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Bill Gross' Lesson Learned: Character Trumps Flash

Bill Gross
CNBC
Bill Gross

Choosing flash over substance led Bill Gross, founder and co-CIO of bond company PIMCO, to say “pass” to two of the best investments in US history and give a thumb's-up to a major flop.

Now, to avoid a repeat of either situation, he keeps a picture of the legendary banker J.P. Morgan on his wall. Morgan had told Congress once, that "Lending is not based on money or property," said Gross.

The first decision of learned lessons was when he turned down Warren Buffett and Charlie Munger for a $10 million loan for their company Berkshire Hathaway in 1975.

“It seemed like a funny company,” said Gross. He made his decision based on the exteriors of their assets—a dilapidated industrial complex in the Northeast, a See's candy store, Blue Chip Stamps, but not much else.”

Although PIMCO didn’t make the loan to those unassuming Midwesterners who eventually became among the world’s wealthiest men, Pacific Mutual, which owned PIMCO, did.

About a week later, Gross met Sam Walton, who was looking to expand his young general store operation to Ohio and Iowa.

“The two sons and Sam would drive me around town and show me the Wal-Mart , all the while with their dog named Dan. They'd yell, ‘Git ‘em, Dan, git ‘em, Dan,’ when a dog or cat would cross the street.”

Gross turned the Waltons down, too, based on appearances, he said.

Shortly thereafter, Gross agreed to loan money to a new company called Itel, not Intel, a San Francisco rail car leaser, which had a plush office 30 floors up with a view of the Golden Gate Bridge.

“I said, ‘Now this is a company. Carpets, secretaries, rail cars that you can touch and feel, and the steel,” Gross explained. “So the loan was made, $5 million to Itel, and six months later the company was bankrupt.”

So whenever Gross is considering a decision, he looks at that picture of Morgan.

Watch the next segments of the "My Worst Trades," featuring Blackrock's Larry Fink, Wednesday, October 20 on Squawk Box from 6-9 am ET and Power Lunch from 1-2 pm ET.