Opinion – From Grain to Grain: Understand why the strategy of buying the Ibovespa and forgetting is not efficient

The Ibovespa trades today at the same 111,000 points it traded in November 2019. In this two-and-a-half-year period, the main Brazilian stock index has only given investors volatility, but no return. For those who were invested, it seems that it was the longest period of time in which the market did not move. However, there have already been at least three other longer timeframes in which the investor did not see any results, only oscillations.

After yesterday’s article, I received some messages asking if the ideal strategy would be to invest in an ETF or Ibovespa passive fund and forget about it.

History explains that the strategy of buying the Ibovespa and forgetting is not efficient. Fabio Mota, manager of DAO Capital explains that:

“…historically high interest rates harm the business environment and, consequently, company shares. Therefore, it is necessary to know how to select more profitable companies, less indebted, with greater profit growth and that, at the same time, , are cheap.”

Yesterday I mentioned that the Brazilian stock investor should have the mindset of a businessman and be patient, but he should also be flexible, changing the strategy according to the scenario.

Investing in the Ibovespa index and standing still is a losing strategy in the medium and long term, given the opportunity cost of the very high interest rate. Only in short periods did this strategy prove to be positive in relation to investing in the CDI.

In the figure above, I present three examples in which, in the last 25 years, the investor saw his application close at the same value after 3 years of investment.

I remember that the Ibovespa is an index. In indices, dividends are reinvested. Therefore, the graph presents the gain related to the price variation, with the dividend gain included.

In the first case, the investor who invested R$ 10 thousand in June 1997, invested in the index at 12.9 thousand points. In June 2003, the Ibovespa was traded at the same value. This means that after 6 years, the investor had the same value of R$ 10 thousand. Throughout this period, the value rose, fell, but ended up at the same level.

I can imagine how frustrating this is. But, it’s still not the worst case.

Consider an investor who invested R$ 10 thousand in May 2008. The Ibovespa at that time was at 72.6 thousand points. First, he saw his invested amount devalue by 50% to just R$5,000.

Two years later, when he was already close to recovering the amount invested, the market began to fall again. More than seven years after the initial investment, he still had only half of the amount invested, that is, R$ 5 thousand.

Soon after, the Ibovespa began to improve and its invested amount exceeded R$ 16 thousand. However, the joy was short-lived, as more than nine years after having invested, the value dropped again to the initial R$ 10 thousand.

Which investor would recover from this trauma? Would you have endured either of these two situations?

As much as this investor has the mentality of a businessman, I have doubts if he would invest in any stock again. Possibly, this investor left halfway at a loss. But what was the mistake?

The mistake was the chosen strategy. The strategy of buying the Ibovespa and forgetting will probably make you remember that you shouldn’t have done that. Reader José Padilha Neto already understood this when he commented yesterday: ​”Investing in stocks, for me, is not investing in the Ibovespa…”.

There are several better strategies for investing in stocks. Nor is it enough to choose any other. It is necessary to align the strategy to the economic scenario.

Michael Viriato is an investment advisor and founding partner of Investor’s House

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