It was only a matter of time. When you have the most people, the most resources, and the most money, you won't be kept down for long. What's happening today is evidence of that.
Which brings us to ...
China. The country is growing and gaining in influence. Its GDP continues to expand at nearly 10% annually, as it has done for the past 25-plus years. It's gearing up for the international stage later this summer, when all the world will watch the Beijing Olympics (where China is among the favorites for overall gold medals). And its ".cn" Internet domain recently became the world's third most popular, behind ".com" and ".de" (though mark my words: it's only a matter of time before ".de" goes down).
In fact, according to VeriSign (Nasdaq: VRSN) -- the tech giant that managed to lose money last year even though it operates in this fast-growing space -- China domain name registrations grew more than 200% year over year in the most recent quarter. That magnitude of growth in anything is just not feasible anywhere in the world. Well, except for China, thanks to its infrastructure development, rapid urbanization, and growth of the middle class.
This is why my colleague Bill Mann recently named investing in China "the greatest opportunity in our lifetime."
Bill's not alone
Warren Buffett reportedly advised young investors that "the 21st century will belong to China. Invest accordingly." Then there's money manager and global investing guru Mark Mobius of Franklin Templeton, who recently noted, "The full economic potential in China is far from being reached today."
As for today's landscape, Mobius was upbeat in remarks to Bloomberg News: "The correction in China provides a good opportunity to get in. ... Even if you downgrade China growth by a few points, it's still going to be greater than in the U.S."
This brings us to the elephant in the room: The Chinese stock market has been an even greater disaster than our own over the past six months. While the S&P 500 is down 8% year to date, the Shanghai composite is down more than 40%!
If China is such a booming place to invest, then what the heck gives?
But before we get to that
The fact of the matter is that the price of a stock and the actual value of its underlying fundamentals don't always walk hand in hand. You may remember this lesson from -- cue Conan O'Brien -- the year 2000 ... when tech stocks such as JDSU (Nasdaq: JDSU), Level 3 Communications (Nasdaq: LVLT), MicroStrategy (Nasdaq: MSTR), Red Hat (NYSE: RHT), and Akamai Technologies (Nasdaq: AKAM) enjoyed multibillion-dollar market caps despite earning no profits off of comparatively small (to their market caps) bases of revenue.
When the Internet was assumed to be The Next Big Thing, these stocks got way ahead of themselves. Then they stumbled, even as the Internet went on being The Big Thing.
Investors gone wild
The same course of events describes China today. China is already the world's most dynamic economic growth engine, and it's only going to get bigger from here on out. But investors are right to worry about the role of the Communist central government in development, the inequitable distribution of wealth in the country, and the lack of disclosure and transparency at even large public companies.
As a result, investors succumb to periods of wild optimism (see 2006 and 2007) followed by sudden and devastating pessimism (2008) at the first signs of trouble. For evidence, just take a look at the chart for China Fire & Security (Nasdaq: CFSG) -- a Beijing-based supplier of fire detection and extinguishing systems that trades on our own Nasdaq. The stock increased nearly six times in value in 2007 -- from $3.45 to $18 -- only to be rocked all the way back down to $3.55 when the company was featured on a prominent short-selling website.
China Fire's true value, of course, lies somewhere between $3 and $18, and though it, like all Chinese stocks, is volatile, if you've bought when it traded closer to $3, China Fire has treated you just fine.
And not just China Fire
The same lesson goes for all Chinese stocks. The fact is, China's growth is an unstoppable global trend, and as long as you pay attention to valuation, focus on finding the country's best-of-breed companies, and commit to holding them over the long haul, you will do very well by putting money to work in the country.
It's to get after that second point -- to find the country's best companies -- that Motley Fool Global Gains advisor Bill Mann and I recently traveled to China for research. Not only have we found some prime candidates for investment, but each one of them has seen its stock price drop over the past few weeks. (For our purposes, that's a good thing.)
You want some names
You can read all about those companies when we publish our findings from the trip next week for our Global Gains subscribers. If you're not a subscriber, click here to sign up for 30-day free trial and read our complete notes from the trip as well as our top international stock recommendations.
And there's one last point about that ".cn" Internet domain. Not only is it the fastest-growing, it's also ranked by McAfee as among the most dangerous on the Web. So it goes in China, where you'll do very well ... so long as you're careful.
Tim Hanson owns shares of China Fire & Security, which is a Motley Fool Global Gains recommendation. Akamai Technologies is a Rule Breakers pick. When ordering food in China, the Fool's disclosure policy always goes with appetizer No. 18, entree No. 37, and a Tsingtao (the jumbo size).
