Manager: Vivian Lewis
Covestor model: International Yield
Last week I dined with a Pimco employee who will remain nameless for his own protection. He told me that the $238-bn (under management) firm’s CEO and co-chief investment officer, Mohammed El-Erian, took his family to Egypt last December. There the fund manager visited relatives and friends. El-Erian speaks Arabic with an Egyptian accent. He had access to off-the-record and spontaneous conversations including frank opinions against the regime. El-Erian is an analyst with brilliant credentials.
When he returned from Egypt, his Pimco colleagues asked him about his impressions of his family’s homeland. El-Erian said he did not see what could go wrong. A few weeks later Tahrir Square erupted, and Egypt’s president resigned.
There is a message here. For all his ability to connect the dots in Egypt, El-Erian did not foresee the upset. Nobody can be certain of the future even in his ancestral homeland where he speaks like a native and can tap sources unavailable to others.
Who forecast the Japanese earthquake, tsunami, and nuclear meltdown?
The lesson is that nobody should think he knows what is going to happen. The El-Erian experience and the Japanese disasters are a wake-up call for concentrated portfolios. You need to diversify, because you cannot predict what will come next.
Our performance last month hit two speed bumps because I don’t predict the future any better than Pimco’s boss or Tepco’s engineers. The model got caught in a Chinese scam over Duoyuan Global Water (NYSE: DGW), which I mistook for a bargain. And then I went for Allied Irish Bank (NYSE: AIB) as a recovery play before the dust had fully settled.
Meanwhile Warren Buffett was betrayed by David Sokol front-running Berkshire Hathaway.
If anyone tells you they can invest without any down picks or down days or bad advice, don’t pay any attention to them. Be aware that the only investment system that produces a steady stream of up months is the lies from Bernie Madoff. In the real world, there will be occasional dips, betrayals, mistakes.
The only way to protect yourself is to have a diversified portfolio with more than one supposedly hot idea in it. Our Global Yield model is highly diversified. So despite DGW and AIB, we posted a slight gain in April.
