This I guarantee: I will make a prediction by the end of this article that will cause chortling across the investment industry.
My prediction isn't about oil prices next year, or currency swings, or whether Google
See, we're long-term investors at The Motley Fool. As such, it's vital to filter out the noise of everyday news, and instead focus on fundamentals that create value over the course of years.
My prediction isn't about the short-term movements of anything. It's about what you need to do to make money in the stock market over the next decade -- so I hope you'll stay tuned.
Let's talk about "long term"
When you focus on the long term, you accept that events such as currency and oil price swings, monthly same-store sales fluctuations, and order delays are unpredictable and unknowable. Instead, you spend twice as much time studying what you can know: the quality of a company's management, its long-term market opportunity, and the sustainability of its competitive advantages.
Such an approach risks making you a temporary victim of volatility, as investors in ExxonMobil
It's important to note, however, that this investment strategy is not for everybody. In fact, in a financial era long dominated by hedge funds and other "products" that seek to rid the world of volatility, we understand that it's not even a popular way to look at the market these days. But we do believe that it is the best, most reliable, and most tax-efficient way to make your mint in the market.
With that as prelude...
But while I am advocating that you be a long-term investor in businesses (not stocks), I'm not advising that you simply buy up a stable of blue chips. These names may fit the bill as well-run, well-capitalized firms -- and the likes of Coca-Cola
But these blue chips today lack one characteristic I'm looking for in a truly great long-term investment: the potential for outsized growth.
That's because they're already so big, their markets are already so penetrated, and so much of their business is already tied to the United States -- a country whose growth I and others expect to see slow over the next 10 years, given current account deficits and permanent impairment in the consumer credit markets.
This isn't to say that these companies won't provide market-matching or, after dividend reinvestment, market-beating returns. But they lack the exponential upside I think we're all hoping to make at least a part of our portfolios.
Here's what I propose
Coca-Cola, Wal-Mart, and Procter & Gamble are exemplary companies. We should look for the traits that made them great -- a strong balance sheet, shareholder-friendly leadership, healthy returns on capital, durable brands, supply chain advantages, entrepreneurial CEOs, etc -- in every investment we make.
But we should be looking for those traits in smaller companies that are focusing their expanding franchises primarily in countries with demographics and growth outlooks more promising than our own. Yes, that will be more difficult, but it should be well worth it.
My aforementioned prediction
If you're wondering when the chortling might start, brace yourself.
I think we should be looking to a country about which many other investors have grown skeptical. They see slowing growth, political instability, a growing divide between the haves and have-nots, quality control issues, and a heavy-handed government that could destroy decades of progress with one wrong move.
These challenges definitely exist. But I also see significant surplus reserves and a willingness to spend them, an entrepreneurial culture, citizens with ample savings, a growing middle class, and a population of 1.3 billion that's committed to upward mobility.
Which brings me to my prediction: Emerging markets will be the great investing story of the next decade, with China foremost among them.
What this means for investors
This does not mean China is a sure thing. It certainly doesn't mean there won't be volatility. But as Credit Suisse's Fan Cheuk-wan told The Wall Street Journal for its 2009 outlook, "There's no absolute haven in a global economic recession, but now we have to look for a market that will recover faster, and in Asia that's China."
Furthermore, the Wall Street Journal reports that notable bear Jeremy Grantham's firm is buying back into emerging markets, because he "expects that over the next seven years, real returns in emerging markets will be about 9.5% per year." That's a heady number, given that returns historically in the U.S. are about 6% annually.
In short, the recipe for investing success over the next 10 years is to find well-run, well-capitalized, transparent, and shareholder-friendly firms operating in China and the other emerging markets. At Motley Fool Global Gains, we believe that companies like these are the best bets to buy and hold going forward, and we travel the world finding them for our members.
If you'd like to review all of our research and recommendations, including a Chinese firm making organic fertilizers, another specializing in industrial fire safety, and a third bent on meeting the country's energy needs, click here to join Global Gains free for 30 days.
Tim Hanson owns shares of Chipotle. The Motley Fool owns shares of Chipotle, American Eagle, and Procter & Gamble. Chipotle is a Motley Fool Hidden Gems and Rule Breakers recommendation. Google is a Rule Breakers selection. Coca-Cola and Wal-Mart are Inside Value picks. The Motley Fool has a disclosure policy.
