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.