The Biggest Risk to Your Portfolio

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"The biggest risk to any investor's portfolio today
is not to have at least some exposure to China."
 -- Burton G. Malkiel, From Wall Street to the Great Wall

Princeton economist Burton Malkiel is best known for having penned A Random Walk Down Wall Street, but the timing of his 2008 book on China might improve his standing in the investing community even further.

See, 2007 would have been a pretty tough year to encourage all investors to own Chinese equities, but now, in 2008, Malkiel and his co-authors have hit the nail on the head by encouraging just that. Last year's market was simply too hot for new investors to make a prudent entry into the Chinese market.

The Shanghai Composite itself surged 97% in 2007, and names like Suntech Power (NYSE: STP) and Solarfun Power (Nasdaq: SOLF) more than doubled while sporting high price-to-earnings ratios. In other words, they weren't exactly screaming buys at the time.

But what a difference a few months can make. The Chinese markets have since crashed, sending the Shanghai Composite down 36% since Dec. 31, and Suntech and Solarfun are well off their 52-week highs.

Here's why now is a great time to take a first (or second) look at Chinese stocks.

Tell me more, tell me more
Unlike the Nasdaq fallout of 2000 -- when the market's punishment of unprofitable companies like Broadcom (Nasdaq: BRCM), XM Satellite Radio (Nasdaq: XMSR), and Amazon.com (Nasdaq: AMZN) wasn't completely without merit -- today's Chinese companies are largely profitable. According to Capital IQ, 90 of the 107 Chinese stocks trading on major U.S. exchanges have produced positive earnings over the past 12 months.

And those earnings are largely expected to continue to grow at a torrid pace. Consider the growth Wall Street is expecting from these Chinese companies.

Company	5-Year Expected EPS Growth	Forward P/E
E-House (NYSE: EJ)	47%	12.4
Mindray Medical	43%	27.4
Focus Media (Nasdaq: FMCN)	36%	14.7

Source: Yahoo! Finance.

Even if the actual growth fall a bit short of the Street's expectations, they've each been sold down to a point where their current prices at least make them attractive for further research.

You jump, I jump
As Malkiel concludes in the book, "No well-diversified investment portfolio can afford to ignore the opportunities that China offers." If you've been waiting for a good opportunity to add Chinese equities to your portfolio, there's no better time than now to start your search.

Not sure where to start? Begin by looking for Chinese companies that aren't state-owned enterprises (SOEs), which typically reside in sectors like telecommunications, energy, and finance. The Chinese government still has large stakes in these companies and your interests as a shareholder may not be properly represented. Instead, look for Chinese companies that are led by innovative founders who are focused on returning shareholder value.

New Oriental Education was one such company that Bill Mann and the Motley Fool Global Gains team noticed and recommended for their international investing service. It was led by a dedicated founder and was adequately tapped into the growing need for education services in China. New Oriental Education shares have more than doubled since they were first recommended last year, but it remains an active recommendation.

Bill and his team are currently on a research trip in China (as well as Indonesia, Singapore, and Vietnam). If you’d like to see the Global Gains lineup of stocks, or be the first to hear the team’s conclusions from their Asia trip, we offer a free 30-day trial.

Todd Wenning and Joe Magyer know it's a long way to the top if you want to rock 'n' roll. Neither owns shares of any company mentioned. Focus Media, Mindray Medical, and Suntech Power are Motley Fool Rule Breakers picks. Amazon.com is a Stock Advisor choice. The Fool's disclosure policy has the biggest policy of them all.