Beating the Dow With Bonds : A High-Return, Low-Risk Strategy for Outperforming The Pros Even When Stocks Go South [ILLUSTRATED] (Hardcover)

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.

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