Great Gatsby and The Bond Business

In F. Scott Fitzgerald’s Masterpiece “The Great Gatsby” the narrator Nick Carraway was in the bond business.  We learn that Nick, “decided to go east and learn the bond business.  Everybody I [Nick] knew was in the bond business so I supposed it could support one more single man.”

We don’t learn much more about Nick’s career aspirations.  In 2013’s movie adaptation of the novel he’s got a stack of finance books piled-up in his cottage, but who has time to read about financial analysis when there are fabulous parties going on next door all summer.  I enjoyed this book so much that I named my first dog Gatsby.  He was a lanky, reddish golden retriever that I got my senior year in college and was lucky to have with me for 12 years.  There’s a picture of him at the end of the post.

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Further into the book we hear Nick lammenting, “Up in the city I tried for a while to list the quotations on an interminable amount of stock, then I fell asleep in my swivel chair.”  Obviously, Nick is having a hard time focusing on work while his personal life continues to dominate his New York existence.  Maybe the issue is that bonds are boring particularly compared to Nick’s social life.  This is an appropriate metaphor for bonds for most investors.  They may be boring, but what sort of role should the play in our financial lives and what was going on in the bond market when the book was written?

In the chart below, courtesy of Ben Carlson we see a history of bond interest rates from 1903-2011.  Ben has a treatise on bonds available on the site that is just excellent for a deeper dive.

The Great Gatsby was originally published in 1925 and the story was set in 1922 at the beginning of The Roaring 20s.  We can see below that rates during the early part of the 20th century were their highest in about 1920 following WWI and then went on a protracted decline during the 1920s with events including 1929’s The Great [Stock Market Crash] and The Great Depression.  Rates didn’t really moderate until WWII where they started increasing as the economy produced strong results in the subsequent decade.

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So, are bonds boring?  Surely, I would be uninformed if I believed that bonds didn’t offer opportunity to both make and loose money.  They are after all a risk asset.  We can’t assume that bond investor’s capital was appreciating during the 1920s and 1930s just because interest rates were declining.  Here’s an obligatory reminder that a bond’s principal rises as interest rates decline.  Surely, there were a lot of defaults and investor principal was wiped-out during this timeframe.

Investment returns during the 1920s and 1930s as well as corporate malfeasance are what gives us Benjamin Graham’s value investment triple net cigar-butt style investing as outlined in his seminal “Security Analysis.”  Current Greatest Of All Time (G.O.A.T.) status investor Warren Buffett traces his roots to Graham.

So, if bonds aren’t boring as poor Nick finds them what purpose do they hold in an investor’s portfolio?  A bond allocation smooths an investor’s returns over extended periods of time.  This is important because of investor psychology.  While the returns of a 100% stock allocation may be higher than a 60%(stocks)/40%(bonds) portfolio an investor is more likely to receive the returns of the portfolio with lower portfolio drawdowns.  See 100 year real returns chart below from Meb Faber.

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A drawdown is decline in value.  Investors often sell during drawdowns without professional advice, systematic rules, or major intestinable fortitude much akin to Rip Van Winkel sleeping allowing his portfolio to ebb and flow.  A portfolio with less volatility is more likely to have less investor sales and therefore investors are more likely to have the same return of their funds which often isn’t the case with high beta (volatility) portfolios.

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We can further see below an example during a 20 period where bonds provided returns similar to the entire stock market.  Understandably, this was during a period of declining interest rates and the 2000 dot com bust as well as the GFC.  Note the smooth progression of the bond mutual funds versus the increased volatility of the stock fund.

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Back to our narrator Nick from The Great Gatsby.  We don’t know much about what happened to him long-term following our protagonist’s death.  Hopefully he learned enough about the bond business to diversify his portfolio between stocks and bonds.  There was a major drawndown coming and an allocation between stocks and bonds would’ve allowed him to stomach the decline better.  Maybe another time we’ll discuss The Great Gatsby and the Fear Of Missing Out (FOMO) which is pretty similar to Keeping Up With the Joneses which are pretty pervasive themes in the novel.

For those of us still interested in the daily routines of millionaires  we learn the following about Young Gatsby’s daily schedule:

  • Rise from bed 6:00 AM
  • Dumbbell exercise and wall-scaling 6:15-6:30 AM
  • Study electricity, etc 7:15-8:15 AM
  • Work 8:30 AM – 4:30 PM
  • Baseball and sports 4:30 – 5:00 PM
  • Practice elocution, poise and how to attain it 5:00 – 6:00 PM
  • Study needed inventions 7:00 – 9:00 PM

There is also a list of general resolutions including no smoeking, chewing, daily bathing, reading, saving and being better to parents.  The schedule and the resolutions appear as irrelevant to readers today as trying to learn to become a billionaire today by following a billionaire’s routine.  But, we can infer from Gatsby’s youthful plan that he was a driven goal-setting person.  He became wealthy in an attempt to win Daisy’s hand.  Have goals and write them down or they’re just dreams.

Finally, perhaps the most famous conclusion in American literature:

     And as I sat there, brooding on the old unknown world, I thought of Gatsby’s wonder when he first picked out the green light at the end of Daisy’s dock.  He had come a long way to this blue lawn and his dream must have seemed so close that he could hardly fail to grasp it.  He did not know that it was already behind him, somewhere  back in that vast obscurity beyond the city, where the dark fields of the republic rolled on under the night.
Gatsby believed in the green light, the orgastic future that year by year recedes before us.  It eluded us then, but that’s no mater—tomorrow we will run faster, stretch out our arms farther…And one fine morning—
So we beat on, boats against the current, borne back ceaselessly into the past.

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