"It was like riding a tiger, not knowing how to get off without being eaten."
This painful quote isn't Indian poetry or a memorable movie line. It's part of the confession that Satyam (NYSE:SAY) Chairman B. Ramalinga Raju provided earlier this year, admitting to years of accounting fraud at his once-popular IT outsourcing company based in Hyderabad.
For foreign investors, the stings don't end there.
Liars, tigers, and Wall Street bears -- oh, my!
Shares of Baidu (NASDAQ:BIDU) were slammed two months earlier, when a scathing expose on China Central TV detailed the company's practice of profiting from unlicensed medical companies that were freely advertising on China's largest search engine.
Baidu cleaned up its act. Satyam is cleaning house. However, the damage is done to stateside investors who felt they had hot leads on fast-growing companies in China and India, respectively.
Don't watch your wallet, watch your passport
Financial bombshells abroad are enough to spook already nervous investors. Many took on risks in buying companies with names they sometimes couldn't pronounce, in countries they have never visited, and got burned.
It's hard enough to get a handle on what local companies are doing, even more so to become proficient in international customs and corporate governance several time zones away.
Does this mean it's time to sell all of your foreign stocks and take a "Buy American" attitude?
No way. Don't even think about it.
Satyam is being called "The Enron of India," but that phrase acknowledges that we have crooks within our own borders, too. Rogue traders have dealt European bankers like Credit Suisse (NYSE:CS) and Allied Irish Bank (NYSE:AIB) hits in the millions -- and even billions -- of dollars, but they still have nothing on Bernie Madoff's colossal swindle.
In other words, the occasional blowup will happen in every portfolio, no matter where the jurisdiction lines are drawn. It is up to you, the investor, to do your part by diversifying to make sure gains from your winners outweigh the head-shaking stinkers that will happen to all of us.
Diversify, diversify, diversify
Besides reducing the downside risk any one position presents to your portfolio, there's a silver lining to diversification: One company's fatal misstep is another company's golden opportunity.
If Satyam clients leave the disgraced IT outsourcing provider, it will be a blessing to rival Infosys (NASDAQ:INFY). If Baidu loses market share, that traffic will simply trickle down to smaller players in China like Sohu.com's (NASDAQ:SOHU) Sogou. When you buy shares of several top players in promising markets, you're much more likely to pick the ultimate winners.
But these days, rather than buying a collection of thriving foreign companies, frightened investors are painting troubled and successful firms with the same brush. That's unfortunate for them, particularly given that some of the world's most successful investors, like Peter Lynch and Sir John Templeton, made fortunes buying a wide variety of stocks all around the planet.
So, for instance, when you see that a few of last year's biggest IPO disappointments were online educators in China, you shouldn't hold that against New Oriental Education and Technology (NYSE:EDU). The company recently delivered stellar results in its fiscal second quarter. Revenue grew by 54%. Earnings soared 58%, yet the stock trades more than a third off of its 52-week high.
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Longtime Fool contributor Rick Munarriz thanks his parents for being able to see so much of the world when he was young. He does not own shares in any of the companies mentioned in this story. New Oriental Education and Allied Irish Banks are Motley Fool Global Gains recommendations. Sohu.com and Baidu are Motley Fool Rule Breakers selections. The Fool owns share of Allied Irish Banks and has a disclosure policy.
