How high can Iraqi stocks go?

In my October 11 post, I argued that the ISX stands a reasonable chance of joining this year’s emerging markets rally. Today, I’d like to make an even more audacious claim: in 2011, inflows of foreign money could potentially make Iraq the world’s top performing market.

You can get some idea of the upside potential for Iraqi stocks from the chart, which shows the dizzying heights to which a sudden inflow of liquidity can push a tiny new market like this one. Whether the new money is primarily foreign—as in the Russian and Sri Lankan examples—or local—as was the case in China and Vietnam, the resulting bubble looks much the same. In a time span of from one to two years, you might make anywhere from five to ten times your money if you managed to get out at the top. (Note that all four of these markets went on to reach even higher levels in later years.)

These legendary emerging markets of yesteryear can also teach us two important lessons about when to sell. First, no stock is overvalued if it is going to continue going up. In a liquidity-driven market, concern with valuations will only lead you to take profits too early. And second, don’t believe the hype. No matter how rosy the prospects for the local economy and corporate earnings seem to have become, when the supply of liquidity begins to dry up, the bull market is over.