Is now the time to invest in US stocks? The old saying credited to Baron Rothschild in the 19 th century is, “The time to buy [stocks] is when there’s blood in the streets.” The saying can apply to war and the shedding of blood but usually applies to difficult financial, social, and economic conditions. Right now with congress haggling over a short term agreement to extend the ability of the US government to borrow it could feel like “blood in the streets” for many investors. Contrast this view of things with the fact that a large percentage of S&P 500 stocks came in with earnings estimates higher than expected for the second quarter of 2011. The dollar could fall in value but US stocks seem to be making money. What happens if the dollar falls and US multinationals bring part or all of their manufacturing operations back to North America, specifically back to the USA? Now that things, in some ways, seem be at their worst may be the best time to invest in US stocks. We wrote recently about investing in US automakers as GM has come back from the dead and Japan’s production is hamstrung by the after effects of the worst earthquake and tsunami in the nation’s history. Some Japanese stocks are falling on the threat of a rise in value of the Yen making Japanese products less cost competitive.
If the investor chooses to invest in US stocks when there is economic and fiscal uncertainty he is going against the tide. He is, to a degree, a contrarian investor. However, the most successful US investor ever, Warren Buffet, has said that investor always pay a premium for buying stocks that everyone feels good about. Successful long term investing depends upon three things. The first is picking stocks with intrinsic value, namely high forward looking earnings potential. Second, a stock should have a margin of safety in the form of cash reserves or unencumbered hard assets such as real estate or manufacturing plants. Third, an investor will profit the most if he buys such stocks when their prices are low and not when the market has discounted all future earnings and margin of safety by bidding price of the stock up sky high. If one wishes to invest in US stocks, the best stocks to invest in are those with the best potential and solid assets that have not been identified by the market in general. This is where many successful have made their millions and even billions.
Fundamental analysis is the basis of long term investing. An investor will need to do his homework in picking the most promising stocks. However, when US stocks are making money it just might be that now is a good time to invest in US stocks. When we are at the depths of another Capitol Hill soap opera it may well be time to look beyond to what US industry could do in a less debt ridden economy. As always we are not suggesting any specific investment in US stocks or suggesting that one not invest in US stocks. Rather we suggest that investors look for opportunities in all investing environments.