Customer Reviews

Beating the Dow with Bonds: A High-Return, Low-Risk Strategy for Outperforming the Pros Even When Stocks Go South

5 star:		(5)
4 star:		(6)
3 star:		(2)
2 star:		(10)
1 star:		(10)

 

 

O'Higgins' "Beating the Dow with Bonds" is an updated version of his very successful "Beating the Dow" which outlined the now well-known "Dogs of the Dow" strategy. In his new book O'Higgins presents a simple system whereby investors decide at the beginning of each year whether their money should be in treasury bills, treasury bonds, or stocks.

Simply stated, O'Higgins recommends investing in stocks only when the average yield (the inverse of P/E: E/P) of the S&P 500 exceeds the yield on government bonds. If this is not the case, then one uses the change in the price of gold is an indicator of inflation to decide whether to invest in US Treasury bills or US Government zero-coupon bonds.

While I find the strategy interesting, and am persuaded that the stock market is tremendously overvalued at present (a main point of the book), I think that this information could have been presented in 10 to 15 pages. O'Higgins reiterates the same information over and over again, and the book is the full of what I consider "filler." A full 65 pages (one fourth of the book!) contains synopses of the 30 companies comprising the Dow Industrials. Four pages list "selected" discount brokerage firms addresses.

I have very little patience for sloppy editing. Between O' Higgins, his cowriter (John McCarty) and their editor I would expect such glaring errors as missing words in sentences (not to mention nonsensical sentences) would not make it to publication. They did.

In summary, I would recommend that interested readers check out a copy from their local library and read pages 166 through 170. After reading this outline of O' Higgins' method, thumbing through previous chapters (noting the figures) will provide a quick, and probably useful, overview of his rationale. O'Higgins is making some very important points in "Beating the Dow with Bonds," and he is certainly a well-respected market veteran (as he points out on a number of occasions), but due to the rambling nature of the book and the sloppy editing I cannot recommend its purchase.

Are you interested in spending thirty minutes per year in order to trounce the Dow Jones Industrial 30 stocks by a factor of eighteen over a 29-year period? Michael O'Higgins, in his recent book, "Beating The Dow With Bonds", lays out a seventeen step method for doing just that, beating the Dow using a nearly risk free method. All the necessary information to follow O'Higgins new strategy is available in Barron's Market Week, and it will not take more than 20 - 30 minutes per year to make the calculations. What really grabs the reader is the stellar performance of this investment approach. Table 9.1 on page 150 contains all the data needed for analyzing O'Higgins new tactics. The cumulative return with this new system is 47,886 percent versus the DJIA's return of 2,640 over the same twenty-nine year time period. O'Higgins is well known as the co-author of "Beating the Dow". In BTDWB, he compares this new strategy with his former Dogs of the Dow approach. The results are impressive, as the new strategy will generate, as mentioned above, a 47,886 percent return versus 12,377 percent for a Beating the Dow Five-Stock's. Another advantage for this new investment scheme is, this can all be accomplished with less risk. O'Higgins asks the question, "Are these results too good to be true"? He claims they are not. On closer examination, these results are too go to be true.

The strategy necessary to accomplish such outstanding returns requires one to look up some easy to find data in Barron's. First, identify the S&P Earnings Yield % and compare this value with the 10-Year U.S. Government T-bond Yield to Maturity after making a minor adjustment of adding 0.30% to the T-bond Yield. If the S&P Earnings exceed the adjusted bond yield, then it is time to select the five Dogs of the Dow (DOD) stocks. O'Higgins reviews the DOD process he originally laid out in his first book. If the adjusted bond yield is higher than the S&P 500 yield, then it is time to look up information on the 'Gold Indicator'. If the one-year change in the price of gold is higher than it was one year ago, then invest 100 percent of your portfolio in U.S. Treasure bills due to mature a year from now. If the one-year change is lower than the price of gold one year ago, then invest 100 percent of your portfolio in the highest yielding U.S. government zero coupon bonds available that are due to mature in twenty years or more. O'Higgins lays out all seventeen steps (there are actually about eleven or twelve critical steps) in great detail. The above description is only to explain the bare bones approach of his recent thesis. Note that the 0.3% correction is a "soft" number. Reading O'Higgins one might accept this as a rigid value.

One becomes suspicious of this strategy when O'Higgins moves investors out of the stock market beginning in 1981 and keeps them in either bonds or T-bills right through the greatest bull market of the century. How can this be so? It all comes down to uncommonly outstanding performance in two of the 29 years; his 30-year zero coupon bonds yielded 156.12% and 106.90% in 1982 and 1985, respectively. If one returns those stellar bond years to the DJIA return of 25.79% (1982) and 32.78% (1985), according to O'Higgins figures, then the DJI and BTD 5 Stocks both will out-perform O'Higgins new strategy. To build an overall investment philosophy where two years of outstanding performance is the key kicker is truly data mining.

Following O'Higgins BTDWB method, I ran the numbers for two consecutive weeks late in 1998. One week I was in 30-year Zero Coupon Bonds; the next week I was in stocks. Where you will have 100% of your portfolio positioned depends on the week you make your assessment. O'Higgins BTDWB strategy is simple and purports to generate excellent returns, both enticing to the novice investor. Nevertheless, it is a flawed system. With interest rates where they are today, it is highly improbable followers of this system will see future returns match the high historical returns. In addition to the fundamental flaws of this investment strategy, BTDWB needed a keener eye when it came to editing the book. Examples of this showed up on page 48, where the Price to Sales Ratio is given as: "To get the price to sales ratio, divide the sales per share figure by the stock's current market price". Price to Sales is the reciprocal of what is stated. Graphs are consistently lacking in fundamental information. On page 50, no units are provided for the y-axis and one of the graph lines is missing as there is a Small Cap value of $4,495.99 floating in space at the northeast corner of the graph. In Chapter 4, a brief case is made for investing in small cap stocks. O'Higgins tells us he will address, in the final chapter, when to be in small cap stocks. He never follows through with this information. The graph on page 106 does not contain any identifying information on the y-axis. Chapter 11 is nothing but filler. These are examples of numerous errors in the book.

Overall, "Beating the Dow with Bonds" is an interesting but flawed read. Both the novice and experienced investor would do well to go back to the fundamental analysis and hard work involved in investing. Forget the quick and simple methods espoused in the popular press.

Lowell Herr

O'Higgins has summarized his approach to making a switch from stocks to bonds on pages 165 to 170. The problem is the instructions for calculating yields and yield differences are confusing and unintelligible. The BTDWB allocation strategy results are summarized over a thirty year period in a table on page 151-152. The BTDWB would have selected 1-year TBills as the optimum investment nine times since 1972. But the data presented shows T-Bills were not the best investment eight out of nine times. This book and BTDWB strategy is flawed. I wish I could get my money back.

This is one of the few stock market books from the 1990s that will be read and appreciated many years from now. While silly stuff like "Dow 36,000" & Harry Dent quickly withers away, O'Higgins advice gains credibility every day in this apparently multi-year bear market. Several web sites (beartopia dot com & others) mention this book. Perhaps the book's title should have substituted "zero coupon bonds" for the word "bonds." Do look up the authors corrected list of investment steps here at Amazon, however, do not let the slightly sloppy editing deter you from learning this powerful investment advice. The more knowledgable one is of the market, the more one appreciates O'Higgins and his two works. This book's advice works in bull and bear markets.

I bought this book because I wanted to learn more about investment products OTHER than common stocks. Instead, (in the book on tape), I got 5-10 minutes about the different types of bonds, a little detail about T-bills, and the frank admission that this book "doesn't really discuss corporate bonds". WHAT!? The whole rest of it is spent preparing you to run for cover for the upcoming crash of 2000 - for that, I must say he was prescient (Too bad I didn't read this in 1999!). More time is spent describing the basics of common stocks, and how the major industrial averages are calculated than is spent on bonds! Oh - and that WRONG formula for computing the price/sales ratio erroniously also made it onto the cassette version. I actually had to rewind the tape to see if I had heard correctly!

Your biggest return this year may be to not buy this one. As others have noted, the book has more holes in it than my broker's ethics. As one example, the simple demonstration of how to use the method doesn't match the text. Worse is the fact that there are inconsistencies in the method even using what Higgins provides. The method recommends in some situations that we buy treasuries--in fact, in those years STOCKS were more often the better investment. So is 1999 stocks or zeros? And will it matter if the DOW hits 10,000 in software that only allowed 4 digits?

I think the ideas in this book are absolutely crucial to investors, but I'm dissappointed by its inconsistencies & omissions. There is no concrete demonstration of how O'Higgins arrived at such spectacular returns, for example, in a particular year, by investing in zero-coupon bonds. 24% annual return is awesome, but it would be nice to see an example of how this would happen in a particular year, some hard data for the novice investor to see (not just total annual returns, year by year). Especially someone (like me) who knows virtually nothing about bonds are finds it hard to beleive that this "safe" investment could provide an 80% return in _one year_. He does not go through even one example to illustrate the process of allocation of his portfolio, so there are some details that I have not figured out after several readings. He also suggests in his section about stocks that he will later explain how to invest in small-caps, since they outperform blue-chips over time, but he never does, at least not in _this_ book! (Maybe this book was pieced together from sections of his old book, Beating the Dow?) I am deeply suspicious that no one edited this book as a whole work, that it was a cut-and-paste job with some new chapters on bonds.

Some information he provides like pieces of a puzzle and later uses, expecting the reader to put the pieces together. An example is the use of the change in the price of gold as an indicator of inflation, about which one of the earlier reviews complained.

Rather than taking on faith many of his derivations, I think I'm going to have to do some more research before I follow this strategy. That's my main gripe -- there is still work for me to do after reading this book, to confirm the annual percentages and cumulative returns that he claims. I am, however, convinced by this book of the value of bonds in an investment portfolio, and of the importance of contrarianism when it comes to investing.

I gave the author 2 stars because I agree with him on one basic premise - equities are generally overvalued. However, I found the rest of the book to be entirely lacking.

First, it severely lacks content. The book is short to begin with - and what few pages it has are spent poorly. Almost 1/3 of the book is dedicated to descriptions of the 30 DOW companies.

His investment strategy is simple. In fact, it's too simple. His conclusions are based upon very little research - nothing more than historic data that just happens to work out.

He has some valid points (i.e. zero coupon bonds as investments), but spent very little effort crafting it. The knowledge encapsulated within the 200+ pages of this book could be condensed to a single web page with little effort.

I really can't defend this book, other than to say, "It told me what I wanted to know." Higgins' original Beating The Dow was my first introduction to the wonderful world of investment literature some ten years ago, so my purchase of this latest one was not an impartial decision. What's ironic about the existence of BTD With Bonds is that at the end of the original book, Higgins plainly showed that mixing his original Beating The Dow theory with other investments only weakened it. So why did I buy this book? I wanted a very clear, easy to understand book about investing in bonds. And that is what I got. While I probably won't be following the investment advice in this book, I did find it a pleasant alternative to Bonds for Dummies, or some similar title.

Although O'Higgins' point about stocks being over-valued is well taken, he does not go nearly far enough to prove his thesis. His new method is not back-tested before the late '70s, and he provides none of the source data that would enable an interested party to verify his returns or extend the method.