(FORTUNE Magazine) – Arthur Bonnel, 46, of Reno, Nevada, isn't afraid of a good gamble. But he doesn't like the odds he's getting in the stock market lately. As portfolio manager of the high-performance MIM Stock Appreciation fund, Bonnel regularly sizes up the bull's prospects. When he senses trouble, he raises cash and moves to more defensive stocks, as he's doing now. Such adept moves have helped guide his fund to a 31.5% average annual return to investors over the past three years, almost twice the return of Standard & Poor's 500-stock index. In an interview with Fortune's Susan Kuhn, he explains why he's bearish and how he's investing now.

Why are you worried? A number of market measures are negative: The price/earnings multiple is awfully high, dividend yields are extremely low, the rush of initial public offerings shows speculation, mutual funds have received tremendous amounts of cash, and the market has been falling, not moving higher. But the technical indicator that really works for me -- and now worries me -- is the pattern of the Dow Jones utilities index.

Flashing a warning, is it? Utilities often peak before the Dow Jones industrials. Since 1946 the utilities have peaked and dropped 10% or more 14 times. Every time the Dow industrials have followed. On average, the industrialsokay? fell 23% from their high. Most recently the utilities peaked on December 31, 1991, and they have now fallen over 10%.

How far might the market fall this time? I see at least a 10% correction coming in the Dow, even if the economy begins to recover. But there is also a distinct possibility that the drop could be 20%, which would signal a bear market lasting anywhere from seven to 11 months. There's a 50% chance the Dow will drop below 2600. Personally, I don't like that. My entire pension is invested in my fund.

So what are you doing to protect yourself? I've raised a little cash, to 15% of total assets. But since I believe that my job as an equity fund manager is to manage equities, that's as far as I'll go. As for the remainder of the portfolio, I am becoming more conservative, which means I am selling my high-P/E stocks and buying stocks with low P/Es. When buying stocks, I always follow four basic rules. I look for companies that are currently making more money than they did last year. I look for solid * balance sheets, where current assets exceed current liabilities. I also want to see low debt. Finally, I like companies owned extensively by managers and directors. When managers own stock in their company, they have a personal stake in seeing it grow.

Tell us your low-risk favorites. Polaroid is selling at ten times earnings. In the December quarter it made $1.16 a share, vs. 90 cents a year ago, a nice increase. Employees, through a stock-ownership plan, own 20% of the company. Debt is just 23% of total capitalization. At $29 a share, the stock has real potential. I really like Briggs & Stratton, selling at 18 times earnings, which as a bonus has a 3% dividend yield. It is a family company: Frederick P. Stratton Jr. is the CEO. It is the world's largest manufacturer of air-cooled gasoline engines of two to 18 horsepower. These are the engines in lawn mowers and the like. You can't buy leaded gasoline anymore, but there are still a lot of mowers out there that run on leaded gas. Those owners are going to be buying new lawn mowers. Lancaster Colony of Delaware makes household items like table glasses and aluminum cookware as well as splash guards for trucks, car mats, and even salad dressings and noodles. Its products are inexpensive, so they sell. Insiders own 35% of the stock. The company is currently reducing debt, now 28% of capital. The stock sold recently for $46.50 a share, or 21 times earnings. That's much cheaper than the Dow, which is selling at 58 times earnings.

Sounds good. Any others? Another issue that people are interested in long term is cleaning up the environment. Wheelabrator Technologies, which builds and operates waste-to- energy plants as well as water purifiers and air-control systems, has increased its earnings every year since 1987. Waste Management owns 57% of the stock, so, like an insider, it has a major stake in seeing the company do well. The stock recently sold for $30.75 a share, or 21 times earnings.

CHART: NOT AVAILABLE CREDIT: JIM MCMANUS FOR FORTUNE CAPTION: Briggs & Stratton Money manager Arthur Bonnel thinks stocks like Briggs & Stratton will survive a market drop.