Sell Now ... So We Can Buy

Let's face facts: Investors are scared witless right now. That's why more than $15 billion has flowed out of stock mutual funds since the beginning of the year. What's more, we've seen weakness in once-venerable names such as Garmin (Nasdaq: GRMN), Valero (NYSE: VLO), and Wynn Resorts (Nasdaq: WYNN) -- each of which has dropped more than 15% in the past month alone.

Given recent volatility and widespread weakness in the economy, 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 withdraw your investment dollars from 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 30% 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 recently 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. The $40 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-market stocks, you're likely to make money by buying those discarded shares.

That general premise also holds true across sectors and styles, explaining why some of the top master investor buys of the last month, as reported by GuruFocus, were USG (NYSE: USG) and Mohawk Industries (NYSE: MHK) -- two companies tied to the housing market.

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 recently returned from another trip to China where we met companies and did research for our Motley Fool Global Gains international investing service. You can get or top 3 stock ideas from the trip, as well as read about all of our Global Gains recommendations, by joining free for 30 days.

Click here for more information.

This article was first published March 18, 2008. It has been updated.

Tim Hanson owns shares of Wynn Resorts. Garmin is a Global Gains and Stock Advisor recommendation. USG is an Inside Value pick. The Fool's disclosure policy flies coach.