Bonds vs. Stocks: What Every Rule #1 Investor Should Know

Bonds vs. Stocks: A Rule #1 Perspective

When most people think about investing, they immediately picture the stock market. But bonds—corporate debt that pays investors interest—have been a big part of investing for centuries. The question I often hear is: Should I invest in bonds or stocks?

The truth is, both bonds and stocks can be approached using the same Rule #1 Investing principles. Whether I’m buying shares in a business or considering corporate debt, I want to make sure I understand the company, know it has durable advantages, and ensure that I’m buying at a price that gives me a margin of safety.

What makes the comparison fascinating is how similar the logic is—but also how different the outcomes can be. Let’s walk through this together.

A Real-World Bond Example: CF Industries

Several years ago, CF Industries, one of the largest fertilizer producers in the country, borrowed billions to build a new nitrogen plant on the Mississippi River. When they borrowed the money, the farming economy was booming—corn and soybean prices were sky-high, farmers were planting every acre possible, and fertilizer demand was through the roof.

It seemed like a safe bet. But as the years passed, corn prices collapsed, fertilizer prices plummeted, and CF’s earnings sank. Suddenly, the massive debt they had taken on became a real risk. Credit rating agencies downgraded their bonds from investment grade to junk.

Investors panicked. Many bondholders rushed to sell, often at steep losses, because the bonds suddenly looked too risky to hold. But here’s the key: CF was still a fundamentally strong company with a durable moat. The business wasn’t going to disappear—it was simply going through a cycle.

Howard Marks and the Art of Buying Distressed Bonds

This is exactly the kind of situation legendary investor Howard Marks looks for. When bonds of a strong company are trading at pennies on the dollar, he steps in.

Imagine a bond originally worth $100 that falls to $30 because of fear in the market. If the company survives and repays its debt, that bond goes right back up to $100. That’s more than tripling your investment—not because the business suddenly became great again, but because you had the discipline to buy when everyone else was panicking.

That’s the margin of safety in action. And it’s the same principle I use in Rule #1 stock investing: buy wonderful companies when they’re on sale.

The Critical Difference Between Bonds and Stocks

At this point, you might be thinking: “So why not invest in bonds the same way we buy stocks?” Here’s the big difference—time.

Bonds come with a fixed maturity date. That means the company has to recover within a certain window for you to make money. Stocks, on the other hand, don’t expire. If I own shares of a wonderful business, I can wait as long as it takes for the market to recognize its true value.

This flexibility is one reason Warren Buffett moved away from bond investing in the early 1980s and focused almost entirely on stocks. Stocks let us be patient—forever, if necessary—while bonds force us to make a bet on timing.

The Real Estate Analogy

One way I explain this to my students is by comparing it to buying a rental house. Imagine you buy a home for $100,000 and rent it out for $10,000 a year after expenses. That’s a 10% annual return. Even if the house doesn’t appreciate much in the short term, you’re still collecting cash flow. Over time, rents tend to rise, increasing both your income and the value of the property.

Bonds are like this rental income. You put up the money, and the company pays you interest year after year. The difference is that when you own stock in a great company, the income (owner earnings) and the value of the business can grow indefinitely. That’s the real wealth-building power of equities.

Which Should You Choose?

Here’s the bottom line: bonds can occasionally offer fantastic opportunities, especially when fear pushes prices down on strong companies. But for most long-term investors, stocks are the superior path to financial independence.

Stocks give you flexibility, compounding growth, and the ability to hold forever. Bonds give you fixed payments and fixed timelines, which limit your upside and force you to bet on timing.

That’s why I believe every Rule #1 investor should focus primarily on buying wonderful companies at attractive prices. Bonds may have their place in specific situations, but stocks remain the most powerful tool for building wealth safely and predictably.

Call to Action

If you’re serious about learning how to identify wonderful companies, calculate their value, and buy them on sale, I invite you to join me in my 3-Day Investing Workshop. It’s the best way to master Rule #1 Investing and build confidence in your financial future.