Nobody said raking in all those billions in management fees would be easy, and after beating the S&P for 15 years, Legg Mason’s Bill Miller stumbled in a big way when it counted the most and never came back.

And so it was that Reuters reported Bill Gross “feels like “crying in his beer” for having bet so heavily against U.S. government-related debt earlier this year.”

This battle of wits to anticipate the basis of conventional valuation a few months hence, rather than the prospective yield of an investment over a long term of years, does not even require gulls amongst the public to feed the maws of the professional; — it can be played by professionals amongst themselves. Nor is it necessary that anyone should keep his simple faith in the conventional basis of valuation having any genuine long-term validity. For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs — a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops. These games can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops some of the players will find themselves unseated.
Or, to change the metaphor slightly, professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one’s judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practise the fourth, fifth and higher degrees. — John Maynard Keynes, Chapter 12, The General Theory of Employment, Interest and Money

Luck or Skill?

You know, it’s not easy to make these giant discretionary calls year after year. Note Mr. Gross is approximately six years older than Mr. Miller was when he fell off the cliff in 2005. I would add that it’s a curious coincidence that Mr. Miller’s streak ended along with a secular bull market in stocks and Mr. Gross has ridden the equivalent in bonds. It sure makes you wonder about the power of a trend and the role of luck.
Even though I am relatively young, after 25 years, I do find myself looking down the rabbit hole now and then, wondering which degrees of the Keynesian Beauty Contest I am playing, hence the move to doing it by the numbers over time to protect against potential bouts of bad judgement.
The question investors might ask Mr. Gross is if he has reached a point where decision fatigue might blemish his spotless record.
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