Take the Federal Reserve at its word. Whether it cuts interest rates again on June 25 or leaves the fed funds rate at its current 1.25%, Alan Greenspan and company have promised low interest rates for as long as it takes.

With Europe on the verge of recession, Japan still unable to end its embrace of deflation, U.S. unemployment at 6.1% and capacity utilization at manufacturing companies hitting a new low of 72.5% for this cycle in April, "as long as it takes" could take quite a while.

So investors ought to invest as if low interest rates will be around for a good while.

If you're a homeowner, it's clear what that means: Refinance and refinance again until you've wrung every last point out of the interest rate you pay on your mortgage, and fix that rate in concrete for the life of your mortgage.

But what does it mean to be a low-interest-rate investor? I think it's time to go beyond the conventional generality that low interest rates are good for the stock market and come up with some specific pros and cons for an environment that we'll all have to live with "as long as it takes."

What to Look For

Here's my first cut at what to look for in this low-interest-rate environment. Seek companies:

  1. that face as little pricing pressure as possible from excess capacity at competitors;
  2. with strong balance sheets that can raise capital cheaply;
  3. that have lots of opportunities to put that cheap capital to work;
  4. whose new projects earn returns as high as possible over the cost of the new capital that funds them; and
  5. whose new projects show returns that are not significantly lower than those for the company's existing businesses.

Let's start by getting rid of that current bit of conventional wisdom: Low interest rates are not good for all stocks, as many investors seem to believe right now.

Low interest rates do make stock valuations look cheaper, and that does tend to lift stock prices. But there's no such thing as a free lunch in the financial markets, so -- what do you know? -- low interest rates also work to depress earnings at many companies. Especially in an economy like this one.

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