Karl Walenda was the undisputed king of the tightrope. As the Flying Walendas, he and his family performed their high wire act as featured stars of The Ringling Brothers and Barnum & Bailey Circus. And to the thrill of audiences everywhere, they performed without a net.1
It’s impossible to perform perfectly every day. The Wallendas came close. But decades of flawless performance were marred by a few accidents, which cost five family members their lives and left several others permanently injured.
In 1978, at the age of 73, Karl Wallenda was performing a promotional walk between two hotels in Puerto Rico when he was caught off guard by a gust of wind. He lost his footing and fell over a hundred feet to his death.
So what do high wire acts have to do with active investing?
Fund managers, especially those tasked with producing market-beating returns, face something similar to a tightrope walker’s challenge. In order to pursue above average returns, they have to take an above average risk, including the risk of guessing incorrectly when the swirling winds of market volatility blow. And their investors expect them to beat the odds this way day after day and quarter after quarter. Like a tightrope walker, they’re always one failure away from disaster.
For both high wire acts and fund managers, it doesn’t matter what they’ve done in the past. They might have made it safely across the wire today, but what about nine days and two cities from now? Will they still be around?
An example of this almost impossible difficulty is the career of Bill Gross, known in financial circles as “the Bond King.”
One of the founders of the Pacific Investment Management Group (PIMCO), he actively managed their flagship PIMCO Total Return Bond Fund through more than two decades of stellar returns. But then in 2014 he was ousted amid negative reports about his leadership and weak returns at the fund.2
Gross moved to managing the $1.3 billion Janus Global Unconstrained Bond Fund. But after four years of index trailing returns, he decided to retire.3
There’s no doubt Gross was just as smart and just as driven near the end of his career as he was during his days as the reigning Bond King. But for some reason (the experts can’t agree on which one) he was no longer able to generate the oversize returns demanded by investors and it was time for him to go.
Few managers have enjoyed Gross’s extended winning record. Yet in the end the complexity of the market proved too opaque, resulting in a string of losses. And like Karl Wallenda, Bill Gross’s impressive career will always be noted with his failure in the end.
As a prudent investor, the most probable way of reaching your investing and retirement goals is to avoid strategies that rely on extended runs of good luck. Instead, you should follow a disciplined strategy that assumes market uncertainty is the best evidence for staying committed to diversification. Your trusted advisor can help you with tailoring a plan designed to fit your circumstances and goals.
Citations
1 – https://en.wikipedia.org/wiki/The_Flying_Wallendas
2 – https://www.reuters.com/article/us-allianz-pimco-gross-lawsuit-idUSKCN0X12B4
3 – https://www.ft.com/content/ab6ee3ce-289d-11e9-88a4-c32129756dd8
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