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How Jeffrey Gundlach uncovers winning trades in the market

Aarthi Swaminathan
Finance Writer

DoubleLine Capital’s assets under management have ballooned to over $120 billion, thanks to its fund managers’ ability to deliver market-beating returns.

So, how does the firm’s head, Jeffrey Gundlach, process information in a way that he is able to generate alpha?

“I look at news wires more than anything else,” Gundlach said in an exclusive interview with Yahoo Finance’s Julia La Roche. “And I try very hard to pay no attention to what other people think.”

“I get invited to all the time, groupthink events,” Gundlach shared. “They call them Titans' Dinners and stuff like this. And all these hotshots are there. All these names of people that we all know in this business. And they'll be there, and you can sit there, and people share ideas.”

Despite the fact that these exclusive events are exclusive and include influential players in the market, Gundlach questions the opportunities discussed.

“I did a couple of those years ago, and I would sit there,” he said. “And here's Mr. Great number one, and he's massively bullish on Apple. And then they turn to Mr. Great number two, and he's massively bearish on Apple. And both of their arguments sound really good to me. So...I don't know what I think now about Apple. I might have walked in the room thinking something positive or negative, but now I'm just confused.”

‘Watch for those times when the news doesn't change, but the interpretation does’

When he’s ignoring the “titans,” what is Gundlach doing?

“I think what's important is to look at the news flow and watch for those times when the news doesn't change, but the interpretation does,” he added. “Or the news does change, and the interpretation doesn't.”

This makes for a dislocation in the market, and the savviest traders will find a way to profit as those dislocations correct themselves. The real key was “to look for Harbingers and instances of the cusp of change. When you actually get a moment, you can act on it.”

Gundlach brought up an instance in 2011 where former Fed chair Ben Bernanke had announced that he was keeping short-term interest rates at zero for at last three years.

“He pre-announced three years of zero interest rates. Shockingly, many instruments in the bond market that were sure to profit tremendously from zero interest rates for three more years, they didn’t go up in price for half a day,” said Gundlach.

Ben S. Bernanke, former chairman of the U.S. Federal Reserve (Andrew Harrer/Bloomberg via Getty Images)

Taking advantage of the pricing delay, he acted fast: “I bought them all. It was like, ‘Why aren’t people buying it? I don’t know, but they should be like 20 points higher.’ And they were 20 points higher about two weeks later. But they were actually there to be had, because people want to see the idea that they have get ratified or corroborated, by a crawler on some financial program.”

So while others were waiting for validation for the opportunity they may have just discovered, “by the time it’s safe, and you have confirmation that your idea might be broadly embraced. By then it’s too late.”

‘Look for correlations’

That belief in his decision was based from his underlying affinity for correlations.

“I have a whole team, that what we do is, we just look for correlations,” he said.

Gundlach shared one relationship he found: “For example, things like the Fed’s underlying inflation gauge, which doesn’t get nearly enough attention. It correlates incredibly well to CPI, core CPI, on about an 18 month lead basis. It’s got about an 80% correlation. Nobody knows about this.”

But trades based on correlations need to be monitored.

“Relationships don’t hold up forever,” he said. “The world changes, the variables change, the coefficients change that drive things. And so it’s really important that you just stay on top of it.”

“That’s why I do what I do,” he added. “I could have retired a long time ago. I find it very interesting, as a way of processing human behavior, society, and just understanding what makes the world go round.”

[ Full transcript of Jeffrey Gundlach’s extended conversation with Yahoo Finance ]

Aarthi is a writer for Yahoo Finance. Follow her on Twitter @aarthiswami .

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