Can you tell me the country that offered the best stock returns in 2006? What about any members of the top 10?

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

You call that a bull market?
Investors rejoiced as the Dow crossed 12,500 in 2006, yet the Dow gained just 16% last year. That's an impressive number on the surface, but it's abysmal when compared to the rest of the world's equities.

Without further ado, 2006's top 10 performing countries:

Country

Return

Peru

168%

Venezuela

156%

Vietnam

145%

China

121%

Russia

92%

Costa Rica

77%

Botswana

74%

Croatia

61%

Serbia & Montenegro

58%

Morocco

57%

Source: Birinyi Associates.

This list is incredible to me. Croatia? Botswana? Peru?

We can learn a few things from this list. First, if you're an American investor, it's absolutely crucial to be invested abroad. The potential returns to be had overseas are too good to pass up. Second, the best returns often come from obscure places -- not from the countries we read about every day in the papers. And finally, there is risk involved in investing internationally. For example, with President Hugo Chavez leading a nationalization push right now, Venezuela isn't exactly a friend to foreign investors.

Buy what others do not
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. 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 have more than 1,500 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 2,500 investors are covering Pfizer (NYSE:PFE) in CAPS, Peru's Compania de Minas Buenaventura (NYSE:BVN) has only 250 ratings.

What's that knocking sound?
That's where your opportunity lies as a Foolish investor. But as I said, international investing is not without risks. If you'd like help finding worthy international investing ideas you may never have heard of, click here to try our new Global Gains service free for 30 days. There is no obligation to subscribe.

This article was originally published Dec. 13, 2006. It has been updated.

Tim Hanson does not own shares of any company mentioned. Wal-Mart and Pfizer are Motley Fool Inside Value recommendations. No Fool is too cool for disclosure.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.