With both China and India expecting GDP growth of 8% or more in 2010, investors may be thinking that making money in these fast-growing emerging economies is all but a sure thing going forward. But I'll wager that most investors in these countries -- and that includes both investors and multinational companies -- won't end up doing as well as they hope.
How can that be? When investors approach emerging markets, they tend to make two key mistakes. By the end of this article, however, you will know how to avoid those mistakes.
Mistake No. 1: Overpaying for growth
As you may know, investors love growth. But growth can be dangerous, and investors and CEOs alike will often act stupidly in its pursuit. For evidence of that fact, see two once-major deals that will be quietly undone by the end of this year: eBay's
And while both of these deals had issues from an operational standpoint, they also both suffered from the mistake that all investors make time and time again, particularly when it comes to emerging markets: The folks buying the growth drastically overpaid.
The consequences of overpaying for growth were demonstrated again this year by Professor Elroy Dimson of the London School of Business. His research found that emerging-market stocks -- even though their home countries grew their GDPs at a faster rate than developed markets -- underperformed developed-market stocks by six percentage points annually. And that's simply because the investors who buy these stocks are "paying a price that reflects the favorable prospects of such countries."
Mistake No. 2: Know the local market
The other error investors make when it comes to emerging markets is that they don't get to know the local market. Thus, rather than adapt their approach to the market, they try to force the market to adapt to their approach. That is a recipe for failure.
Consider, for example, the experience of Starbucks
YUM! Brands
Buy it local, buy it cheap
Put simply, you need to get involved on a local level if you are to succeed in emerging markets. For individual investors like us, that means replacing the multinational exposure you'd get with the likes of Wal-Mart
That's why our Global Gains research team travels regularly to the countries we're investing in. We believe that if we don't have the story from the locals, we don't have the right story at all. This approach has paid off handsomely this year, and we're off again to India at the end of the month to continue our work.
If you'd like to receive all of our free real-time insights from the field, just click here and enter your email address on the next page.
Tim Hanson is co-advisor of Motley Fool Global Gains, and he's looking forward to dining at Trishna in Mumbai. He does not own shares of any company mentioned. eBay and Starbucks are Motley Fool Stock Advisor picks. Procter & Gamble is a Motley Fool Income Investor pick. Wal-Mart is an Inside Value recommendation. Motley Fool Options recommends a bull-call spread on eBay. The Fool owns shares of Procter & Gamble. Take a look at our disclosure policy.