The 5 Best Places to Invest

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If pressed, could you tell me the country that offered the best stock returns over the past year? What about any members of the top five?

It's harder than you might think, because they're not the countries you'd expect.

You call that a market?
Given our dismal performance this year, you might guess that the U.S. is not on the list ... and you’d be right. In fact, the S&P 500 is down 33% over the past year. That's abysmal ... and it’s particularly abysmal when compared withj some other global markets.

Without further ado, the top five performers:

Country	Return
Zimbabwe	972,917%
Lebanon	55%
Tunisia	26%
Jordan	22%
Oman	22%

Source: Motley Fool Global Gains.

We can learn a few things from this list:

• If you're an American investor, it's absolutely crucial to be invested abroad. By doing so, you can get better returns and better diversification
• The best stock returns often come from obscure places -- not from the countries we read about every day in the papers.
• There is some risk involved in investing internationally. For example, given its problems with 11,000,000% inflation (give or take a few million), Zimbabwe isn't exactly a no-brainer for foreign investors.

Buy what others don't
But the main lesson here is old-hat: To get the best returns, you need to be willing (and able) to look where other investors don't look. That's why the 10 best domestic stocks of the past 10 years were all small caps.

See, huge numbers of investors and analysts watch large companies and popular markets.General Electric (NYSE: GE), Wal-Mart (NYSE: WMT), and Advanced Micro Devices (NYSE: AMD), for example, get coverage from 20 or more analysts. Those three popular stocks also each have more than 2,500 ratings in our Motley Fool CAPS community-intelligence database.

In other words, they're probably pretty efficiently priced.

You'll get the best returns, however, by finding market inefficiencies. And while another 3,000 investors cover Pfizer (NYSE: PFE) and Chesapeake Energy (NYSE: CHK) in CAPS, there's not a single Tunisian stock that trades on a major U.S. exchange.

The Foolish bottom line
That's where your opportunity lies as a Foolish investor. But as I said, international investing has risks -- particularly if you're investing in frontier economies on the gray sheets. But you don't necessarily have to assume that much risk to find promising international investments.

If you'd like some help finding worthy international investing ideas that you may never have heard of, click here to try our Global Gains service free for 30 days. There is no obligation to subscribe.

This article was originally published Dec. 13, 2006, as "The 10 Best Places to Invest." It has been updated.

Tim Hanson owns no shares of any company mentioned. Wal-Mart, Pfizer, and Chesapeake are Motley Fool Inside Value recommendations. Pfizer is also an Income Investor pick. The Motley Fool owns shares of Pfizer. No Fool is too cool for disclosure.