Final Word on BTDwB
Just stay Foolish

by Ann Coleman (TMF

Reston, VA (January 22, 1999) -- It's been a Michael O'Higgins Week here in the Foolish Four area, and after spending a week on his new book, I'm left with the feeling that it's probably not worth much more time and effort. Here's why.

If you are truly invested Foolishly, meaning you first paid down your all of your debt except your mortgage and are only investing with money you won't need for at least 5 years, then a major market correction is not going to put you on the streets or force your kids to transfer from Yale to the local community college. It might hurt, but it doesn't spell tragedy.

If this is not the case, then if nothing else, our examination of Beating the Dow with Bonds has served as a warning. Get your investing house in order! I, personally, do not think that we will have a major meltdown that will take decades to recover from, but I am not going to bet the ranch-style house on it. To say that something like that WON'T happen is as silly as saying that it will. I don't know what the future holds any more than Michael O'Higgins does.

His points about the market being at very high levels are not disputable, though, and we should all keep that in mind. Markets go up, markets go down, and they are more likely to go down when they are at record high levels than when they are at relatively low levels. Every Fool knows this and should make sure that these facts of investing life are not going to ruin his or her own life.

So what do you do if you are Foolishly invested and still worried about the possibility of a major market meltdown? You are left with the same decision you have always had: How much of your non-essential cash are you willing to risk? That's a decision only you can make. If you decide to look for alternatives to stocks for some or all of your cash, is the new O'Higgins strategy something to consider?

I'm not sure that the strategy makes more sense than a plain old savings account right now. The success of O'Higgins's strategy is totally dependent on the Gold Indicator we discussed Wednesday, and while the table in the book indicates that it has been 100% successful in avoiding long bonds in years when they lose money, it only takes one mistake to put your money at great risk. Thirty year zero coupon bonds have lost more than 20% in 7 of the last 30 years. (By comparison, the Foolish Four's worst-by-far year during that period was an 18% loss, and it only had negative returns in 3 other years.)

While the Gold Indicator may be right on the money -- it might also be one of those correlations that seem to be amazingly accurate until it isn't any more. Had O'Higgins provided more data on it, especially intra-year data that showed exactly how it worked, we would have a better way to evaluate it. But he doesn't.

Imagine this. On December 31, you check the price of gold and it is just a little bit under its price last year at that time. The Gold Indicator says "buy zeros." The next week the price of gold starts to rise....

There is no doubt about it -- zero coupon bonds are very risky and highly volatile. Past success of the Gold Indicator or not, I don't know that I would be willing to bet that it will never make a mistake, or that it won't make a mistake between now and the next market correction. (After the crash, presumably, we will all be back in stocks.) If you are really worried about a crash, there are much safer places to put your money.

This is also a very good time to review just WHAT you are invested in. If you are betting your retirement on Internet stocks with no earnings that have gone up a zillion percent in the last few months, you may be in a pretty vulnerable position -- for the next few years, anyway. If you are betting your retirement that people will still be drinking Coke in 20 years (or buying tractors, using toilet paper, wrapping Christmas presents with Scotch tape, and borrowing money), you may be a bit safer.

The point O'Higgins made that troubles me most is that too many people are investing very indiscriminately -- as if they are on a hot streak at the craps table. ("Come on, baby, roll anything dot com!") I don't necessarily agree that the small investor, as a group, is going to panic and drive the market into the ground if we have a correction. But anyone who views the market as a perpetual money machine or who is investing money that should be going to pay off debt is vulnerable -- and very unFoolish.

Maybe I'm preaching to the choir. Foolish Four investors are probably not the type to be betting next month's rent on the latest Internet IPO. Still, this might be a real good weekend to take stock of your stocks and your overall financial plan.

Fool on and prosper!

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Today's Stock Lists | 1998 Dow Returns

01/22/99 Close
Stock  Change   Last
CAT  -1  1/8   43.75
JPM  -2  3/4   103.13
MMM  -   5/8   71.31
IP   -1  5/16  41.00
                   Day   Month    Year   History
        FOOL-4   -2.24%  -3.76%  -3.76%  -2.33%
        DJIA     -1.55%  -0.66%  -0.66%  -1.06%
        S&P 500  -0.78%  -0.30%  -0.30%   1.09%
        NASDAQ   -0.25%   6.67%   6.67%   8.13%

    Rec'd   #  Security     In At       Now    Change

 12/24/98   24 Caterpillar   43.08     43.75     1.56%
 12/24/98    9 JP Morgan    105.51    103.13    -2.26%
 12/24/98   14 3M            73.57     71.31    -3.07%
 12/24/98   22 Int'l Paper   43.55     41.00    -5.86%

    Rec'd   #  Security     In At     Value    Change

 12/24/98   24 Caterpillar 1034.00   1050.00    $16.00
 12/24/98    9 JP Morgan    949.62    928.13   -$21.50
 12/24/98   14 3M          1030.00    998.38   -$31.63
 12/24/98   22 Int'l Paper  958.12    902.00   -$56.12

                             Cash     $28.26
                            TOTAL   $3906.76