-greats-make-mistakes-part-ii","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/09\/19\/even-the-greats-make-mistakes-part-ii\/","title":{"rendered":"Even the Greats Make Mistakes, Part II"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

In an earlier article<\/a>, I commented that even the all-time greats make mistakes.\u00a0 Michael Jordan missed that occasional dunk\u2014and world-class investors like George Soros and John Paulson botch the occasional trade.<\/p>\n

What can I say, it happens.\u00a0 Investing is not an exact science.\u00a0 It\u2019s an exercise in making educated guesses with incomplete information.\u00a0 And no matter how well-researched you are, you will not always guess correctly.<\/p>\n

Good investors learn from their mistakes; this ability to grow is what defines <\/em>them as good investors.\u00a0 Luckily for us, we can also learn from the mistakes of the all-time greats.<\/p>\n

Let\u2019s consider the case of the Bond King himself, Bill Gross, who as manager of the Pimco Total Return Fund (<\/strong>PTTRX)<\/strong> is the largest money manager in the world.<\/p>\n

When it comes to investing, being big is more of a curse than a blessing as it becomes almost impossible to quickly enter and exit trades without moving the market.\u00a0 Yet this didn\u2019t stop Gross from being ranked in the top 1% of all bond funds in his category over the past 15 years.\u00a0 It\u2019s good to be king.<\/p>\n

His Majesty, however, swung for the fences and missed when he dumped his U.S. Treasury holdings earlier this year and even took a small short position against them.\u00a0 Gross had bet that yields would rise when the Federal Reserve ended its quantitative easing program.\u00a0\u00a0 Instead, the 10-year Treasury yield fell from over 3.5% to less than 2.0%, and Gross\u2019s fund has underperformed 85% of its competitors this year.<\/p>\n

PIMCO Total Return Fund (PTTRX)<\/strong>\n<\/p>\n
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<\/center>Gross\u2019s mistake?\u00a0 He oversimplified.<\/p>\n

He was partially right. When the Fed\u2019s QE2 program ended, it did indeed drain liquidity out of the financial system.\u00a0 But it was not<\/em> Treasury securities\u2014the primary objects of the Fed\u2019s buying\u2014that suffered.\u00a0 It was instead riskier assets like stocks and commodities that fell as investors ran to Treasuries as a safe haven.\u00a0 The same happened when Standard & Poor\u2019s downgraded the United States\u2019 credit rating from AAA to AA+.\u00a0 In the aftermath, panicked investors sold everything except <\/em>for the freshly-downgraded U.S. debt.<\/p>\n

Gross wasted no time feeling sorry for himself.\u00a0 In a recent Financial Times<\/em> interview, he joked that after taking a loss like this, \u201cyou go home at night and cry in your beer. It\u2019s not fun, but who said this business should be fun. We\u2019re too well paid to hang our heads and say boo hoo.\u201d<\/p>\n

Well said, Mr. Gross.<\/p>\n

So, what can the rest of us learn from Gross\u2019s Treasury short gone bad?\u00a0 There are two points I would take away:<\/p>\n