Philosopheconomics

“I am a philosophical nomad disguised in Western clothing, a wondering drifter, masquerading in a suit near a California beach. Sand forms the foundation of my being, and its porosity is at once my greatest strength and deepest wound.”

Who said it? I’ll give you three guesses, and we’ll do it Dora the Explorer Style ... No, not Caligula ... Not Kanye either! ... Ahh, so close, but it’s not Jordan Belfort.

That quote, wrapped in all its insane, street corner philosopher glory, is the start of Bill Gross’s November Investment Outlook.

Bill Gross is a big deal. Gross founded the Pacific Investment Management Company (PIMCO) in 1971, and quickly turned the small $12 million firm into a bond investing giant. PIMCO’s Total Return Fund -- Gross’s baby -- has returned nearly eight percent annually since its inception, while Gross himself is worth an estimated $2.3 billion.

So why does he sounds like such a crazy person? Well, it’s because he is a bit crazy.

While still at PIMCO, Gross referred to himself as “Secretariat” -- the undefeated race horse -- and preferred that employees not talk or make eye contact with him on the trading floor. Facing criticism for his cold demeanor, Gross later led a conga line through the trading floor, “to let employees know it’s OK to scream and shout and let it all out.”

Still, Gross’s antics do not receive the same kind of coverage and respect that his investment outlooks do.

While economics is usually presented as a decidedly quantitative field, philosophy still has its place. George Soros, another investment fund giant, has authored several texts and given countless lectures on the role of society in finance and economics.

But why do investors listen to people like Gross and Soros?

Say you have $1,000 to invest. The universe of possible investments is broad and deep, like the sands of time -- or something like that. Investors have millions of places they can put their money. They can pick one stock to invest in and hope that the company does well. They can buy a commodity like gold and hope that the demand for that commodity rises. They can buy a foreign currency and hope that the exchange rate improves.

These decisions are important and time-consuming, and making the wrong one can lead to huge losses.

So, many investors choose to put their money into a fund. The fund then groups that investor’s money with the money of several other investors, and invests that pool of money as it sees fit.

Though your $1,000 may have gone towards a poor investment, the fund as a whole might return 25 percent, so you now have $1,250.

Funds can also invest in an index as a whole, and simply match the returns of that index. Maybe your $1,000 can’t purchase a share of every company in the S&P 500, but a fund can.

People listen to fund managers like Bill Gross and George Soros because their funds tend to do very well. Common sense would say that they probably have a better sense of how the market will perform, and they deserve your trust. They could speak in tongues and people would probably say, “Hmm, you know I never thought of it that way!”

Now here’s the kicker: Passively managed funds -- which simply track an index -- match or even outperform the average returns of actively managed funds nearly 75 percent of the time. People like Gross and Soros are certainly outliers, but fund managers regularly get their asses handed to them by index funds.

Perhaps philosophy does have a place in economics, and perhaps the musings of a Bill Gross will enlighten us in ways we couldn’t possibly imagine. But he should cool it with the nomad stuff.