An Unprecedented Investment Opportunity

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Hundreds of hotshot money managers and analysts convened at the Marriott Marquis in New York last fall to attend JPMorgan's annual Asia Pacific and Emerging Markets Equity Conference -- even as those emerging markets were seemingly falling apart. I guarantee you that they weren't there because they're scared of investing in emerging-markets stocks.

But many others were, and I can’t necessarily blame them. It turns out, however, that if you could stomach emerging markets’ volatility, you would have been richly rewarded.

Some very scary numbers
See, markets such as China, India, Indonesia, and Brazil were all absolutely crushed in 2008. China was underwater to the tune of 60%, Indonesia and India 50%, and Brazil 40%.

The rebound, however, has been just as sudden and just as strong. Thus far in 2009, China is up 60%, Indonesia 78%, India 68%, and Brazil 51%. As always when it comes to the market, it paid to hang in there.

Take China, for example
If you’d been super savvy, however, you would have done much more then hang in there. You may have doubled down on depressed prices and supercharged your returns. That, at least, was the takeaway of the first session at that aforementioned closed-door conference -- courtesy of famed author, investor, and Princeton economist Burton Malkiel. His presentation, titled "Investment Strategies for the China Century," essentially said:

1. Though China's GDP growth is slowing, it will remain the fastest in the world.
2. If you're an American investor, you're lucky to have even 2% exposure to China -- and that makes you dangerously underexposed.
3. The recent decline in China stock valuations, together with the magnitude and duration of China's potential growth, makes today an "unprecedented investment opportunity."

That last phrase was his words, not mine, though I did -- and continue to -- agree. And even though the Chinese stock market has climbed back up, significant opportunities remain in some of the country’s most promising niches. The question, of course, is how the individual American investor can take advantage of this unprecedented opportunity.

Your four options
If you're an American investor looking for maximum returns and minimum hassle, then you have four ways to buy China:

1. Buy a Chinese index fund, such as the Xinhua China 25.
2. Buy an actively managed mutual fund -- such as Matthews China -- that is concentrated in China.
3. Buy multinational corporations such as 3M (NYSE: MMM), Deere (NYSE: DE), and Nike (NYSE: NKE) that have made doing business in China a significant part of their growth strategy.
4. Buy individual Chinese stocks such as New Oriental Education (NYSE: EDU) and Mindray Medical (NYSE: MR) that trade on U.S. exchanges.

Each one of these approaches comes with its own set of pluses and minuses. Though the index fund is low-cost, for example, it will condemn your portfolio to holding nothing but enormous, bureaucratic, state-owned enterprises such as Aluminum Corp. of China (NYSE: ACH). The actively managed fund might make more discerning stock picks, but it's also expensive -- and Malkiel's research showed that most actively managed China funds substantially underperform the index.

Can you pick your own stocks?
That leaves two options: Picking your own multinationals or picking your own Chinese stocks. In fact, Malkiel recommends you do both.

Of course, you'll probably feel more comfortable researching U.S. stocks that have a CEO who speaks your language (literally), that sell products familiar to you, and that release financials you're more likely to trust.

That's particularly so since Malkiel recommends that when you're picking Chinese stocks, you avoid the big state-owned enterprises and instead focus on small caps that are run by passionate entrepreneurs, rather than the cautious (and Communist) Chinese government. These stocks have more potential and more upside, and they're more likely to have been heretofore overlooked by institutional money -- so you might get a screaming bargain.

To do so, however, you need to know a thing or two about China. And at Motley Fool Global Gains, we'd like to help you with that.

Here's why
If you pursue both of these strategies, you mitigate some of the volatility and maintain China's upside -- a recipe for making good money in the long term. If you focus solely on Chinese small caps, then you get a whole heck of a lot of upside, but you will need to be able to withstand serious volatility.

If you stick solely with multinationals, however, then you're back at square one -- lacking direct exposure to China.

Global Gains can help you get out of your comfort zone. We've traveled to China twice over the past year, established a network of contacts, and specialized in finding and vetting promising Chinese small caps that we believe have the potential to be multibaggers many times over for many years.

If you'd like to look at all of our China research and insights, as well as read about the stocks we're recommending today, click here to join Global Gains free for 30 days. There is no obligation to subscribe.

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This article was first published on Sept. 12, 2008. It has been updated.

Tim Hanson owns shares of 3M. Mindray Medical is a Rule Breakers recommendation. 3M is an Inside Value choice. The Fool owns shares of Mindray Medical, and its disclosure policy likes Tim’s blog.