If you're an investor, this scenario should keep you up at night: You find a promising stock, spend weeks doing due diligence, finally gain enough confidence in the company to buy shares, and...
WHAMMO! Some previously undisclosed ethical or financial shenanigan comes to light, and you're out some, most, or, in the worst case, all of your investment.
Don't think it can't happen
This type of stuff happens in our public markets. Before Sarbanes-Oxley (SOX), we had Enron, Tyco
As investors, we weren't safe before SOX, and we're certainly not safe after.
However, while we can all cite ethical grievances against American business and government, we still live in one of the world's more reliable countries. According to Transparency International's 2007 Corruption Perception Index, the United States is one of the world's 20 least corrupt countries, and American companies are the ninth least likely to bribe others in order to do business.
This is good news, right?
American enterprise scores well, at least on a relative basis, when it comes to corruption. However, over the past few years, American investors have been rushing headlong into foreign equities, hoping to make their fortunes abroad. Many are blindly buying "China" or "India" in the hopes of cashing in on globalization.
That's smart in some respects. After all, globalization is here to stay, and some of the world's best stocks have offered incredible returns.
But if you're investing in China and India, you should know that of the world's 30 leading exporting countries, businesses in China and India are the most likely to pay bribes. Moreover, China and India tied for a disconcerting 72nd on the Corruption Perception Index.
In other words, you'd best be prepared for some blowups.
Avoid corruption calamities
If this is scaring you, good. It scares me, too. That's precisely why Motley Fool senior analyst (and resident skeptic) Bill Mann launched Global Gains, a stock-picking service to help more American investors find better foreign stocks.
After all, it's hard enough finding great investments when we have reasonably reliable financials. It gets that much harder when regulatory and accounting frameworks break down. And while many auditors have begun pushing for coherent international accounting standards, it will be some time before that comes to pass.
Consider yourself warned.
This article was originally published on Nov. 13, 2006. It has been updated.
Interested in having the Global Gains team help you find foreign equities? Try the service free for 30 days. You can read up on the inaugural picks and see everything the team has to offer with no obligation to subscribe. Click here for more information.
Kristin Graham updated this article, originally written by Tim Hanson, and owns shares of Apple. Tyco and Dell are Inside Value recommendations. Dell and Apple are Stock Advisor picks. The Fool's disclosure policy is rockin' in the free world.