Sell Now ... So We Can Buy

Let's face facts: Investors are scared witless right now. That's why nearly $45 billion flowed out of stock mutual funds between December and January -- and why more than $160 billion found its way into low-interest money market funds. What's more, noted financial institutions Wachovia (NYSE: WB), AIG (NYSE: AIG), and Citigroup (NYSE: C) have dropped between 10% and 17% in the past two weeks alone.

Given recent volatility, these trends will only continue.

The panic is perhaps most pronounced in the emerging-markets sector. According to a recent Emerging Portfolio Fund Research (EPFR) report featured in The Wall Street Journal, investors have "pulled a net $14.3 billion out of emerging-market stock funds" since the beginning of the year.

That's a lot of money moving around, and it's worth asking one question: Is now really the right time to pull your investment dollars out of these emerging economies?

The experts agree
When I put this question to some money managers recently, their answers were nothing short of unanimous: No way; no how; not by a long shot.

Jeff Feinberg, founder of JLF Asset Management, told a crowded room at a Roth Capital conference recently that now is a fantastic time to be looking at Indian stocks. That country's market is down more than 20% since the beginning of the year, even as the fundamentals that have made it such a fantastic market over the past five years -- the world's second-fastest growing economy; a young, hungry, and growing workforce; and a clear commitment to democracy and freedom -- remain firmly in place.

"It's a long flight to India," Feinberg said. "In order to go over there, I need 50% growth at a single-digit P/E ... and I was just there for two weeks." That's when Roth founder Byron Roth chimed in. "I've already got my trip planned," he said.

It doesn't stop there
Feinberg and Roth aren't the only pros still excited by emerging markets. The Fool's Bill Mann explained a few weeks back why you must own international stocks. And that EPFR report noted that over the past nine months, global stock funds have increased their average emerging-markets exposure from 5.8% to 9% ... a very bullish bet.

In other words, the individual investor is selling; the professional investor is buying. That should tell us something.

Then there's Merrill Lynch (NYSE: MER). The $50 billion firm recently launched a "Frontier" market index to track stocks in countries such as Nigeria, Oman, and Vietnam. They explained the move by saying that returns in these countries have low correlation with returns here in the United States. While that may be true, rest assured that this index would not have been launched without palpable demand from some big-money clients.

And you thought it was time to pull out!
Why all the interest? The best investors consider widespread market sentiment a contrary indicator. In other words, if the rabble (apologies to Nietzsche) is selling emerging-markets stocks, you're likely to make money by buying those discarded shares.

That general premise also holds true across sectors and styles, explaining why the top master investor buys of the last month, as reported by GuruFocus, were USG (NYSE: USG), Legg Mason (NYSE: LM), and First American (NYSE: FAF) -- three companies tied to the housing market, the stock market, and the housing market, respectively.

And finally, the Oracle
Warren Buffett said as much, when he described his investment strategy as being greedy when others are fearful and fearful when others are greedy. Right now, others are clearly fearful. The question is: What are you?

Bill Mann and I traveled to the emerging markets of China and India last summer to meet companies and do research for our Motley Fool Global Gains international investing service, and we're planning to visit some of the Asia frontier economies for ideas in the next few months.