Value Investing / Main Index / previous / next

September, 2003


Last year at this time bond funds looked like a brilliant investment. Such assets substantially outperformed stock funds through the long bear market for equities (early 2000-early 2003) and, partly as a consequence, many folks were pulling their money out of stocks or stock funds and pouring it into bond funds.

Now, however, the wisdom of such recent bond fund purchases is being called into question. While a few still suggest that the biggest threat to our investments and economy may be from deflation - as occurred, beginning in the late 1980s, in Japan, ushering in a more than decade-long severe recession there, with huge losses in stocks and real estate - more analysts believe the hazards ahead for us are from higher interest rates and inflation, conditions in which bond funds usually do very badly. Indeed, already, in just the last several weeks, owners of bond funds have seen significant losses as interest rates, though still low in historical terms, have risen about 1%, approximately 25% higher than only a few months ago.

My brother, Frank, a Raymond James branch manager, has weighed in on this pro vs. con bond funds debate and thinks, with interest rates having been at their lowest level in about forty years, bond fund prices are extremely vulnerable. He's thus been recently advising his clients, even if they only hold short-term bond instruments, to get completely out of all bond funds.

According to "Forbes," in its 9/29/03 issue, "Money Manager," pp. 105-106, Warren Buffett also has been recently leery of bond holdings, having sold off nearly all his long bonds in the first part of 2003. Yet the article points out as well that at least one fixed-income manager with a good record, Van R. Hoisington, based in Austin, thinks the argument for deflation in the U.S. is more convincing. Were he to be correct, bonds here could do quite well but our real estate and stocks rather badly.

I am not at all skilled as a market timer and so do not feel comfortable forecasting the directions for bonds, equities, real estate, and so on. If you agree, however, that bond funds are currently too risky, or you simply have been safely parking reserves in money market funds, the question arises: where shall excess dollars be put now?

Some like REITs (real estate investment trusts), others convertibles, certificates of deposit, or trust-backed corporates. Each has advantages and disadvantages to be considered. Our main quarrel with REITs at this point, for instance, though they have good yields, is that many have already had a big run-up and are not cheap.

Instead, as was true last year, I now like five actively managed well diversified no-load stock funds with excellent long-term records.

Had you invested a year ago in the five funds recommended here then, (See "Show Me the Money!"), you'd doubtless have done better than with an investment in the Standard and Poors 500 Index. (Per the "Forbes" 9/15/03 issue, for 8/1/02 through 7/31/03, our five mutual fund recommendations averaged a 16.0% total return vs. 10.5% for the Vanguard 500 Index Investor Fund, though with wide performance variations: Heartland Value rose about 45%; Clipper Fund went up only about 3% in that period.)

Here are five that may serve you well and show you the money in the next few years, all members of a recent (9/15/03) "Forbes" issue's "Fund Survey Honor Roll:"

FundSymbolToll Free #Annual
Value of
Mairs & Power Growth FundMPGFX800-304-7404.78%$37,461
Thompson Plumb Growth FundTHPGX800-999-08871.15%$32,993
Excelsior Value & RestructuringUMBIX800-446-1012.99%$31,699
Torray FundTORYX800-443-30361.07%$31,470
Weitz Partners Value FundWPVLX800-232-41611.13%$31,274

*The Value as of 7/31/03 of $10,000 invested on 1/31/94, after loads and taxes, per "Forbes," in the 9/15/03 issue, pp. 162-163. (Per the same source, for the S. & P. 500 during 1/31/94-7/31-03, the value of an initial $10,000 investment would have become $24,730, excluding taxes.)

Another likely good use of extra funds, either for new investment or with assets available from exchange or redemption from bond holdings, is to purchase Benchmark Investing (BI) stocks, particularly those in the Dow 30, for which this method of equity selection has an especially superior record. (See our earlier essay, An Introduction to Benchmark Investing.)

Readers are advised to check out the excellent "Benchmark Investing" site created by Rick Sandberg and Lee Lackey. Here you may find the results of the complicated B.I. calculations provided to you for free. The B.I. Dow Record is also provided. Currently, the most attractive Dow 30 stock, using their Value BI4 approach, which returned 24.6%, compounded annually, for 1973-2002, is Home Depot (HD) (recent price $33.10).


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

Value Investing / Main Index / previous / next