The World's Greatest Value

Between 2004 and 2007, the Chinese stock market index rose more than 450%. On the streets of Shanghai, I witnessed lines of Chinese citizens waiting outside brokerages to deposit funds so they could trade on the big stock market boom. The hyperbole surrounding the Great Chinese Miracle approached that of Japan, Inc., nearly two decades ago.

This was it -- missing out on China would be the greatest mistake investors of our generation could make.

You know what happened next, don't you?
Since mid-January, the Shanghai Stock Index has declined by more than 50%. Speculators from Shanghai, Beijing, and all over China have seen their brokerage accounts get smoked.

It's a bit of a fortunate accident for foreign investors that shares trading on Chinese exchanges are largely limited to Chinese investors. Still, the whiff of opportunity a year ago has suddenly turned into the stench of decay. For people who are fundamentally opposed to overpaying for great investments, you couldn't ask for a better situation: Companies based in the world's most important growth economy are suddenly trading at a fraction of their former prices.

Wait, isn't the Chinese dream dead?

But the market collapsed! Someone must know something!
Will you let me finish?

Officially, the Chinese economy grew by 11.5% in 2007. Unofficial estimates are even higher. These are growth rates that the U.S. economy will never reach again. It can't -- it's simply too developed.

This is not a bad thing. But it does mean that investors who focus only on the United States are ignoring some of the best growth opportunities in the world, ones that can be bought right on the U.S. stock exchanges. Not taking advantage of the ability to invest in faster-growing markets like China is like traveling to Paris to eat at le Taco Bell -- you know, because you're familiar with it.

Last year I wrote an article stating that investors could not afford to miss opportunities investing internationally, and cited the economic growth rates of China, India, Brazil, and several other high-growth countries. Famed investing author William Bernstein sent me a thoughtful response, pointing out that there is very little correlation between stock market returns and economic rate of growth. Case in point -- China's growth engine continued churning along in the past six months, while its stock market tanked.

But with apologies to Mr. Bernstein, who is as thoughtful an investor as you'll ever hope to encounter, even if stocks and economic growth don't perfectly correlate, doesn't it make sense that, over time, companies that create economic returns will reward shareholders? In fact, isn't the key to good investing to get these opportunities at advantageous prices?

But wait, China's risky!
Let me thus spell it out: The way China has transformed its economy over the past 20 years is without precedent. Its trade surplus with the rest of the world grows by about $1 billion per working day. It has two dozen cities bigger than Chicago, many of which are only just tasting the prosperity that Shanghai and Beijing have enjoyed for a decade. This is a market that has really only truly been investible for foreign shareholders since 2002. And now its shares are down 50% in a few months.

Do you hear that dinner bell?

When I took my Global Gains team to India and China last summer, we saw the cranes, the transforming skylines, the increasing signs of a growing consumer class. We also met with some of the country's great entrepreneurs from companies like and China Fire & Security. We sat in on English-language classes at New Oriental Education & Technology, the most prominent private-education company in China.

We saw the boom -- but when we came back, we recommended not a single Chinese company to our subscribers for almost a year. In fact, I rated the iShares FTSE/Xinhua 25 China Index -- the proxy for the Chinese market -- underperform. It was grossly overvalued, for one, and also the components of this index are former state-owned companies -- largely the exact investments you want to avoid in China, with the exception of a precious few like China Mobile (NYSE: CHL  ) and China Life Insurance (NYSE: LFC  ) .

Price = what you pay
So why didn't we come back and start firing off Chinese recommendations? (New Oriental -- run by a passionate, brilliant manager who has built the company to embody all that is great and promising in China -- had already been a Global Gains recommendation.) Well, growth is one thing -- but I couldn't help but recognize that there were hundreds of millions of people who were trying to invest in the Chinese market at the exact same time. And so Chinese stocks were brutally expensive.

And now they're not. In fact, in Global Gains we've recently recommended some fabulous opportunities in China -- companies that address the spectacular rise in demand for goods and services in the country.

Now is the time to buy China. But you have to know how, because as I've said before -- while many fortunes will be made in China in the next 20 years, many will also be lost.

How well do you know China?
I've worked in China, and I have better than a decade's experience as an investor in the country. I've traveled it from stem to stern, and just last month I took a team of Global Gains analysts back to China -- as well as Vietnam, Singapore, and Indonesia -- to look for investible ideas.

China is brimming with potential -- and great investment opportunities. We met with management from China Security & Surveillance (NYSE: CSR  ) and Mindray Medical (NYSE: MR  ) -- think Medtronic (NYSE: MDT  ) , circa 1988.

You can see our notes from the trip as well as our library of market-beating stock selections. Just click here to take a free 30-day trial.

This article was originally published May 12, 2008. It has been updated.

Bill Mann owns shares in several Chinese companies not listed here and 34 Pez dispensers, including three featuring Elvis Presley (made in China). He does not own shares in any company mentioned in this article. New Oriental Education and China Fire & Security are Global Gains recommendations. is a Motley Fool Hidden Gems selection. Mindray Medical is a Rule Breakers pick. This disclosure statement is getting really long, but we feel pretty good about it nonetheless. Want more? You're in luck -- the one and only Fool policy on disclosure is right here.

Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 04, 2008, at 3:39 PM, none0such wrote:

    It would be nice to know your insight on what percentage of that GDP figure for 2007 is made up of foreign capital inflows.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 677775, ~/Articles/ArticleHandler.aspx, 5/26/2016 4:52:24 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 7 hours ago Sponsored by:
DOW 17,851.51 145.46 0.82%
S&P 500 2,090.54 14.48 0.70%
NASD 4,894.89 33.84 0.70%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

5/25/2016 4:02 PM
CHL $56.10 Up +0.92 +1.67%
China Mobile CAPS Rating: ****
CSR.DL2 $0.00 Down +0.00 +0.00%
China Security & S… CAPS Rating: ***
LFC $10.88 Up +0.09 +0.83%
China Life Insuran… CAPS Rating: **
MDT $81.08 Up +0.14 +0.17%
Medtronic CAPS Rating: *****
MR $27.94 Down +0.00 +0.00%
Mindray Medical In… CAPS Rating: ***