The World's Greatest Investors: Bill Gross (Magazine Cover)

Published July 14, 2009 at 4:00 a.m.

Editor’s note: Even as stocks come crawling back from the abyss, big name money managers are still going to have a hard time regaining investors’ trust – even if they deserve it. In this special report, SmartMoney spoke with four of the world’s greatest investors to see how they managed to minimize investors’ losses during the worst of the downturn and how they’re making money now.

Bill Gross

Co–Chief Investment Officer, Pimco

For Bill Gross, all the world’s a gloomy metaphor. Last year’s downturn? “Like living in a Three Stooges episode,” he says, comparing the string of bad news to Moe repeatedly slapping Larry in the face. The threat of deflation? Think Darth Vader. “Luke Skywalker is winning the battle at the moment,” says Gross, “but it doesn’t guarantee the end result.”

Then again, even the Dark Side of the economy’s Force can’t seem to stop Gross these days. Last year he navigated the $159 billion Pimco Total Return, the world’s largest mutual fund, to a 4.3 percent return, nine points better than the average among his peers. The fund ranks in the top 4 percent among all bond funds for the past 10 years, according to Morningstar. “It’s quite possible that Bill Gross has made more money for investors than any other manager on the planet,” says Don Phillips, Morningstar’s managing director.

We meet Gross in a Chicago hotel room prior to his giving a speech. The billionaire has just finished ironing his own shirt; he fears the suite’s lack of a minibar might represent “the new normal” in a world where consumers and investors will have to make do with less. Gross has been deeply involved in the government’s efforts to revive the economy. But while he acknowledges the need for the new financial regulations the White House recently proposed, snail-like growth will be the price of that safety net. “The next four to 12 years will not be investor-friendly,” he says. The new cosmic order involves 8 percent unemployment, anemic single-digit annual stock market increases, and ultimately, once the short-term economic crisis is over, higher inflation.

Granted, the master of bonds can seem excessively gloomy about stocks. After the tech bubble collapsed, Gross predicted the Dow would sink to 5000. “I’m still waiting for that,” says Daniel Moisand, former president of the Financial Planning Association. But Gross sees a major role for stocks in a slower economy. Investors should seek stable income from stocks that pay good dividends like Coca-Cola and Procter & Gamble. He also recommends a bond portfolio focusing on high-rated companies like Dow Chemical or AT&T.

After that, it’s time to hunker down. “Give up the notion that the Dow is going to 14000,” says Gross, or “that the house is going to catch up in value to what you paid for it.” The world has changed, he says, because we consumed too much and saved too little. To return to the Three Stooges metaphor, we’ll all need a couple of nyuks in the years ahead.

Investments He Likes

Short-term bonds of Dow Chemical and AT&T.
To boost his portfolio’s income, Gross is focusing on high-quality corporate bonds with interest rates of 7 to 8 percent.

Treasury Inflation- Protected Securities (TIPS).
With the government facing deficits for the foreseeable future, investors will need an inflation hedge.

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