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Can Your Portfolio Survive This Bailout?

"Will I be broke soon?"

We’re hearing that question far too often lately. It takes different forms. Sometimes it's "when will the U.S. go bankrupt?" or "when will China call in the $2 trillion in U.S. Treasuries that it has stockpiled?" or "when will Steve Wozniak get kicked off Dancing With the Stars?"

We're consumed with signs of the apocalypse.

Why the end may be near
And why not? In the past year, we've

  • Endured two market panics that torpedoed a number of banks.
  • Watched as Warren Buffett helped shore up Goldman Sachs (NYSE: GS  ) and General Electric (NYSE: GE  ) .
  • Seen Bernie Madoff confess to an estimated $65 billion ponzi scheme that ruined some investors -- even as his wife, Ruth, socked away millions before the fall.
  • Allowed the federal government to commit about $1 trillion to bail out banks through acronyms like TARP, TALF, and PPIP.

And let's not forget the bailouts that give the government a big say in General Motors (NYSE: GM  ) and Chrysler. In Chrysler’s case, the government’s failure to achieve sufficient concessions from bondholders forced the company into bankruptcy.

Combined, the U.S. government has committed more than $8 trillion to stabilize the financial system and stimulate the economy. How can we know we’re done?

Consider health care. The President's budget sets aside $634 billion over 10 years to move the nation toward universal coverage. Trouble is, the administration calls this spending a "down payment." Most experts believe the total cost will ultimately reach one trillion dollars.

At the very least, Social Security spending will rise with the pending retirement of more than 75 million Baby Boomers. What's more, Social Security entitlements could be underfunded by many, many trillions.

How are we going to pay for all this? Cutting spending in other areas is an option. So is raising taxes. Trouble is, I've a hard time imagining either strategy raising enough capital to keep Uncle Sam flush. If I'm right, the only answer is the printing press. Just churn out greenbacks till there's enough to pay for everything -- inflation be damned.

That's a huge problem. Earlier administrations were crippled by inflation -- the Ford and Carter administrations, notably -- causing years of deep recession, sluggish consumer confidence, and lagging growth.

More fervent supporters of government intervention will argue that some intervention was necessary because the credit crunch forced the Feds’ hand. They have a point. The problem isn’t that the Feds took needless action, but that their actions will balloon federal debt, will likely cause inflation, and were performed in an arbitrary, and -- in some cases -- sloppy fashion. That makes for a very uncertain environment in which to invest.

Why the end isn't near
Knowing all that, how could anyone be optimistic? I suppose because history says to be. Presidents come and go, but stocks, usually, persist.

Don't get me wrong; I'm not arguing that you needn't be concerned about the President's policies. Or, as my Foolish friend Alyce Lomax calls them, "Obamanomics." To the contrary -- I believe that outrage is good. We've been idle as a people for far too long. I'm encouraged to see us taking to the streets, to blogs, to Twitter.

But my personal political views -- Rocky Mountain independent, yet closer to the president than to his opponents, for the record -- don't much matter when it comes to picking stocks.

Again, turning to history: Costco was founded during the stagflationary Ford years. Wal-Mart (NYSE: WMT  ) went public just before a recession during the Nixon administration. Hewlett-Packard was founded during the Great Depression, during the throes of a government spending pig-out known as The New Deal.

Each of these businesses has multiplied the initial investments of their early backers through careful capital management and steady growth. Each has enjoyed outstanding, engaged leadership. They employ timeless principles that still work today.

How to beat Obamanomics
Will the Obama administration destroy your portfolio? Only if you're failing to routinely invest in the very best businesses -- the Costcos, Wal-Marts, and HPs of today. Here are three I particularly like right now, and why.

Google (Nasdaq: GOOG  ) . One of the clear leaders in cloud computing and the dominant provider of search advertising, the Big G is positioned to disrupt any number of existing industries. Mix in a $15 billion cash hoard, healthy cash flow, and committed management, and you've a formula for long-term success.

Taiwan Semiconductor (NYSE: TSM  ) . The world's largest foundry manufactures chips that others design. It, too, has a very healthy balance sheet and more than enough cash flow to fund its 4.3% dividend yield.

Netflix (Nasdaq: NFLX  ) . Far and away the leader in mail-order DVD rentals, it's been gaining share in the overall rental market for years. An ailing competitor in Blockbuster suggests this trend will continue and provide time to carve a niche in the still-nascent business of streaming video delivery.

Short of an economic collapse, I expect each of these businesses to beat the market over the next five years. So convinced am I that I own shares in two -- Google and Taiwan Semiconductor. I believe in buying and holding superior franchises.

And so do David and Tom Gardner. Each has singled out Netflix at least once for Motley Fool Stock Advisor and, combined, they're beating the market by more than 40 percentage points. Click here to try the service free for 30 days.

Finally, in answer to the question asked at the outset: No, you won't be broke soon. Not if you buy to hold superior businesses led by excellent managers. Nothing President Obama does will keep them from outperforming.

Fool contributor Tim Beyers had stock and options positions in Google and a stock position in Taiwan Semiconductor at the time of publication. Costco and Wal-Mart are Inside Value picks. Costco and Netflix are Stock Advisor selections. Google is a Rule Breakers recommendation. The Motley Fool has an ironclad disclosure policy.

Read/Post Comments (4) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 04, 2009, at 1:25 PM, Ibeatmykids wrote:

    I have to agree, Obama is making a mess of things. But I sincerely hope that I am wrong. But seriously a beauricratic health care system does not sound like much fun to me and it also sounds really exepensive as I will be apying for all of you obese smokers as I live a healthy life. Welp, I guess I'll go ahead and grab a cheeseburger and a pack of marlboros so I can at least get my moneys worth.

  • Report this Comment On May 04, 2009, at 1:48 PM, eluusive wrote:


    "Welp, I guess I'll go ahead and grab a cheeseburger and a pack of marlboros so I can at least get my moneys worth."

    So you're just going to contribute to the tragedy of the commons? How noble of you.

  • Report this Comment On May 04, 2009, at 6:39 PM, jc09058 wrote:

    Ok, Warren Buffett is helping bailout a couple of companies publicly. What others is he helping that we don't know about yet?

    But, if memory serves me correctly, back about a 100 years ago didn't JP Morgan along with a few other well-to-do folks get together to help out the banks once before back before there was a central bank?

    Sounds like Warren Buffett has taken a page from JP Morgan's playbook and is going to make a little money do it. Just like JP Morgan did.

  • Report this Comment On May 04, 2009, at 7:38 PM, xetn wrote:

    Yeah, jc09058: Its called the FED and since that time the dollar has dropped over 95%. The year was 1913 and also ushered in the federal income tax. Not the US's most shinning hour. Now we have Obama running around trying to close so-called tax loop-holes on international corporations. Another fine illustration of government theft of private property.

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