Bill Gross says investors are managing assets at the grade school level

Bill Gross and grade school level investing problems

Bill Gross doesn’t have much nice to say about professional investors who are managing assets these days.

In his April investment outlook, Gross of Janus Capital warned about a global downturn and spoke out about the inexperience that is plaguing traders.

Gross says investing is one-third math, one-third economics, and one-third horse-trading.

“But back to the 1/3 math thing,” he wrote Wednesday.

“It’s there that I find the average lay and even many professional investors still thinking and managing assets at the grade school level. The childlike ‘teeter totter’ principle, for instance which couldn’t be simpler in its visualization of bond prices going up when interest rates go down, produces foggy-eyed reactions from a majority of non-professionals, and from a few supposed experts as well.”

If bond investors don’t understand the math concepts needed for the market, Gross believes they shouldn’t be investing.

Gross points to trading with negative interest rates as the biggest sign of market misunderstandings.

Gross talks about Zeno’s paradox. Here’s what he had to say about that concept:

“Zeno was an ancient Greek who posed the following conundrum: Imagine a walker heading towards a finish line 10 yards away but every step he took was half of the length of the step he took before. If so, even if he walked an infinite amount of steps he could never reach his destination. Mathematically correct but the real world resolution was that Zeno’s walker and everything else that we experience moves forward in full step integers as opposed to fractions. It was a mathematical twist only.”

Negative bond rates Japan and Germany lose investors money, yet they are still being purchased.

Gross explains this phenomenon.

“Anyway, for those private investors that continue to hold 5 year OBL’s and lock in a guaranteed loss 5 years from now, many of them are using a bit of Zeno’s paradox to convince themselves that they will never reach the loss-certain finish line at maturity. They think that because 4 year OBL’s yield even less (-40 basis points), the 5 year OBL’s will actually go up in price (remember the teeter totter?) if 4 year rates stay the same over the next 12 months, and the ECB has sort of — sort of — promised that. Whatever it takes, you know. If so, the private investor will actually make a little money over the next year (10 basis points) and she can give herself a slap on the back for having eluded the ECB’s negative interest rate trap!”

Gross says someone will have to hold the bond until maturity, which means the market will have losses because of negative rates.

“The reality is this,” he concluded. “Central bank polices consisting of QE’s and negative/artificially low interest rates must successfully reflate global economies or else. They are running out of time.”

So according to Bill Gross, investors are operating at a grade school level and they are destroying the global economy in the process.