The recent rally may have you feeling pretty good about yourself. After all, Dow members such as Coca-Cola (NYSE: KO), United Technologies (NYSE: UTX), and 3M (NYSE: MMM) are all up big this year. If you're new to the market, you may be thinking that this stock-picking stuff is easy money.
It's not -- and this recent rally cannot continue. It's not in the nature of U.S. large caps to offer greater than 20% returns in a year, let alone a few months. This market is seriously out of whack.
That makes no sense
And although Federal Reserve Chairman Ben Bernanke has declared the recession "very likely over," unemployment still hovers close to 10%, the credit markets are still anemic, and the government is subsidizing consumer activity.
You may say, "Yeah, but the market is forward-looking." Sure it is, but it's not thatforward-looking. Tack on the inflation that's likely to result from rampant deficit spendingand, well, tread carefully in U.S. stocks.
What you can do
It's for these reasons that we continue to look outside the U.S. for compelling stock ideas at Motley Fool Global Gains , and why we're particularly excited about the opportunities in China, Brazil, India, and Chile.
Stocks in these countries today offer better valuations relative to their future growth prospects -- and the recent rally has left many of them behind. And the advantages over the U.S. aren't necessarily the same from country to country.
India has a younger workforce; Chile a large budget surplus and abundant natural resources; China a massive population with significant personal savings; Brazil a growing resource economy that is developing stronger and stronger ties with China. Thus, these countries can hold up to some degree even as the U.S. falters, although complete decoupling is unlikely.
China's tiny Yanglin Soybean , for example, has fallen by 30% this year and now trades for a paltry 0.2 times revenue. And although the company is struggling to handle rising soybean prices in China, more important for the long term is that it's been classified as a key leading enterprise in agriculture and is helping that country achieve its strategic goal of becoming food-independent.
But if you look up Yanglin Soybean, you may be scared off. It trades over the counter, the stock is illiquid, and the board has no independent directors. There's no way to be sure that the company cares a lick for outside shareholders.
It's time to take off the training wheels
These are legitimate concerns. But I've already triedto assuage them. So, today, I point you to Baupost Group's Seth Klarman's 1997 letter to shareholders:
I frequently hear the argument that the rules are different overseas: the accounting murky, the annual reports unreadable, the currencies sometimes unhedgeable. All of these points are fair, but, rather than being arguments to avoid foreign markets, they are instead arguments to embrace them. After all, as an investor you never have perfect information, and the biggest profits are always available (just as they have been in the U.S.) when competition and information are scarce. The payoff to fundamental analysis rises proportionately with the difficulty of performing it.
Yes, I added that emphasis, because it's such a key point. Klarman goes on to say that the highest return -- the realmoney -- is made in markets where information is scarce and management teams are not yet obviously shareholder-oriented.
The logical conclusion
Think about that and decide what kind of investor you're willing and able to be. If you're satisfied with average returns, buy an index fund and enjoy the 5% or so annual gains you'll reap from core holdings in Oracle (Nasdaq: ORCL) and McDonald's (NYSE: MCD). And yes, you're getting those same kinds of big, staid megacaps even when you purchase an emerging-markets index fund. Top holdings in Vanguard's offering are Petrobras (NYSE: PBR) and China Life Insurance (NYSE: LFC).
© 2009 UCLICK L.L.C.