Peter Lynch is famous for advising investors to "buy what you know." But "knowing," for Lynch, is not simply having a favorite restaurant or store. In the introduction to the millennium edition of One Up on Wall Street, he writes, "Never invest in any company before you've done the homework on the company's earnings prospects, financial condition, competitive position, plans for expansion, and so forth."
In other words, there's a lot more to "know."
An AP headline revealed some of the driving forces behind the frenzy that pushed the Shanghai Composite Index up 130% in 2006 and 97% in 2007: "1st Time Investors Buy Up Chinese Stocks."
1999 all over again
Did these first-time investors truly know what they're buying? Here they were in their own words: "'We can still make money,' Ding [Xiurui] said. ... Asked what stocks she would buy, Ding said, 'I don't know. I'm still learning.'"
If that sounds familiar, it should. Here's Steven Leeb writing about the tech bubble in his book, The Coming Economic Collapse: "Millions upon millions of investors ignored time-honored principles for investing in stocks, such as due diligence and fundamental analysis, and began to buy and sell out of emotion. Believing in the wonders of technology, they rushed to buy technology and Internet stocks like rats following a Wall Street pied piper."
China: The next wonder of the world
Just as technology was the wonder 10 years ago, China was the wonder last year. An investor who threw $10,000 at the iShares FTSE/Xinhua China 25 Index
In other words, it was unbelievable.
But it's also pretty similar to the 124% return that the Nasdaq 100 index offered from March 1999 to March 2000. Just as tech giants such as Adobe
Or was it?
While China stocks are down this year, the country's businesses continue to grow.
What's more, the opportunity in China is clearly huge. If it weren't, companies such as Yum! Brands,Caterpillar
That number has only increased.
A growing $75 billion opportunity
Just as the potential rewards of investing in China make it imperative for U.S. companies to invest there, individual U.S. investors must put some money to work there as well. And since Chinese stock valuations have been cut in half this year, now is the perfect time to do so.
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This article was first published on May 21, 2007. It has been updated.
Tim Hanson does not own shares of any company mentioned. Huaneng Power is both a Motley Fool Rule Breakers and Income Investor recommendation. Dell is an Inside Value recommendation. The Fool's disclosure policy never drops it, even when it's hot.