A Billionaire’s Story

Bill Gross

Wealth Origin: Investments

Birthplace: Middletown, Ohio

Education: Bachelor of Arts/Science, Duke University; Master of Business Administration, Anderson School of Management

Military Service: United States Navy

A “Seminal Moment”

U.S. Navy Ensign Bill Gross was serving the dreaded “midwatch” shift aboard the USS Diachenko when at 2:00 am, he noticed a gargantuan freighter on a direct collision course with his 306-foot amphibious transport ship. He points out that “tankers set their controls on automatic pilot during the midnight hours, so the approaching ship wasn’t about to change course.”

2,000 miles west of Honolulu, Hawaii, he and about 150 other men were on their way back to San Diego from Vietnam. At the time of the sighting, Gross was the only Officer awake; he quickly called up to the Captain.

Recalling the moment his Captain emerged, he says, “A captain in full dress uniform is an impressive sight – four stripes on the epaulets, heavily starched white shirt. ‘Yes Sir!’ is the almost automatic response. But an unshaven, 60-year-old, pot-bellied captain in his underwear? Now there’s a disconcerting sight. ‘I got the deck,’ he said, which meant he was assuming control as he plopped into the captain’s chair with a toot and an expulsion of natural gas worthy of the prior evening’s pork and beans.”

The ships continued to creep closer to each other and when the vessels were within just a thousand yards of colliding Gross screamed up to the deck, “Captain – constant bearing, decreasing range!”

Gross remembers, “ah, but El Capitan wasn’t hearing me – he was asleep at the helm, and half-naked no less: in command, in his underwear, and off somewhere in la-la land. Twenty seconds after my warning, the tanker came within 20 yards of cutting us and 150 young sailors in half.”

He continues, “I, in my fascination with a captain in his jockey shorts, had assumed he was awake and knew what he was doing. He in his Fruit of the Looms and 2:00 am exhaustion was incapacitated, temporarily incompetent, and anything but a Naval captain.”

As the freighter slid by their destroyer, the Captain awoke, yelling, “What in the hell was that?!” To which Gross meekly replied, “A tanker, sir.”

Early Life

Before he was dodging oil tankers in the vast Pacific ocean, Bill Gross was born in Middletown, Ohio on April 13th, 1944. His father, Sewell “Dutch” Gross, worked as a sales executive for AK Steel Holding – an American steel producer which sold primarily to the automotive industry. Bill’s mother, Shirley, looked after their home.

Childhood

The Gross family moved to San Francisco in 1954, Bill was 10 years old.

Using the story as an anecdote for an investment outlook, he reflects on a young man he knew in high school:

Long ago and far away in the adolescent cauldron known as Los Altos High School, I attended a senior U.S. history class with a man-child named Delos Roman. He was appropriately christened it seems, because his body resembled that of Zeus, the God of Thunder, and at 6’4″/230 pounds, he rumbled down the football sidelines like a Mack truck on a downhill mountain road. If you were a defensive corner, you didn’t want any part of him, nor did you after the 3:00PM Springtime bell, when “fight” became the rallying cry between Delos and any would-be challenger in the school parking lot. Fate, it seems, had predestined him to be a tough guy. His size didn’t necessarily mean he lacked intellect, but it emphasized brawn over brains and he went with his strong suit like many of us did.

Homecoming queens, high scoring SAT nerds, chess club leaders, debate champions, even those with less attractive physical and IQ characteristics seemed primarily guided by how they came out of the oven, not by who they might become – if uninfluenced by their genetic makeups. That was not to discount free will (I now understand), but Nietzsche was never required reading back then and four years was too short a time to really judge the measure of a boy or a girl in blossom. “Mirror, mirror on the wall” seemed a better lead indicator than Nietzsche’s “Superman.”

I was reminded of Delos when the phone rang at my office several months ago and my assistant said there was a Mr. Roman on the line. He had had a hard life, he said, and wanted to know how to invest the $50,000 he had received from his mother’s will. He spoke softly and was almost inaudible, “I’ve been in and out of trouble all my life”, he murmured, “beginning in junior high when I was tough enough to beat up high school seniors.” His story had a ring of the famous Marlon Brando soliloquy in On the Waterfront. “I could’ve been somebody”, he said in so many words, “but I was too big for my own good.”

Well, Mr. Roman was just one example in hundreds of the Los Altos class of ’62, many molded by inbred physical and intellectual characteristics that had guided their destinies. But perhaps, I wondered if some of those with a plain vanilla wrapper or an average IQ might in some ways have been better off than the 800 SAT genius or the prettiest girl in the class. Maybe that left them free to determine their own direction, to develop a multitude of skills that then led to a more successful outcome than that of Delos Roman.

Bob Dylan once wrote that “I got nothin’ Ma – to live up to.” He did of course – strange little guy with the raspy voice. But Dylan’s and Roman’s lives might just be a lesson for discouraged parents to stay optimistic. If your child isn’t at the head of the class or captain of the volleyball team, a free-will outcome, as opposed to predestination, maybe just around their corner.

Some readers might think that there are some autobiographical traces in the above, and I suppose there are. I was “different.”

College

After graduating from high school, Gross attended Duke University, where he earned his bachelor’s degree in psychology as an Angier Duke Scholar in 1966.

Freshman Year

His freshmen year of college consisted of getting cut from the Duke basketball team on the first day of tryouts and failing miserably in the backseat of cars with women.

He elaborates, “Being somewhat of a high school star, I decided to try out for the taxi squad on the freshman team. Duke that year was well stacked with three future All Americans and NBA players but they needed some competition in practice and I was a prospective servant for the greater cause – not Duke – but my chance to show off and eventually get a girl into the backseat of a car for the first time in my life. Neither came to pass as I was cut during the first tryout session and cut frequently as well on second and third dates in parking lots behind the sorority houses.”

Gross’s investment outlooks always seemed to begin with a random story from his colorful repertoire of life experiences. One such document describes less than pleasant service he received from a waitress when he was 21 years old.

Bill tells us, “The Gross family legend is rather full of Paul Bunyan tall tales passed down over the years but none perhaps more self- revealing than “The Day When I Gave the Waitress a Negative Tip.” Admittedly I was young and full of testosterone but the service was terribly sloooww and I was in a big hurrrryyy! Finally presented with a $2.00 bill, I took two bucks and wrote the following on a nearby napkin: “Thanks for the sh…ty service, negative tip – you owe me 25 cents.” I didn’t stick around to see the reaction, but I’m sure it was a unique experience for the young lady. I was, of course, like any 21-year-old, in the business of establishing a repertoire of “unique” experiences and this was but one notch on my Paul Bunyan Axe.”

Psychology and Investing

Andrew Sorkin of the New York Times asked Gross in an interview in 2015, “As an undergraduate at Duke, you majored in psychology. Do you use what you learned there when you invest?”

Gross responded, “You don’t need a degree in psychology to understand human nature. There was an old dude, Jesse Livermore, who wrote a great book that said the most important thing in investing was to know yourself — your weaknesses, your flaws and your strengths.”

Phi Kappa Psi

Degree in hand, 22-year-old Gross opted to join the Navy amidst an intense draft for the Vietnam War. He preferred to have a say in his military destiny, rather than just receiving a letter in the mail foretelling his future.

The Stars and Stripes website notes that he did feel a sense of obligation to join the conflict in order to “honor the memory of a fraternity brother who joined the Marines and was killed in Vietnam six months after graduating from Duke.”

During his senior year, another of his fraternity brothers decided to become a Navy pilot. That sounded good to Bill, so he followed suit despite never having any desire to fly a plane in his life.

Gross had five months to kill before reporting to the Navy so, with $200 in his pocket, he hopped on a freight train leaving North Carolina for Las Vegas, Nevada.

Las Vegas Gambling Career

Legend has it, after getting into a horrific car accident while at Duke, Gross spent his time in the hospital reading Beat the Dealer by Edward Thorpe. The book on counting cards inspired him to set out for sin city!

He played seven days a week, 16 hours per day, and after a few months managed to turn his hundreds into $10,000; not bad! However, he confesses that given the amount of time he put into the endeavor it averaged out to a wage of $5/hour.

In his own words, “It was hard work. I never went to the movies, I never had a friend, I didn’t have a car and there were no hookers or any of that shit…It was just 16 hours a day of blackjack.”

Okay, maybe he didn’t make a fortune in Vegas but Gross does point out the “sense of risk” the whole experience gave him. In addition, it acted as an early incubator for his future investment strategies. Gross says, “Although the odds were many times in my favour, if you took too much leverage and had too much debt then the house of cards will come tumbling down.”

United States Navy

October of 1966 came around and Gross was in Pensacola, Fla., beginning a 12-week officer candidate school. He compared this period of time to hell. One Marine drill sergeant even told him he’d never make it through flight school. That hurt Gross, he tried to explain he was more conceptual than detail-oriented.

The drill instructor assured him, “a conceptual pilot is a dead pilot.”

Ultimately, in April of 1967, Gross dropped out of Naval Flight School at Saufley Field in Pensacola. He says, “It was very humbling. I’d never been so scared in my life,” adding, “I remember going before the admiral, and he said ‘Son, we’ve spent $500,000 on you already. If you think you’re going to a plush assignment somewhere in the Mediterranean you’ve got another thing coming. I’m sending you to Vietnam on an amphibious ship and making you ultimately the chief engineer.’ I saluted and said, ‘Yes sir.'”

Boot Camp

In an investment outlook to PIMCO, Gross describes boot camp in the following story:

When I was twenty-two years old, I game face-to-face with a Marine drill sergeant who turned out to be the meanest old dog you’d never want to meet in your life. Sergeant Cruz was his name, but “Sir” was the only title he recognized-and that at a minimum of 110 decibels from a squeaky voiced kid who was barely able to shave. From the start, let me acknowledge that was never cut out to be a military man — and Cruz knew it. Like a lion instinctively culling out the weakest wildebeest from the herd, he was on to me the minute I took that fateful first step inside the Pensacola barracks in October of 1966. My hair was gone in the first ten minutes, my body became vulnerable during the next ten, and my ego was completely destroyed by sundown. I had decided to be a Viet Nam jet jockey, but the commitment was weak and the Sergeant smelled it almost instinctively. “Where are your love beads. Mr.!”, he screamed in my face. “In San Francisco. SIR!”. became my accepted reply. “Well, then you’d better get your hairy ___ out of here and back to your hometown real soon don’t you think, boy?” “No. Sir!”, I would squeak in return.

Ah. Sergeant Cruz. Everyone else hated him too, you see. He was the personification of the system we were being forced to accept within the short span of twelve weeks. After that, we would be officers and learning the insides of a cockpit instead of a latrine. But Cruz was standing in our way, especially mine it seemed. I could do nothing right. I was awake until three in the morning searching for that microscopic piece of rust in my rifle that he always seemed to find during inspection. I never slept in my bunk, because the “hospital corners” he demanded for my sheets took over an hour to make and there was simply no time. All the while my broken body, though never once touched by his hand, was in full retreat from the countless marches, push-ups, pull-ups, obstacle runs, and anything else that you’ve seen in the movies and thought was pure Hollywood fiction. I’m here to tell you – they’re all true.

“You’ll never fly a jet, Mr. Gross!”, he would scream. “Blimps are more your style.” He was right, of course, but the Navy wasn’t using any blimps in Viet Nam, so I eventually found my home on a destroyer in the South Pacific. I’ll never forget Cruz though. His twelve weeks were three months from Hell, but they were my first big steps on the way to manhood. As was customary at the commissioning ceremony for young officers, each new Ensign would sign a dollar bill and hand it to their drill sergeant in hopes of being remembered once they became famous down the road. I didn’t know it then, but I realize now that it was Cruz who should have done the signing. Bill Gross, and a thousand other blimp pilots, have surely disappeared from his memory lane, but Marine Sergeant Alfredo Cruz will remain indelibly in ours, with the highest respect and esteem, for the rest of our lives.

Next to the Sergeant, my strongest impression of those years was the swiftness of the transition – hair one minute, bald the next.

Commanding a Navy Ship

After dropping out of flight school, Gross was sent to Philadelphia for a “crash course” on damage control – a necessity when becoming a damage control officer and eventually chief engineer. He did not feel prepared for his new destiny, saying “The five weeks of training, geared toward those who washed out of other programs, was barely long enough to scratch the surface on the subject.”

Stars and Stripes documents, “The Diachenko was in dry dock in Bremerton, Wash., when the ‘scared 23-year-old kid,’ as Gross referred to himself, reported for duty in June 1967.” Four short months later, the ship set sail for the Phillippines.

Now out to sea, the ship’s chief officer announced over the loud-speaker that Gross would be in command of the ship. He remembers, “Mr. Gross has the deck. Mr. Gross has the con.’ I didn’t know anything about taking the deck, taking the con, not even about giving a command, right rudder or anything. … It was just the shock of responsibility. I had 110, 120 people. Their lives were now my responsibility.”

In hindsight, he concludes, “I wasn’t meant to be a chief engineer, but the necessities of war meant I would be…I did the best I could.”

Ship Nearly Overturns

Another investment outlook for PIMCO includes the time Gross and his crew nearly made their way to Davy Jones Locker, he explains:

I’ve spun a few yarns in recent years about my days as a naval officer; not, thank goodness, tales told by dead men, but certainly echoes from the depths of Davy Jones’ Locker. A few years ago I wrote about the time that our ship (on my watch) was almost cut in half by an auto-piloted tanker at midnight, but never have I divulged the day that the USS Diachenko came within one degree of heeling over during a typhoon in the South China Sea. “Engage emergency ballast,” the Captain roared at yours truly – the one and only chief engineer. Little did he know that Ensign Gross had slept through his classes at Philadelphia’s damage control school and had no idea what he was talking about. I could hardly find the oil dipstick on my car back in San Diego, let alone conceive of emergency ballast procedures in 50 foot seas. And so…the ship rolled to starboard, the ship rolled to port, the ship heeled at the extreme to 36 degrees (within 1 degree, as I later read in the ship’s manual, of the ultimate tipping point). One hundred sailors at risk, because of one twenty-three-year-old mechanically challenged officer, and a Captain who should have known better than to trust him.

We survived, and a year later I exited – the Diachenko and the Navy for good – theirs and mine. I think I heard a sigh of relief as I saluted the Captain for the last time, but in memory of those nearly tragic moments, let me reprint an article posted on wikiHow, outlining exactly how to go about abandoning ship should you ever venture into the South China Sea or anywhere close to Davy’s infamous locker.

Transporting SEALS

From its port in Subic Bay, Phillippines, the Diachenko would make four 60-day deployments to Vietnam while Gross was aboard. He was responsible for captaining one of four smaller boats attached to the ship. These 30-foot vessels were used to survey the coastline for potential beach landing sites; they also carried SEALS.

SEALS would roll over the sides of the boats, swim to land, and conduct combat operations. According to Stars and Stripes, “typically, the SEALS would return to the waiting boat six to eight hours later for a lift back to the mother ship patrolling about 10 miles offshore.”

Gross says his first transport mission was stunning. As his boat made its way near shore, he remembers seeing a number of Vietnamese on the beach – he didn’t find them threatening considering there were women around. He remembers one of the women taking off her broad-rimmed manila hat and placing it over her heart.

Little did he know, she was signaling an attack. Moments later, a grenade she hid beneath her hat exploded and “all hell broke loose!” The only weapon Gross had on him was a pistol so he couldn’t do much and focused on making sure his ship didn’t run aground. It took about an hour for the SEALS to return – at which point, they left the scene.

He thought his job would be a “relatively safe type of mission” and that it wasn’t made him nervous all the time.

Thoughts on the Vietnam War

On one hand, Gross learned valuable lessons from his time spent in the Navy. Principals he’d carry with him throughout the entirety of his investing career. Effective communication and having to take over responsibility for a situation despite feeling unqualified are just two examples.

He even laments, “If I hadn’t gone in and did what I did [in the Navy], none of this here [in his investment world] would have happened.”

However, his opinion on the conflict as a whole is best summed up in a story he tells about this chance encounter he had with a taxi driver:

It was a matter of happenstance I suppose – certainly not serendipity. Our meeting may have been an inevitable coming together, but it was certainly not initially welcomed by me. Happenstance is the better word. Fateful happenstance.

Serendipity rarely happens in a cab and it was in a San Francisco cab – not an Uber – where I confronted my ancient past. Sue and I were headed back to the Four Seasons after a brief glimpse of the city at dusk from the “Top of the Mark.” The driver appeared to be Vietnamese, and having had a margarita or two, I unfortunately stumbled into the emotional jungles of Vietnam to which I had come, and from which I had safely departed nearly a half century ago. “You’re Vietnamese,” I said, “how old are you?” “53,” he said. “I grew up in Da Nang and escaped when I was 8 with my mother, after my father and older brother were killed.” I subtracted 8 from 53 and quickly placed him in Vietnam at the same time I had been, in 1969. “Have you ever been there?” he queried. “Well yes,” I stuttered, “about the time you left, but I was in the Navy” – an excuse that supposedly cleared me of direct involvement, but in reality was not the case. An awkward silence followed. I wanted to say, “I’m sorry for what we did. I/we shouldn’t have been there.” I desperately wanted to say that. But I didn’t. I missed my moment of atonement and we continued on to the hotel. Getting out I gave him a $20 bill for an $8 fare – a weak apology to be sure, and he knew it. “No,” he said, “that is too much, take back 5 dollars.” I did – apology accepted – flawed as it was. He and his mother had survived and moved on. Perhaps I have too. “Goodnight,” I said. Goodnight Vietnam ….

Launching PIMCO

After returning stateside from the Navy, Gross knew he couldn’t return to his life of Las Vegas gambling. However, his time spent at the blackjack tables did instill in him mathematical skill, an obsessive work ethic, and a sense that he could be the system. In fortuitous fashion, Gross got his hands on Edward Thorpe’s second book, Beat the Market, which encouraged him to pursue a career in investments.

Using money still saved from his stint in Vegas, he enrolled in courses at UCLA for an MBA. Gross would write his thesis on Thorpe’s Beat the Market book.

Despite earning his MBA, he isn’t the biggest fan of institutionalized education. He explains, “A mind is a precious thing to waste, so why are millions of America’s students wasting theirs by going to college?” Adding, “an undergraduate education is primarily a four-year vacation interrupted by periodic bouts of cramming or Google plagiarising.”

Career

Fresh out of UCLA’s MBA program, Gross found work as an investment analyst at Pacific Mutual Life in Newport Beach, CA.

The warm Southern California beach life led to his iconic loosened tie look. He says, “I came down here to Orange County in ’71 from L.A., and Pimco had this brand-new, beautiful building, but they didn’t have a gym or showers. I was an exercise nut. At noon, I’d change in the bathroom and then run for about five miles. Since there wasn’t a shower, I’d towel off as best I could, but I’d be sweating and hot for an hour or two. So in the afternoon, I began to just not tie my tie. Then a year or two later, I said: ‘Well, what the hell, I guess I’m not tying it in the afternoon, I’ll just not tie it in the morning either.'”

Early into his career, there was a very powerful motivation brewing within Gross. During a lunchtime interview with Robin Wigglesworth of the Financial Times, he reveals, “I wanted to be famous because I wanted to be loved . . . so I pursued that obsessively.” He adds, “Shit, that’s why I’m talking to you today.”

This underlying drive likely had something to do with his co-founding of PIMCO in 1971 – the company originally operating as a Pacific Mutual Life spin-off.

An Innovative Bond Investment Strategy

“His real claim to fame was pioneering total return investing in fixed income,” says Miriam Sjoblom, director of fixed-income ratings at Morningstar. “That means you are not just concerned with collecting income. You are concerned with price appreciation and avoiding losses.”

Sjoblom adds, “The fact that he was able to popularize a style of investing that didn’t focus on yield changed the industry.”

Manager of the Decade

For his performance between 2000 and 2010, Morningstar named Gross “Manager of the Decade.”

Their declaration reads:

No other fund manager made more money for people than Bill Gross. Investors of his flagship, PIMCO Total Return (PTTRX), are $47 billion wealthier for the decade. (Our wealth creation figure is the aggregate return made on dollars invested in the fund throughout the entire period.) The fund was already large in 2000, with approximately $32 billion in assets, which could have presented quite a handicap. It ended the decade much larger at more than $200 billion. But it succeeded in outsmarting the competition even with its behemoth size and continues to do so. Gross has managed the fund’s and the firm’s remarkable growth well.

Gross has stayed ahead of the competition throughout the decade by making the right calls at the right times. His successes have come in a variety of forms. For example, despite the mess that mortgages created in the market, bonds backed by mortgages have been one of the fund’s largest sources of excess return. Other good calls have come in the form of yield-curve bets and plays on emerging markets and corporate and foreign bonds. Gross was betting against the dollar in 2006 and was vindicated when the dollar declined versus other currencies. Gross is often accused of relying heavily on duration plays, but in reality, they haven’t once been the top earner.

It is clear from his investment calls and topnotch performance that Gross is one of the best investors of our era. Many investors eagerly await the insights in his monthly investment outlook. And in 2009, investors poured more than $50 billion into PIMCO Total Return. But he hasn’t done it alone; he’s surrounded himself with a lot of smart people at PIMCO, including Mohamed El-Erian, Paul McCulley, Michael Gomez, and others who have made him even better and who give us confidence in PIMCO’s ability to remain a good steward of the hundreds of billions of dollars entrusted to them.