Here's reality: As the market crashed last year, hundreds of hotshot money managers and analysts convened at the Marriott Marquis in New York to attend JPMorgan Chase's annual Asia Pacific and Emerging Markets Equity Conference. They weren't attending because they were scared of investing in emerging-markets stocks.
But you very well may have been ... and I don't necessarily blame you.
Some very scary numbers
China, India, Indonesia, Brazil ... what do these emerging markets have in common? They were all absolutely crushed in 2008. China was underwater to the tune of 60%, Indonesia and India 50%, and Brazil 40%.
It was a tough and volatile period of time for emerging-markets investors, and those who naively came to believe (thanks to the 2003-2007 period) that emerging-markets investing was all about outsized gains went away with their tails between their legs.
But it turned out that last year was precisely the wrong time to abandon emerging markets. Chinese, Indonesian, Indian, and Brazilian stocks all returned more than 60% this year! So did you miss your chance to make money in emerging markets?
Not if you believe Burton Malkiel
The good news is that even if you weren't invested in emerging markets this year, the forces that drove those stocks upward this past year should prove to be sustainable. In fact, it was at that same JPMorgan Conference that famed author, investor, and Princeton economist Burton Malkiel presented his "Investment Strategies for the China Century" -- and as the title implies, these are not things that are going away. Here's the summary:
1. Though China's GDP growth is slowing, it will remain the fastest growth in the world.
2. If you're an American investor, you're lucky to have even 2% exposure to China -- and that makes you dangerously underexposed.
3. The recent decline in Chinese stock valuations, together with the magnitude and duration of China's potential growth, makes today an "unprecedented investment opportunity."
Those are his words, not mine, although I do agree. The question, of course, is how does the individual American investor take advantage of this unprecedented opportunity?
Your four options
If you're an American investor looking for maximum returns and minimum hassle, then you have four ways to buy China:
1. Buy a Chinese index fund, such as the iShares FTSE/Xinhua China 25.
2. Buy an actively managed mutual fund -- such as Matthews China -- that is concentrated in China.
3. Buy multinational corporations such as Coca-Cola, Starbucks
(Nasdaq: SBUX), and Yum! Brands (NYSE: YUM)that are expanding in China and that have made doing business in China a significant part of their growth strategy.
4. Buy individual Chinese stocks such as CNOOC
(NYSE: CEO), ShengdaTech (Nasdaq: SDTH), or Global Sources (Nasdaq: GSOL)that trade on U.S. exchanges.
Each one of these approaches comes with its own set of pluses and minuses. Though the index fund is low-cost, for example, it will condemn your portfolio to holding nothing but enormous, bureaucratic, state-owned enterprises such as China Telecom. The actively managed fund might make more discerning stock picks, but it's also expensive -- and Malkiel's research showed that most of the actively managed China funds substantially underperform the index.
Can you pick your own stocks?
That leaves two options: Picking your own multinationals or picking your own Chinese stocks. In fact, Malkiel recommends you do both.
Of course, you'll probably feel more comfortable researching U.S. stocks that have a CEO who speaks your language, that sell products familiar to you, and that release financials you're more likely to trust.
That's particularly so because Malkiel recommends that when you're picking Chinese stocks, you avoid the big state-owned enterprises and instead focus on small caps that are run by passionate entrepreneurs, rather than the cautious (and Communist) Chinese government. These stocks have more potential and more upside, and they're more likely to have been heretofore overlooked by institutional money -- so you might get a screaming bargain.
To do so, however, you need to know a thing or two about China. And at Motley Fool Global Gains, we'd like to help you with that.
If you pursue both of these strategies, you mitigate some of the volatility and maintain China's upside -- a recipe for making good money in the long term. If you focus solely on Chinese small caps, then you get a whole heck of a lot of upside, but you will need to be able to withstand serious volatility.
If you stick solely with multinationals, however, then you're back at square one -- lacking direct exposure to China.
Global Gains can help you get out of your comfort zone. We just returned from research trips to China and India and named the five industries and five stocks you must own in each market.
Get your hands on that report and look at all of our China research and insights by clicking here to join Global Gains free for 30 days. There is no obligation to subscribe.
This article was first published Sept. 12, 2008. It has been updated.
Tim Hanson owns no shares of any company mentioned. CNOOC is a Global Gains recommendation. Coca-Cola is an Inside Value and Income Investor choice. Starbucks is a Stock Advisor selection. The Fool has a disclosure policy.