The best time to buy shares is when the majority of investors have turned their backs on the stock market.
Investors can generally improve their chances of finding shares priced below their value. Consequently, when shares return to favour, this desirable investment kicker can help investors significantly improve their returns.
The converse of buying low is selling high. High points in the stock market are typified by lots of companies looking to raise money through share placements and flotations. However, trying to determine the high and low points of a market can be very difficult. Consider, for example, rushed plans to refloat General Motors. Could this be tacit admission by GM that this is about as good as it will get?
Almost certainly, the plan to refloat GM has more to do with politics than conventional business considerations. The Democrats, who face mid-term elections in November, will undoubtedly welcome a successful flotation. The flotation could in effect see US taxpayers recoup some, if not all, of the £40bn of loans to GM.
US taxpayers could probably do better if the GM flotation were to be delayed. Currently, US shares are valued at about 12 times earnings for this year, which is not expensive. What's more, the profitability of US companies is forecast to rise about 10 per cent next year, bringing down the valuation to about 11 times earnings.
It would seem that corporate America is on the mend. However, it is important not to underestimate the importance of Ben Bernanke's "Put". This is an unambiguous undertaking by the US Federal Reserve chief that guarantees America will not slide back into recession.
Given the backstop provided by Bernanke's guarantee, investing in US shares does seem attractive. It is possible to buy US shares through UK brokers that include Halifax, the Motley Fool and Charles Schwab. It does cost a little more than buying UK shares. A better way to get exposure to the US market is through exchange traded funds (ETFs).
ETFs are less costly than buying individual shares but you are still exposed to currency risk. If the pound strengthens, the value of your dollar investments will fall, and vice versa.
BlackRock is one of the UK's largest providers of ETFs through its range of iShares. For example, iShares MSCI USA aims to track the performance of the MSCI USA Index. The fund will give investors exposure to sectors such as IT and financials.
Investing always carries some risk, but the Bernanke "Put" should provide some comfort. Bernanke will ensure that the money presses will start rolling again if there is the slightest hint that the US economy is showing signs of stuttering. If you believe Bernanke, then a double dip is not going to happen on his watch.
David Kuo is a director of financial advice website fool.co.ukReuse content