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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a philanthropist, private investor and co-founder of Pimco
With age comes some insights and as we head into 2025, now is as good a time as any to look back on some of the lessons from my investing career that have served me well.
On the occasion last year of the publication of a (almost) comprehensive collection of my Investment Outlook essays going back to the late 1970s, I allowed myself some time for reflection. Not over the humility of calls that I got right or wrong, but what can be drawn from them now.
In the big picture, American capitalism is in relative terms more reminiscent of the wild west than some economies. It allows for risk taking — backstopped of course in many ways by government and central bank policies but flexible enough to promote the modern entrepreneur in the quest for a profit. That promotion provides for, even encourages, risk and innovation. And in most cases, this also allows not just success but outright failure and bankruptcy. It is this lesson, I believe, that an investor must recognise and learn as we wind our way up the long-term mountain of portfolio management in this “new age”.
The combination of leverage and time is a critical one to recognise in any portfolio blueprint. Leverage can be dangerous, but is less so given enough time for fundamentally sound investment ideas to work out. Just ask Warren Buffett. His belief in superior equity returns over the long term has been anchored by the balance sheets of Berkshire Hathaway’s insurance companies. The capital from those companies has been more or less impervious to being “called in” at inopportune times. Insurance premiums and long-term debt have semi-permanence to them that overnight lending and subscriber capital does not. And so Buffett — who should be recognised for his brilliance as a financial architect as well as an investor — has prospered while John Meriwether of Long-Term Capital Management notoriety temporarily stumbled in the face of collateral calls on the company’s trading positions. Buffett has shown that time is a vital third dimension in financial architecture.
And with the passage of time, I’ve also learned another valuable lesson, and that is that all money managers and certainly bond managers have a responsibility that goes beyond the accumulation of assets, the earning of fees, and outperformance of the competition. They lend money to companies, countries and continents, and what they do affects the fortunes and the lives of hundreds of millions if not billions of people. When irrationality or greed get the upper hand — as they did in the US savings and loans crisis in the late 1980s or perhaps with the dotcom bubble and now the bitcoin bubble — then markets, economies and people, can be damaged for years and years.
It also helps to know what’s on the minds of other investors because markets, as John Maynard Keynes long ago observed, can be a beauty contest — at least in the short run. Momentum is actually a proven historical generator of “alpha”, above market returns. But when the productive momentum wave crashes, the consequences are usually immediate and prices reverse course. I learned this early on in my career from an incident involving my first and only personalised licence plate.
I had originally purchased a licence plate reading “BONDS 1” in an attempt to send a message to the chair of my then employer Pacific Mutual, who I felt controlled the fate of my next raise and at least several thereafter. If I could drive that car next to his in the company garage, I might quickly or at least eventually send a subliminal signal that yours truly was a pretty hot ticket in the bond world — an idea, by the way, which had no basis in fact in 1973. Well, the “great licence plate” comment never came down from the chair nor did much in the way of raises, but “BONDS 1” did attract the attention of some observers.
Several times while filling up my gas tank in Mission Viejo that year, an interested bystander walked up to me and asked if I could bail their nephew or brother out of the Orange County jail. It was then that I learned that “BONDS 1” meant different things to different people. It was a reminder that investors likewise have very different takes on assets that might be at odds with my own. Experience has shown again and again that it pays me to listen to such views and that people watching is key to financial markets. So as it turns out, one of my most important lessons in seeking to master markets came from a reflection in a petrol station forecourt.
