The 10 Best Places to Invest

If pressed, could you tell me the country that offered the best stock returns in 2006? What about any members of the top 10?

It's harder than you probably think, because they're not the countries you might expect.

You call that a bull market?
Investors rejoiced as the Dow crossed 12,500 in 2006, yet the Dow gained just 16% last year. While that's an impressive number on the surface, it's abysmal when compared with the rest of the world's equities.

Without further ado, the top 10 performers:

This list is incredible to me. Croatia? Botswana? Peru?

We can learn a few things from this list. First, if you're an American investor, it's absolutely crucial to be invested abroad. The potential returns to be had there are too good to pass up. Second, the best returns often come from obscure places -- not from the countries we read about every day in the papers. And finally, there is some risk involved in investing internationally. For example, with President Hugo Chavez leading a nationalization push right now, Venezuela isn't exactly a friend to foreign investors.

Buy what others aren't
But the main lesson here is old hat: To get the best returns, you need to be willing (and able) to look where other investors aren't. That's why the 10 best domestic stocks of the past 10 years were all small caps such as Hansen Natural (NASDAQ:HANS) and Chico's (NYSE:CHS), and it's also why even the best large-cap investors manage to beat the market by only a few percentage points.

See, large companies and popular markets have huge numbers of investors and analysts watching them. Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), and Apple (NASDAQ:AAPL), for example, get coverage from 25 or more analysts. Those three popular stocks are also the only stocks to have more than 5,000 ratings in our Motley Fool CAPS community intelligence database.

In other words, they're probably pretty efficiently priced.

You'll get the best returns, however, by finding market inefficiencies. While 3,000 more investors are covering Johnson & Johnson and Dell (NASDAQ:DELL) in CAPS, Peru's Compania de Minas Buenaventura has just 116 ratings -- despite returning 60% over the past two years.

The Foolish bottom line
That's where your opportunity lies as a Foolish investor. But, as I said, international investing is not without risks. If you'd like some help finding worthy international investing ideas that you may never have heard of, click here to try our new Global Gains service free for 30 days. There's no obligation to subscribe.

This article was originally published on Dec. 13, 2006. It has been updated.

Tim Hanson does not own shares of any company mentioned. Johnson & Johnson is an Income Investor selection. Microsoft and Dell are Motley Fool Inside Value picks. Dell is also a Stock Advisor recommendation. No Fool is too cool for disclosure.