One of the best things that ever happened to Bill Gross was a horrific car crash. That sounds crazy, but you’ll soon see why. As he slowly recovered in a hospital bed, the 22-year-old Gross read a book cover to cover. That book wound up changing his life, putting him on the path of legendary investment success that followed.

Fast forward to today; after 47 years of managing money, Bill Gross retired last week at age 74. He will be remembered as a market legend, and arguably the greatest bond investor of all time. While Gross had a rough four years after leaving Pacific Investment Management Company (PIMCO), the bond juggernaut he co-founded in 1971, the final short chapter doesn’t take away from four-plus decades of brilliance.

For more than 40 years, Gross was more than just the head trader and co-founder of PIMCO. He was also the face and voice of the outfit, which meant his opinions often had a huge impact on the multi-trillion-dollar bond market.

PIMCO was so dominant in its heyday, Gross could announce a huge new position PIMCO had taken — and the rest of the street would scramble to copy them, adding hundreds of millions worth of gains to PIMCO’s position (which they would continue to hold, as PIMCO thought “long-term” and was right more often than not).

In 2002, Fortune magazine called Gross the “philosopher-king of bonds,” combining “big-picture wisdom with day-to-day performance.” Gross was the highest paid money manager in the world at that time, personally running a bond portfolio of $350 billion (with other PIMCO managers running even more).

By 2002, Gross had already amassed a track record of over three decades of outperformance, crushing his bond market benchmarks with only three losing years. Sometimes a magazine cover is a money manager’s curse, marking the peak of their performance. But seven years after the 2002 Fortune piece, Morningstar named Gross “fixed income manager of the decade” for the years 2000-2009.

Gross was more than just a great bond trader. He essentially created the industry from scratch.

Before Bill Gross came along as a junior bond analyst, bonds weren’t for trading. They were mostly for holding. In the 1960s and earlier, it was normal practice to buy a bond and just sit on it, mailing in the coupons to collect yield payments.

But when Gross started working for Pacific Mutual, an insurer based in Newport Beach, Calif., the combination of rising inflation and a weak economy had been horrible for bond values.

Gross was convinced that, by trading the bonds with the right strategies, Pacific Mutual could generate additional returns without too much risk. PIMCO was launched in 1971 with $12 million in assets, and the instincts of a young and aggressive Bill Gross turned out to be correct. Soon the $12 million had grown to $40 million.

In the mid-1970s, when passive bond holders were struggling, Gross delivered returns in the high teens. Decades later, PIMCO had more than a trillion in assets. Gross had become a bond market “rock star” by then, in part with a colorful writing voice through monthly letters he started sending out in the 1980s. He would later advise the Treasury Department of the U.S. government in the midst of financial crisis, and his TV appearances would sometimes move markets.

As for the car crash and life-changing book: In his senior year at Duke University, a 22-year-old Bill Gross nearly died when his Nash Rambler hit an ice patch and skidded into oncoming traffic. He was thrown through the windshield and lost three-quarters of his scalp.

His recovery, which involved multiple skin grafts and treatment for a collapsed lung, meant lots of time in hospital beds. At Duke, Gross had majored in psychology, but he also enjoyed math. To pass the time recovering, he started reading Beat the Dealer, a book that explained a revolutionary (at the time) method of counting cards in blackjack.

In Beat the Dealer, Gross loved the concept of using probability to minimize risk and maximize returns. He decided to try his hand at the blackjack tables as soon as he could. After he recovered, he headed west to Las Vegas, keeping his expenses down by staying at a $5-a-night motel well off the strip.

Gross spent 16 hours a day testing his blackjack methods, inspired by Beat the Dealer, at the Fremont and Four Queens casinos. As a psychology major, Gross quickly saw that most blackjack players were ruled by their emotions — and he took the opposite approach. He focused on managing his emotions and making small, probe-type bets, only increasing his wagers when the card-count numbers turned in his favor.

The strategy worked, helping Gross turn a $200 blackjack stake into $10,000 in less than six months. That $10K in blackjack winnings — a more meaningful sum in the late 1960s than today — helped put Gross through UCLA business school after a tour of duty on a gunboat in Vietnam.

But more importantly than the winnings, the blackjack experience showed Gross how to manage money. “Vegas taught me that I could beat the system with a combination of hard work, ideas that no one has thought of yet, and the ability to tolerate a constant routine that, to many people, seems monotonous,” Gross would later say. “But to me, it’s the most exciting thing in the world.”

For Gross, the pathway that began with Beat the Dealer was still paying dividends decades later, as his old blackjack memories kept him from dangerous mistakes in the 2008 financial crisis. Whereas other money managers had been tempted by too much leverage, Gross knew in his gut to be careful.

“There was a sense that there was no amount of leverage that cannot be applied to a sure thing,” Gross told the Financial Times in 2010. “That was a lesson I learned in 1966 with blackjack, where although odds were many times in my favor, if you took too much leverage and had too much debt, then the house of cards will come tumbling down.”

Gross also knew from experience that, no matter how hard you try, a mathematical model cannot fully incorporate the impacts of human behavior. “I would say that human nature is a consistently inconsistent input into a model,” he said.

Bill Gross will always be a unique legend. There is no way to copy his path, unless someone figures out how to reinvent bond trading from scratch. But what can we learn from him?

At a minimum, we can observe how investment success comes from a combination of math, probability, and the management of human emotions — particularly one’s own emotions — in the pursuit of maximizing gains and minimizing risk.

We can also emphasize the importance of a system — having a clear methodology and a rules-based way of doing things — without being so rigid as to forget the human factor.

At TradeSmith, the success of legends like Bill Gross inspires us to bring all these aspects together — intelligent use of math and probability, with control of the human emotion element, applied in a systematic way — via the power of great investment software. So here is our salute to Bill Gross, the original bond king.

Richard Smith
Richard Smith, Ph.D.
CEO & Founder, TradeSmith