The Strategy That Beats the Market. Always. Everywhere.

The attractions of international investing are obvious. You're expanding the pool of potentially great investment ideas by looking at companies throughout the world, you're reducing the risk in your portfolio by adding international exposure without decreasing returns, and every once in a while, as they did in 2006, things go crazy good in various international markets.

But that chart says more to me than just "blindly invest in the hottest markets." Obviously, a lot of people have been doing just that, pushing up the prices of a number of these markets to seemingly stratospheric levels. India and China, in particular, are widely accused of being too expensive at the moment. China, for its part, has been labeled "expensive" for more than a year now, yet it keeps skyrocketing higher, and it's now home to the world's most expensive stocks.

Of course, those countries are also growing their economies at phenomenal rates, so maybe they can justify their sky-high valuations.

Maybe this time it's different.

Don't count on it
One of the nice things about getting to learn about what works in international investing is that it isn't all that different from what works domestically. There are certain historical, time-tested, well-researched truths out there, and one of the most important ones comes from Columbia School of Business professor Bruce Greenwald:

"[L]ow market [capitalization]-to-book all over the world -- every place -- has outperformed the market in every extended period at least by 3% to 5%."

That's 3% to 5%.

Every extended period.

Everywhere.

Back to that chart
Don't be fooled by the chart above. Yes, those gaudy international returns really happened, but they are completely abnormal, both from all the years that preceded last year and anything investors can possibly hope to achieve on a regular basis over the long term. A difference of 3% or 5% seems to pale in comparison to the dramatic returns of being in the right country at the right time, but that's not really the case.

When planning for the future, investors should assume no better than something in the range of 6% to 7% real annual returns. Add 2% to 4% for inflation, and 8% to 11% returns, by the market, is about what you can expect over time.

So you can see why any method with that beats the market by 3% to 5% over time is so remarkably powerful.

Back to that strategy
Buying stocks with low price-to-book (P/B) ratios works in international markets. But before you get started screening, know that international accounting differences can make P/B ratios from your average database rather raw figures that need refinement.

With a little effort, though, you'll be ready to go.

You'll find that this approach leads you away from the sexier companies that seem like sure winners to so many investors. Some people are just attracted to that type of stock no matter what data they are shown. Just know that investing in the land of high growth and high valuations is not historically a market-beating formula ... anywhere.

Stocks you should be looking at
International stocks that look interesting on the simple P/B metric today include Cemex (NYSE:CX), Sony (NYSE:SNE), China Netcom Group, and Aegon (NYSE:AEG).

While large U.S. stocks with tangible P/B ratios of less than 1.9 seem to be much harder to find, that group today includes Duke Energy (NYSE:DUK); a number of brokers, including Merrill Lynch (NYSE:MER) and subprime-market embroiled Bear Stearns (NYSE:BSC); and perhaps most intriguingly, Loews (NYSE:LTR).

Simply buying low P/B stocks isn't anybody's idea of a completely nutritious method of investing, but it's a metric worth starting with, no matter what stocks you're researching.

A "perfect storm" of traits
To get the truly exceptional returns available from the best international investments, you need to know which companies can profitably grow their businesses for decades and take market share in these emerging markets. That means building franchises and withstanding inevitable competition.

If you combine those traits with a compelling valuation, you'll have the kind of wealth-creating investment our Motley Fool Global Gains international investing team is looking for. The recent drop in international markets has brought prices down nearly 15% off recent highs, according to the MSCI EAFE index, near 52-week lows. That's increased the margin of safety for the kinds of stocks we're looking for, and hopefully for the ones that you're looking at as well.

If you'd like to join our team for a free 30-day trial of the service and learn more about finding the best international opportunities, click here.

Bill Barker does not own shares of any company mentioned. Duke Energy is a Motley Fool Income Investor pick. Cemex is a Global Gains and Stock Advisor selection. The Motley Fool has a disclosure policy that works everywhere, all the time.