This Is Not a Fad

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Dutch Tulipmania of the 17th century was a fad. Dot-coms of the late 20th century were a fad. The pet rock was a fad.

International stocks are not a fad.

Just ask the Oracle
Great investing minds such as Warren Buffett chose to ignore the dot-com bubble in the 1990s, believing that irrational exuberance had inflated their valuations. Boy, did they get it right. Buffett even outright mocked dot-coms in their heyday, comparing their business models to little more than "the old-fashioned chain letter."

He's singing a different tune about international stocks. In this past year, his Berkshire Hathaway bought a $4 billion stake in Israeli firm Iscar Metalworking, as well as shares of French pharmaceutical company Sanofi-Aventis. Buffett even tapped the Chinese market in 2003, picking up a 13% stake in PetroChina.

Moreover, many of Berkshire's top U.S.-based holdings such as Procter & Gamble (NYSE: PG), Coca-Cola (NYSE: KO), and Nike (NYSE: NKE) continue to generate a significant amount of their revenues overseas.

Other U.S. companies are becoming more global everyday. Starbucks (Nasdaq: SBUX) and Dell (Nasdaq: DELL), for instance, have made considerable in-roads overseas and have increased their international assets over the past few years. Even Georgia-based insurance company AFLAC (NYSE: AFL), known well for its commercials with the funny duck, generates some 70% of its revenues in Japan.

Not a quacking matter
Despite the market's increasing interest in international stocks, investors should proceed with caution when looking overseas. International stocks, particularly those from emerging markets, have added factors to consider such as political and currency risks. For instance, Israeli stocks such as Teva Pharmaceuticals (Nasdaq: TEVA) -- warranted or not -- took a sharp downturn following the conflict with Lebanon in July. Yet Teva's stock, however, has returned an annualized 20.3% over the past 10 years even with all of the uncertainty in the region.

To help you navigate the sometimes murky international waters, here are four factors we use to find attractive countries for investment for our new Global Gains international investing service:

1. Respect for rule of law, strong rights of appeal, and low corruption.
2. Political stability and limited government economic control.
3. A stable currency.
4. Openness toward free markets and investing.

Even though the location of a company's headquarters is becoming less important in this increasingly globalized world, we believe that these factors can help you benefit from international investing while limiting peripheral risks.

If you can't take the heat
The potential for international stocks to deliver market-beating returns is certainly apparent, but some American investors may be wary of staking a portion of their portfolios on foreign companies. That's certainly understandable, but ignoring the potential of these markets is also a risk -- the risk that your returns will be lackluster compared those found on the world market.

If you're interested in hearing a few of the Global Gains team's ideas, including their two inaugural picks (one hails from South Africa, the other from Canada), follow this link for a free 30-day trial.

Todd Wenning owns shares of Starbucks. Starbucks, AFLAC, and Dell are Motley Fool Stock Advisor picks. Dell, Coca-Cola, and Berkshire Hathaway are Motley Fool Inside Value choices. Unlike bellbottoms, the Fool's disclosure policy never goes out of style.