PIMCO’s founder and star manager Bill Gross called the bonds bubble too soon. He got a lot of flak for getting out of Treasuries before Treasuries had a good run. Many people point to this as a case-in-point for the failure of active management. He had to issue a mea culpa saying he was wrong.
At the same time bonds ran up in prices, gold also did very well. The mainstream model portfolios typically don’t include gold. Gurus I admire, John Bogle, Burton Malkiel, David Swensen, et al don’t recommend investing in gold.
A March 2010 LA Times article said Vanguard founder John Bogle thought "gold is now the wrong place to invest." Gold price was about $1,150 per ounce at that time. It’s about $1,750 now. If you listened to John Bogle in March 2010, you missed a 50% run up.
In a December 2009 interview, Burton Malkiel, author of A Random Walk Down Wall Street, suggested investing in a broad stock market index fund, which includes gold mining companies like Freeport-McMoRan Copper & Gold, instead of buying gold at then $1,200 an ounce. A broad stock market index fund gained about 20% since then. Freeport-McMoRan stock returned no more than 10%. Gold is up 45%.
A September 2011 article in Yale Daily News quoted Yale President Richard Levin saying the Yale endowment didn’t invest in gold. Swensen also missed a big run-up in gold.
Bill Gross, on the other hand, probably missed no more than 5-10% return for getting out of Treasuries too soon. PIMCO Total Return Fund lags Vanguard Total Bond Market Index Fund by about 3.5% year-to-date.
I’m not picking on Bogle, Malkiel, or Swensen to say they are "wrong" in not recommending investing in gold. I’m just showing that the market can go against all rational evaluations. With regard to a bonds bubble versus a gold bubble, there are these possibilities:
1. Bill Gross was right in getting out of Treasuries. Buying Treasuries at high prices was too risky even though their prices can go higher or stay high for a long time.
2. Bill Gross was wrong in getting out of Treasuries. Treasuries are not in a bubble. Their prices are where they should be.
3. Bogle, Malkiel, and Swensen were right in not investing in gold. Buying gold was too risky even though gold prices can go higher or stay high for a long time.
4. Bogle, Malkiel, and Swensen were wrong in not investing in gold. Gold is not in a bubble. Gold price is where it should be.
How do you know which is the case? Just because the market went against someone, does it mean they are wrong? Why should Bill Gross be blamed for a miss if Bogle, Malkiel, and Swensen had much larger misses?
I still don’t know whether Bill Gross is right in getting out of Treasuries. I also don’t know whether Bogle, Malkiel, and Swensen are right in not investing in gold. But I know I shouldn’t judge them just by which way the market went. Not by the short-term results anyway.
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