Can belief be a business model?
Retail investors once paid irrational premiums to bet on a bond king. Now they’re doing it for crypto kings
Artwork by Crystal Le
Bill Gross, the “Bond King” and co-founder of PIMCO, was one of the main characters in finance for nearly two decades.
He was also quite the character.
Gross, who oversaw $1.9 trillion in assets under management at PIMCO’s peak, wrote a monthly investment letter that touched on topics as diverse as his disdain for self-flushing toilets, how his cat liked to watch him on CNBC, the “half-erotic” pleasure of sneezing, how his youngest son was conceived, how his oldest son was a disappointment, and how he once gave a waitress a “negative tip” for poor service.
The letters often got philosophical, too: “Sand forms the foundation of my being,” he wrote in 2014, “and its porosity is at once my greatest strength and deepest wound.”
He liked to reason by analogy: Bond investors were “vampires of the investment world,” central bankers were monkeys throwing darts, financial markets were “hooked on a morphine drip,” credit markets were a supernova beginning to suffer from entropy.
His investing style was similarly unorthodox: He pioneered the “total return” investing strategy in bond markets, actively trading for capital gains instead of just passively collecting yield.
In short, he was the Warren Buffett of bonds, but quirkier.
In the 1990s, Gross’ monthly musings became a must-read in finance circles, where his quirky metaphors were widely shared and his macro trades were widely copied.
The quirkiness added to his mystique as an investing savant — Gross was not just the Bond King, but something of a philosopher king, too.
That attention helped make him the first bond investor that anyone outside of finance had ever heard of.
It also helped that he really was good at bond investing: In his 27 years at PIMCO, Gross achieved an annual return of 7.52% a year, well in excess of the benchmark index at 6.44%.
Both institutional and retail investors started to take notice in the early 1990s, pouring billions into PIMCO’s flagship Total Return Fund.
Retail investors also rushed into the closed-end funds that Gross managed, causing the funds to trade at unprecedented premiums above their net asset value (NAV).
This was odd behavior: The PIMCO Total Return Fund was open-ended, so anyone could invest with Bill Gross exactly at NAV.
But retail investors were drawn to the closed-end funds because they seemed to promise more scope for Gross to outperform markets (by using leverage and more aggressive strategies).
Unfortunately, they paid prices that no feasible amount of outperformance could possibly justify.
The PIMCO High Income Fund (PHK), for example, traded 72% above NAV in 2011.
Even for a Bond King, that was a bar too high: 10 years later, the fund’s NAV was up a respectable 63%, but the price of the fund was up only 19% (both in terms of total return).
The difference was that the 72% premium to NAV that investors insisted on paying had slowly eroded to 0%.
Investors who thought they were betting on Bill Gross to outperform learned they were also betting on him maintaining his aura of investing invincibility.
That is hard, if not impossible, to do over an extended period of time.
Even Berkshire Hathaway, still run by the Oracle of Omaha, has long traded at a discount to the intrinsic value of the assets it owns.
Could crypto markets prove different?
Investors in the mushrooming number of crypto treasury companies seem to think their respective Oracles and Crypto Kings will do better.
The companies themselves would argue that investors are betting on their unique ability to accumulate crypto faster than investors can on their own.
But there’s nothing unique about their strategies: They all do that primarily by selling shares at a multiple of their NAV (or mNAV, for short).
The example of Bill Gross suggests that mNAV is a function of investors’ belief in a person, and I don’t think it’s any different in crypto.
How else, for example, should investors differentiate between the bitcoin treasury companies BSTR Holdings and Twenty One Capital?
Both were created by merging with a SPAC, both of which were sponsored by Cantor Fitzgerald.
The press releases announcing their formations are effectively interchangeable, with both companies stressing their mission “to maximize bitcoin per share,” which they both acknowledge copying from MicroStrategy.
The primary way to do that is to sell shares at a high, perhaps irrational multiple of NAV — and the only way to do that is with a charismatic frontman who can inspire investors to pay it.
The premiums to NAV that BSTR Holdings and Twenty One Capital command will be a measure of investors’ belief in Adam Back and Jack Mallers.
It might be a little different for treasury companies holding Solana and Ethereum, where executives can promise to maximize the native yield that those assets offer.
The latest Ethereum treasury company, for example, claims to be differentiated by the skill of its executive team.
Announcing the launch of Ether Machine yesterday, co-founder Andrew Keys emphasized the company’s ability to maximize yield: “We have assembled a team of ‘Ethereum Avengers’ to actively manage and unlock yields to levels we believe will be market-leading for investors.”
I have no doubt that these impressively credentialed executives are all Tony Stark-level geniuses.
But how much extra yield can even superheroes squeeze out of Ethereum?
Will it be enough to cover the salaries of a chai, CEO, vice chair, CTO, CFO and head of DeFi and still leave something for shareholders?
Bill Gross, the greatest bond investor of all time, heroically outperformed the index by one percentage point per year.
But that was nowhere near enough to justify that 1.7x multiple of NAV that his retail investor acolytes insisted on paying for his closed-end funds.
I imagine he’d be skeptical of crypto treasury companies doing much better.
“Picture perfection or fairy tale endings,” he wrote in 2014, “do not describe the global economy or even its financial markets.”
With crypto treasury companies, investors seem to be betting on a picture-perfect, fairy tale ending.
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