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Stocks With Huge Potential

Bill Mann
May 7, 2008

My Motley Fool colleagues and I recently sat down with Dr. Jeremy Siegel, noted professor of finance at the University of Pennsylvania's Wharton School, to talk investing. In that meeting, Siegel said that he believed investment advisors who keep the international component of their clients' portfolios in the typical 5% to 15% range are doing them a disservice. Instead, he argued that international stocks should comprise some 40% of the average investor's portfolio.

Now, as a value guy, I'm not a huge fan of portfolio allocation. As I've said before, I want my money invested 100% in companies that don't suck, and 0% in companies that do.

But I think Siegel has a good point: Too many investors view "international" as a sector, akin to "technology," "consumer staples," or "decorative paper products." But that would be some kind of sector: International stocks have a collective market capitalization on par with that of all American stocks -- and offer incredible diversity.

An imperfect classification
If you insist on viewing global stocks as a sector, perhaps you can tell me the commonality between, say, BP (NYSE: BP  ) and Israel's Teva Pharmaceutical (Nasdaq: TEVA  ) . They aren't in the same country, business, continent, or industry. They don't use the same currency, and they don't depend on the same supplies, commodities, or labor pools. They're only in the same "sector" in three ways: They're located on the planet Earth, they both seek to make money, and they're not based in the United States.

Those two companies are in the same sector in the same way that Kenneth Branagh and Carrot Top are in the same business, which is to say: They aren't.

Incredible global opportunities
I started investing in international companies many years ago because I wanted to. While I liked the thought of owning America's greatest businesses, I loved the idea of owning the world's greatest businesses. Moreover, because there are many reasons why you wouldn't want to invest in foreign securities (from risk to unfamiliarity to lower standards of governance and regulatory protection), I believe that many of the market's great bargains exist overseas.

Even better, if you open yourself up to global investing, you have the ability to find opportunities in countries that are at the same point in their growth trajectory that America was 20, 40, or even 60 years ago -- places where the growth and industrialization train is just pulling out of the station. For example, fueled by the torrid performance of companies such as CVRD (NYSE: RIO  ) , Brazil's stock market has produced annual returns of about 40% over the past five years.

Classic investment techniques apply
For me, international investing is not so much a matter of diversification -- though I fully accept that this plays an important role in a person's desire to look overseas for investments -- but a matter of making money. After all, if I found that all my best ideas were located in the United States, I'd invest all of my money there.

But they aren't. Never have been. Foreign markets simply have huge growth potential, even as many investors still shy away from them. And I suspect that this condition will remain true. You'll have opportunities to buy foreign companies very cheaply for many years to come -- if you know where to look.

Successful international investing doesn't mean simply saying, "Well, China's big -- I'll buy China." No, it means applying fundamental stock analysis to other countries, and picking the best opportunities. In other words, it means looking at a great long-term opportunity such as Satyam Computer Services (NYSE: SAY  ) when the Indian