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Are You Ready to Make Real Money?

Thanks to the recent rally, you may be feeling pretty good about yourself. After all, American stalwarts such as Caterpillar (NYSE: CAT  ) , Disney (NYSE: DIS  ) , and FedEx (NYSE: FDX  ) are all up 50% or more since March 9. If you’re new to the market, you may be thinking this stock-picking stuff is easy money.

It’s not -- and this recent rally cannot continue. It’s not in the nature of U.S. large caps to offer greater than 50% returns in a year, let alone a few months. This market is seriously out of whack.

As evidence, just look at what happened to Bank of America (NYSE: BAC  ) the other day. It announced that it needed $35 billion in new capital to survive a worst-case scenario -- and investors decided that meant the company was worth 30% more.

That makes no sense
There’s more evidence that the U.S. market has gotten ahead of itself, of course. Wal-Mart (NYSE: WMT  ) recently decided to stop publishing monthly sales statistics, hoping it will encourage investors to take a long-term view.

Of course, they were more than happy to publish these stats when they were good, so this action would seem to indicate that they expect them to get worse. And if U.S. consumers aren’t shopping at a discount store like Wal-Mart, then where are they shopping?

Further, real estate values continue to decline and unemployment continues to rise, though at a lower-than-expected rate.

You may say, “Yeah, but the market is forward-looking.” Sure it is, but it’s not that forward-looking. If first-quarter earnings disappointments continue on into the second quarter, the market will reassess its optimism.

Tack on the inflation that’s likely to result from rampant deficit spending and, well, tread carefully in U.S. stocks.

What you can do
It’s for these reasons that we continue to look outside the U.S. for compelling stock ideas at Motley Fool Global Gains, and why we’re particularly excited about the opportunities in China, Brazil, India, Chile, and Peru.

Stocks in these countries today offer better valuations relative to their future growth prospects -- and many have been left behind by the recent rally. And the advantages over the U.S. aren’t necessarily the same from country to country.

India has a younger workforce; Chile a large budget surplus and abundant natural resources; China a massive population with significant personal savings; and Brazil and Peru growing resource economies that are developing stronger and stronger ties with China. Thus, these countries can hold up to some degree even as the U.S. falters, though complete decoupling is unlikely.

China’s tiny Yanglin Soybean, for example, is actually down more than 35% since March 1 and now trades for a paltry 0.2 times revenue and 2.5 times EBITDA. Yet this is a company that pays no taxes to the Chinese government, since it’s been classified as a Key Leading Enterprise in Agriculture and is helping that country achieve its strategic goal of becoming food-independent.

Yet if you look up Yanglin Soybean, you may be scared off. It trades over-the-counter, the stock is illiquid, and the board has no independent directors. There’s no way to be sure that the company cares a lick for outside shareholders.

It’s time to take off the training wheels
These are legitimate concerns. But I’ve already tried to assuage them. So, today, I point you to Baupost Group’s Seth Klarman’s 1997 letter to shareholders:

I frequently hear the argument that the rules are different overseas: the accounting murky, the annual reports unreadable, the currencies sometimes unhedgable. All of these points are fair, but, rather than being arguments to avoid foreign markets, they are instead arguments to embrace them. After all, as an investor you never have perfect information, and the biggest profits are always available (just as they have been in the U.S.) when competition and information are scarce. The payoff to fundamental analysis rises proportionately with the difficulty of performing it.

Yes, I added that emphasis, but it’s because it’s such a key point. Klarman goes on to say that the highest return -- the real money -- is made in markets where information is scarce and management teams are not yet obviously shareholder-oriented.

The logical conclusion
Think about that and decide what kind of investor you’re willing and able to be. If you’re satisfied with average returns, buy an index fund and enjoy the 5% or so annual gains you’ll reap from core holdings in ExxonMobil (NYSE: XOM  ) and Procter & Gamble (NYSE: PG  ) .

If you’re looking for more, come join us at Global Gains, where we study the foreign markets for inefficiencies and strive to pick up fast-growing, little-known names like Yanglin Soybean for dirt-cheap price tags after doing intense due diligence. Click here for a free, 30-day trial, complete with all of our recommendations. There's no obligation to subscribe.

Already subscribe to Global Gains? Log in here.

Tim Hanson does not own shares of any stocks mentioned. Disney and FedEx are Motley Fool Stock Advisor recommendations. Wal-Mart is an Inside Value pick. Procter & Gamble is an Income Investor selection. The Motley Fool owns shares of Procter & Gamble. The Fool’s disclosure policy is the real deal.

Read/Post Comments (7) | Recommend This Article (35)

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 May 14, 2009, at 10:37 AM, FinancialFellow wrote:

    I think it's a bit much to say that the rally has to come back down to Earth and that the current rate of gains is unsustainable (Okay maybe a continual 50% gain is tough but I don't think 25% over the rest of the year is unrealistic). If this were a "normal" market I would be inclined to agree. But, stocks were so abnormally and unfairly beat down over the last year and change that I don't think it's too much to leave the door open to the possibility that we will see some pretty good returns out of stocks over the next couple years. I think the average investor would be well served to buy some index funds and hold onto them for the long haul:

  • Report this Comment On May 14, 2009, at 3:07 PM, pberardi wrote:

    "Think about that and decide what kind of investor you’re willing and able to be. If you’re satisfied with average returns, buy an index fund and enjoy the 5% or so annual gains you’ll reap from core holdings in ExxonMobil (NYSE: XOM) and Procter & Gamble (NYSE: PG)."

    Wow, talk about an insulting way to encourage people to subscribe to an investment letter.

    Take a look at most of the stocks recommended by these folks and tell me if you are willing to bet your retirement money are these stocks?

    I don't mind "dabbling" in a few issues and some are downright good companies but to call indexing and PG/EOM average returns considering the power of reinvested dividends goes against my conservative investment nature.

    Same goes for the stock investor picks as well. Talk about a bunch of over valued over priced stocks that were destined to fall. Can we say Whole Foods?

  • Report this Comment On May 15, 2009, at 6:33 AM, FastTradinOutlaw wrote:

    by the time i retire cars wont use gas or oil. xom will be out of buisness,

  • Report this Comment On May 15, 2009, at 6:49 AM, Xciteddon wrote:

    Actually it is a wise forcast for the market. With the S &P gaining over 250 points in the last month or so history shows that we are do for a fall of about 50%. So where does that put the NASDAC and the DOW? The S&P will be at about 800. Also some foreign countries really do have a better ecomony than ours right now. First off their cost of living, compared to ours is lower. Their employee wages are definately lower, and their business costs are less do to tax structures within these countries. Maybe a closer look is justified? :)


  • Report this Comment On May 15, 2009, at 12:13 PM, djveed wrote:

    A lot of economic indicators are showing the US markets may be out of recession by year's end. Declining TED spread, declining sales/inventories ratio, etc. Can't the recent rally be indicative of economic data, therefore reasonably forward-thinking and sustainable?

  • Report this Comment On May 16, 2009, at 11:05 AM, Dynachrome wrote:

    "15 years ago Motley Fool Co-founder David Gardner made a discovery that changed the way he would look at investing forever. On Oct. 7, 2008, Gardner's team of analysts put this strategy to the test... using options, ETFs, and other hedge strategies - to actively manage a portfolio of $1 million in REAL MONEY! "

    That's a coincidence. That's THE day I bought Ford, Cicso, Motorola, Wachovia, and CAT....

  • Report this Comment On May 22, 2009, at 9:17 PM, KnightCook wrote:

    Trouble with the market is , that it's a horse race with different tracks with no rule on who's the worst or best. Yes !, you can look at the chart with all the moneys in the past made - only that can change like the weather ( like Florida) "If you don't like the weather ?, wait 5 minutes and it will change ( like stock prices. It's a shame that firms go under after 75 to 100 yrs being a good to great company - "MAYBE" not the firm it's the people that change, if it an't broke don't fix it !!!. Look at what happen to Coke - not that it's not still a good firm, but you can't better the first idea that worked - remakes never hit the same mark, Not knowing how a firm can drop billions and still stay in Biz. is beyond me. The system must have a lot of loop holes, the market is like a sponge - it will fill with water and you can ring it out and collect more ( buy & sell). Large firms have a hard time ajusting to conditions in short notice, even with a plan it can take a year before you see it take, to re-tool a shop or sell off property ( size down). Time is money ( and will be for ever) the market is one of the things that changes by the second,minute, hour and day, Like the saying " YOU HAD TO BE THERE" Years ago people worked for a company for 25/30 yrs some with a pension some not - but! saved in two places - the banks and Wall St., for the return ( over the long run ) with firms like GE, NY TEL GM, FORD, COKE, PFIZER to name a few.

    Still good companys but trying to change with todays world ( fast pace) , fast is not always a good thing, Eat a pc. of fruit that was picked to early then wait till it's right to pick - you will see ( fast and slow)

    The market is like a Pool ( when on vacation) you have a deep side and a side you can stand, if you can't swim ( learn ) diving in can be dangerous. Like anything eles - if you learn the ropes ( workings) of anything you can learn to do well. In short Never get in over your head ( money dosen't grow back. A stock can come back for it's lows ( very slowly) time is money - set a goal ( time frame) and work it, Where will you be in 5 yrs - 10yrs. TIME FLYS WHEN YOUR HAVING FUN. FOR YEARS TREES GROW, AND THE AIR WAS CLEAN - NOW STANDS A MALL OF A SQUARE MILE - YES THINGS CHANGE - BIGGER MAY NOT BE BETTER ???.

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