There are “about 2,000 mistakes an investor” can make, and DoubleLine CEO Jeffrey Gundlach estimates that he has made almost all of them twice. The good news is he made hardly any of them a third time.

Learning the lessons of your mistakes was one of the far-ranging topics Gundlach discussed in a video interview earlier this month with Real Vision CEO Raoul Pal. It was some of those lessons that gave Gundlach the emotional and institutional memory to emerge from the 2008-2009 financial crisis with hefty gains.

Gundlach’s first memorable mistake came early in his career at TCW. In April 1986, he sold 30-year Treasurys at yields of 7%, at exactly the top tick in that period.

It was what followed that hurt him. The bond market “totally tanked” and then started to rally. Gundlach got back in, much to his regret.

“I remember feeling trapped in the trade,” he recalled. “I just started losing tons of money.”

Gundlach was still in a rock band from his prior career as a percussionist. He proceeded to sit down and write a song called “Wishing, Hoping, Praying,” which described his attitude towards his decision to re-enter the long-term Treasury market.

Hoping that a market will turn around isn’t a particularly sound strategy, he learned. “Someone told me, your first loss is your best loss,” he told Pal. “That is really good advice.” Sometimes an investor “just has to get out even though you are taking a loss.”

The second biggest mistake proved to be an error of omission, not commission. It occurred in the fall of 2002, when the junk bond had been thoroughly “trashed” by Enron and other companies caught in various accounting crises and scandals.

In accounts where he had a great deal of latitude, he established large positions in junk bonds. But in his core flagship fund, primarily a mortgage strategy, he had never owned corporate bonds.

“For some reason, I didn’t want to get my hands dirty,” he said. “Because of that, I missed the entire junk bond rally from October 2002 to October 2003.”

Over that period, the returns on most Treasury bonds were near zero while the returns on junk bonds were about 30%.

“I told myself [that] I’m never going to be that foolish or narrow-minded again,” he said. “The next time there is a washout in credit, I’m going into credit, even though” his flagship fund is a “low-risk strategy.”

This past spring when the corporate bond market was collapsing in the early days of the pandemic, Gundlach said he was ready to “pull the trigger.” But the Federal Reserve Board “pulled the rug out from under the opportunity” when it started “illegal bond buying” in the corporate bond market “in direct violation of the Federal Reserve Act of 1913.”

That’s another lesson of recent years. Today “almost anything is possible” when it comes to central bank market manipulation. Central bank policy entered a very different zone of its existence. It began protecting various interests deemed essential  in 2008—mostly banks though a bailout out of homeowners was contemplated.

The financial crisis buried mortgage-backed securities and junk bonds in 2007 and 2008, and Gundlach dodged most of that carnage. But 1994 was a disastrous year for virtually all fixed-income assets, and his portfolio got hit, at least temporarily.

In 1994, interest rates rose rapidly over a very “compressed timeframe,” right after a period of major interest rate declines. The mortgage market was refinancing at the most rapid rate in history prior to 2003.

That created a phenomenon where mortgage-backed securities (MBS) morphed into short-term vehicles. “If half of mortgages refinance in one year, the securities backing those mortgages become definitionally short-term securities with low durations,” he noted.

The yield curve was very steep in those days and when rates rose, the refinancing opportunity disappeared. The MBS market went from being one with an interest rate maturity of two years to one with maturities closer to 10 years.

In Ginnie Maes, investors had the experience of “rolling up” the yield curve so the “losses became extreme.” Many investors got margin calls. Orange County, which didn’t hold mortgage-related securities, went bankrupt and was forced to liquidate, throwing many sectors of the bond market into short-term turmoil.

In his most aggressive strategy, Gundlach had his worst year ever. That fund was down 23% in 1994, while his other more traditional strategies performed better, suffering only small losses.

Amazingly, the market reversed pretty sharply in 1995 as then-Fed Chairman Alan Greenspan managed to engineer a soft landing. By June 30, 1995, Gundlach’s aggressive strategy had recouped all its losses and ended the year up 53%.

But the memories still linger. “Anybody who wasn’t in the market probably wouldn’t believe how cheap bonds [were.] We’re talking about government-guaranteed mortgages,” he said. “Treasury bonds were yielding 7% and there were [mortgage] securities yielding 16% to the worst-possible scenario.”

That experience prepared him for the 2007-2008 meltdown. “Valuation means absolutely zero when you are in a brutal bear market,” he said. Supply-demand problems and margin calls overwhelm intrinsic laws of finance.

Signs of distress started surfacing in the MBS market in 2007 and Gundlach, being one of the world’s leading students of mortgage investing, was well-positioned. He recalled that a very good originator, Santa Fe, N.M.-based Thornburg, had a $300 million tranche of adjustable-rate mortgages that were not sub-prime and had never traded below 100 cents on the dollar thanks to the adjustable rate feature.

Suddenly, there was a price talk at 97 cents on the dollar. Gundlach and a Latvian colleague put in “a throwaway bid” at 93 cents of the dollar. Their bid got hit.

His Latvian colleague called it “the craziest thing I’ve ever seen.” Recalling the experience of 1994, Gundlach told Real Vision Pal he was more circumspect. Hearing his colleague make that remark triggered a sense of doom “all the way down my spine.”

He promptly told the Latvian manager, who now oversees DoubleLine’s agency department, to write down his observation on the ticket and said he suspected their yield would go from 8% to somewhere in the teens.

That prediction turned out to be wrong. Eventually the securities collapsed so far that the yields rose to above 40%.

However, the memories of 1994 prompted Gundlach to also declare a moratorium on future purchases of mortgage securities for the time being, setting his funds up to be among the biggest beneficiaries of the mortgage crisis.