How I Plan to Beat the Stock Market Safely


“No one tests the depth of a river with both feet.” Ashanti proverb

I’ve been talking to people I trust and have recommended to you — and they’ve convinced me that right now there are still two good options for conservative investors like me.

First, I am going to invest about 20% of the “extra” money in a stock-index fund (in case I’m wrong about the stock market’s future). And, second, I’ll put some into bond funds with good track records — and one in particular: Pimco Total Return (PTR).

In case you haven’t heard about it, PTR has a phenomenal track record. Since 1987, it has gained an average of 9.5%. That beats the Lehman Brothers aggregate bond index by a percentage point a year. “That’s the bond-market equivalent of Joe DiMaggio’s 56-game hitting streak for the Yankees in 1941,” says USA Today. $10,000 invested in PTR in 1988 would have turned into about $41,000 by 2003.

What may be just as impressive to me is that the fund returned an average of 8.3% over the last five years — this while bond returns (as well as stock prices) were falling steeply. This impressive performance is the work of Bill Gross, who gets paid $40 million a year to beat out the bond market through a combination of price gains and interest income.

PTR now has $76 billion in assets. That makes it a big fund, about a billion short of the Vanguard 500 Index Fund, the nation’s largest stock fund. I like bonds because of their inherent safety. They are loans, not investments. Making loans, it seems to me, is easier than investing. When you loan a business money, you have certain advantages you sometimes don’t have when you invest in it. First and most important, you often have some sort of collateral. Second, you have some history to look at — not only the history of business performance (which you have when you invest in a company that has a history) but also the record of how the business honors its debts. These factors and more account for an overall yield for bonds that is less than that of stocks, but for conservative investors (like me) the ratio is worth it.

I like bond funds because of their diversity. I don’t have enough time to study individual businesses; so, when it comes to bonds, the only individual bonds I buy are government-backed munis. But I will buy bond funds. And of the promising bond funds out there, I like PTR best. Not just because of its long-term track record but also because of the guy who runs it.

Bill Gross is the kind of person I like to get financial advice from. He didn’t start out as a financial specialist. He began with an undergraduate degree in psychology from Duke. He’s good with numbers, but he employs analytical skills that he learned from his liberal-arts education to guide his selections. “Bill is very philosophical, very big-picture,” a colleague said of him. “I like to piece together history,” Bill told the USA Today reporter. “Not just bubbles and manias, but countries and continents and conflicts.”

Studying wars, Gross says, gives him an idea about why “governments do things and why they make mistakes.” Those observations help him understand trends and patterns in inflation, interest rates, economic growth, and — ultimately — bond prices.

The problem with bonds — and Gross is the first person to point this out — is that the American economy might well be in for a long period of slow or even stagnant growth (because of the enormous debt it is taking on). “The U.S. is in the catbird seat,” Gross says, “But it may be that the seat has a shaky foundation in terms of finance.”

It boils down to this: Bonds generally are giving you poor returns and they may get worse. This is certainly true of municipal bonds and may turn out to be true in regard to my investment in Gross.

Still, I like quality bonds better than quality stocks for one irrefutable reason: They are less speculative. Stocks are a form of gambling online Info. (I’m investing in the business because I believe in it.) Bonds are IOU’s. (If the bond seller defaults, it pretty much ruins him.)

I am reluctant to buy stocks right now, because they are twice as expensive as they should be (by traditional P/E standards). But since I know that stocks are good over the long haul and since I can’t predict the future (and may be wrong about stocks), I do want a portion of my passive-investment portfolio in them — but only a small part and that in index funds (which are conservative because they are so diversified).

I like my municipal bonds because they give me a total payback amount I can count on. The only thing I must do is wait till they have matured. With corporate bonds, the guarantee of repayment isn’t as strong (companies do go bankrupt), but with Gross making the picks for me, I feel pretty safe. So, even though many experts are advising against bonds right now, I’m buying. And even though many experts are predicting another stock-market surge, I’m in stocks only in the most conservative way.

And since that’s what I’m doing for myself, that’s what I’m recommending for you.