Beating the Dow with Bonds - Softcover

O'Higgins, Michael B.; McCarty, John

Softcover

ISBN 10: 088730883X ISBN 13: 9780887308833

Publisher: HarperCollins, 2000

Synopsis

The author of Beating the Dow takes on the bond market, sharing his simple formula for deciding when stocks are not the best investment and when to turn to bonds instead. Reprint.

About this title

Review

Michael O'Higgins is worried. The ideas advanced in his 1989 classic, Beating the Dow, have been adopted by mutual funds and market gurus alike as a proven formula for getting consistently high returns with a minimum of risk. In that book, O'Higgins introduced a system that become known as the "Dogs of the Dow", which prescribed investing in out-of-favour Dow stocks--an approach that has produced annual returns that have handily beaten most all market averages.

These days, however, O'Higgins is less concerned about beating the market than surviving it. In Beating the Dow with Bonds, O'Higgins considers the wild valuations of today's stock market and sees the spectre of a sharp and steep decline. To face this inevitable sell off, O'Higgins offers a survival strategy that involves annually allocating assets among stocks (Dow Dogs), T-bills, and T-bonds. While most members of the baby-boom generation know how stocks work, they'd be hard-pressed to explain the arcane world of bonds. O'Higgins explains them admirably. Had you followed O'Higgins's new system for the last 30 years, which saw six bear markets, your portfolio would have enjoyed an average annual return of 23.77 percent versus 18.03 percent with his Dow Dogs portfolio and 11.77 percent with the DJIA.

O'Higgins is no Chicken Little--rather, he's a market contrarian with a proven and profitable track record. If you think the stock market will go up forever, then look elsewhere for advice. But if you believe in gravity, then get this book and read it soon. Highly recommended. --Harry C. Edwards, Amazon.com

From the Author

Corrections to "17 Simple Steps to Super Returns"
1.) Determine your investment fund (same as in book)

2.) Open a brokerage account (same as in book)

3.) Prepare an Asset Allocation Worksheet (same as in book)

Figure 10.1. Beating The Dow With Bonds Asset Allocation Worksheet

1.) S&P Industrial Index Earning Yield ______%

2.) 10-Year Gov’t T-Bond Yield to Maturity ______%

3.) AAA Corporate / Gov’t Spread + 0.30 %

4.) Estimated 10-Year AAA Corporate Bond Yield ______

5.) Last week Gold Price Per Troy Ounce ______

6.) Year-Ago Gold Price Per Troy Ounce ______

7.) One-Year Change in Gold Price (Plus or Minus) ______

4.) Begin Your Research

On or about January first, buy the latest issue of Barron’s, the tabloid-sized business and financial newspaper published weekly by Dow Jones & Company; it’s available at any large newsstand for $3.

5.) Locate P/Es and Yields

Turn to the pullout section titled "Market Week" located in the center of the newspaper and find the index to the week’s statistics at the bottom of the page; under the column headed "The Indexes," look up the page number for "P/Es and Yields," then turn to that page.

6.) List Latest Standard & Poor’s Industrial Index Earnings Yield

Referring to the column of statistics in the top left-hand corner of the page, locate the box in the column dealing with Standard & Poor’s Industrial Index; identify last week’s S&P Industrial Index "Earnings Yield %," and list that number in space 1 on your Asset Allocation Worksheet.

7.) Locate T-bond Price and Yield Quotes

Refer back to the "Market Week" index to the week’s statistics; under the column at the bottom of the page headlined "The Markets," locate the page for "Bonds," which contains the latest U.S. Government Treasury bond price quotations, then turn to that section.

8.) List Latest Long-Term T-bond Yield

In the box marked "U.S. Notes and Bonds," locate, under the column labeled "Mo/Yr," the most recently issued U.S. Government Treasury bond scheduled to mature in ten years, and list the identified yield to maturity in space 2 of your Asset Allocation Worksheet.

9.) Estimate Long-Term AAA Corporate Bond Yield

In space 3 of your Asset Allocation Worksheet, add 0.30 percent (30 basis points) to the 10-year U.S. Government Treasury bond’s yield to maturity so that you will arrive at an estimated average yield to maturity for 10-year AAA-rated corporate bonds.

10.) Calculate the Difference in Yield

Compare the S&P earnings yield listed in space 1 of your Asset Allocation Worksheet to the estimated 10-year AAA-rated corporate bond yield shown in space 4 of your worksheet.

11.) Select Your Asset Class

If the estimated 10-year AAA-rated corporate bond yield in space 4 exceeds the S&P earnings yield in space 1, go to Step 12. But if the S&P earnings yield exceeds the 10-year AAA yield, this indicates that stocks are the asset class of choice, in which case proceed directly to Chapter 11 and follow my basic Five-Stock Strategy for beating the Dow.

12.) Locate Market Indicators

Go back to the "Market Week" page again; at the bottom of the page under the column marked "The Indicators," locate the page containing the prices of gold and silver, then turn to that section which bears the general headline, "Market Laboratory – Economic Indicators."

13.) List Latest Gold Price

Locate the box entitled "Gold & Silver Prices"; under the first boldface heading in the box marked HANDY & HARMAN, note last week’s price of gold per troy ounce, which appears in the first column, and list that price in space 5 of your Asset Allocation Worksheet.

14.) List Year-Ago Gold Price

Again under HANDY & HARMAN, locate the price of gold per troy ounce of a year ago appearing in the far right column, and list that price in space 6 of your Asset Allocation Worksheet.

15.) Compare Gold Prices

Calculate whether the latest price of gold per troy ounce is higher or lower than the year-ago price, then list the one-year change in price, plus or minus, in space 7 of your Asset Allocation Worksheet.

16.) Select Your Portfolio and Place Your Order

If the gold price has risen in the past year, put 100 percent into 1 year Treasury Bills. If gold has dropped in price, put everything into 20 + year U.S. Treasury Zeros.

17.) Take Stock and Revamp

Sit back, relax, and do nothing but watch your returns come on for the next twelve months.

Then, on or about January first of next year, go out and buy Barron’s again, and revisit your investment strategy by repeating Steps 3 through 17, making any changes in your portfolio deemed necessary by your latest research and calculations. Follow the same procedure every year thereafter.

And that’s all there is, folks, to my new Beating the Dow with Bonds strategy. Told you I kept it simple!

Figure 10.2. Beating the Dow with Bonds Asset Allocation Worksheet (Barron’s 1/4/99)

1.) S&P Industrial Index Earnings Yield 2.65%

2.) 10-Year U.S. Gov’t T-bond Yield to Maturity 4.66%

3.) AAA Corporate / Gov’t Spread +0.30%

4.) Estimated 10-Year AAA Corporate Bond Yield 4.96%

5.) Last Week Gold Price Per Troy Ounce 289.20

6.) Year-Ago Gold Price Per Troy Ounce 289.90

7.) One-Year Change in Gold Price (Plus or Minus) -0.70

Going through the January 4, 1999 Barron’s and the Seventeen Simple Steps to Super Returns, I came up with the following conclusions:

1.) The S+P Industrial Index earnings yield is 2.65%

2.) The estimated 10-year AAA Corporate bond yield is 4.96% (4 ¾ Nov 08 at 4.66% + 0.30%)

3.) The current price of gold was $228.70

4.) The year-ago price of gold was $288.00

Therefore, bonds are more attractive than stocks and long zeros are the bond of choice because the price of gold declined.

Edition details

• Publisher: HarperCollins
• Publication date: 2000
• ISBN 10: 088730883X
• ISBN 13: 9780887308833
• Binding: Paperback
• Language: English
• Number of pages: 228