Surfing Wall Street's Bloodbath

Bear Stearns. Freddie (NYSE: FRE  ) and Fannie (NYSE: FNM  ) . Lehman. AIG (NYSE: AIG  ) . Iceland! The hits just keep coming, and the blood continues to course down Wall Street. The S&P 500 has offered a terrifying ride over the past three weeks, the yield on three-month Treasury bills has dropped to almost zero, and even money market funds are having trouble maintaining value. Where is an investor to turn?

One of the most repeated quotes from this site's favorite font of knowledge, Warren Buffett, says something about being greedy when everyone else is fearful. I understand that typing this bit of advice is infinitely easier than actually putting money into a market that appears to be testing the bounds of terminal velocity, but Buffett seems to have done well, so let's assume he has something to teach us.

Into the void
Taking Buffett's advice, if we want to make the most money, we should be looking where people are most afraid. Right now, that's emerging markets.

Since the turn of the century and right up through last year, these markets have posted amazing returns. Since last year's all-time highs, however, Brazilian markets are down 51%, Indian markets are down 50%, and Russian and Chinese markets are down a whopping 70%.

This seems like fertile ground for our greedy searching, but there has to be a reason for these plunges, right? Well, yes and no. Loose credit sparked vigorous investment in these markets because they offer strong growth opportunities. However, with lots of money chasing relatively few assets, prices climbed rapidly.

When prices climb rapidly, you attract speculators (people chasing quick returns based on momentum), which pushes prices even higher. Those readers who were paying attention to markets in the late 1990s might recognize this as the type of activity that created the dot-com bubble and, more recently, the real estate bubble.

Watch that first step ...
When the U.S. real estate bubble popped and subprime concerns tightened up credit markets, this speculative investing rapidly lost steam. Then, banks that had bet big on securities backed by subprime mortgages found they held assets that weren't worth nearly what they had thought. In order to shore up their balance sheets with cash, they were forced to sell off assets, often including foreign assets.

Now the situation is just the opposite of what I described above: lots of participants looking to rapidly sell assets that had previously been fetching artificially high prices. The result has been the rapid drop of emerging markets.

But that doesn't mean the fundamental reasons investors went overseas in the first place have changed. The U.S. currently has the largest economy in the world, but our economy is mature and, at only 304 million people, we won't be driving the economic growth over the next 10, 50, or 100 years.

As long-term investors, we should be interested in companies serving the 1.3 billion Chinese, the 1.1 billion Indians, the 238 million Indonesians, the 196 million Brazilians, the ... well, you get the picture. With these massive populations joining the global economy and gaining access to previously undreamed of wealth, billions will be spent on things like infrastructure and consumer goods.

That's great news for companies like Johnson & Johnson (NYSE: JNJ  ) and General Electric (NYSE: GE  ) . But the companies that will provide investors with the biggest wins will be the ones that are currently unknown on Wall Street -- companies like Brazilian food processor Sadia (NYSE: SDA  ) or Indonesian telecom Telkom Indonesia (NYSE: TLK  ) .

Tomorrow's forecast is sunny
That's not to say there aren't risks and challenges in emerging markets. Rapid, strong economic development has resulted in high inflation in many markets, as well as an uneven distribution of new wealth, both of which can lead to political disruptions. Emerging markets are also relatively unsophisticated, so regulations protecting shareholders are not nearly as robust as they are in more mature markets. But these are near-term issues and will be worked out.

Even with the inherent risks, emerging economies offer unprecedented opportunities for far-seeing investors to capitalize on global growth. And that's what we look for at Motley Fool Global Gains. You can cash in on the wonderful opportunities outside our borders, all without a passport or annoying security check, just by clicking here for a free 30-day trial -- there's no obligation to subscribe.

Nate Weisshaar does not own any of the stocks mentioned above. Telekom Indonesia is a Motley Fool Global Gains and Income Investor selection, Sadia is a Motley Fool Hidden Gems selection, and Johnson & Johnson is an Income Investor selection. The Fool has a disclosure policy.


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