Opinion – Grain in Grain: We tested a strategy that yielded 60.505% and it just gave a buy signal; find it out

Investing in equity without a strategy is like walking through a forest without a compass. You will end up going around in circles. The strategy guides the investment and defines what attitude you should take at any given moment. There are two basic methodologies to guide your attitude: fundamentalist and quantitative. There is no better one, but with quantitative it is easier to measure the effectiveness of past results. I explain a simple quantitative strategy that anyone can use and that has yielded extraordinary returns.

This strategy has returned 60.505% from October 1999 to this last Monday. If you had invested in Ibovespa and CDI, in the same period, you would have obtained a return of 934% and 1,187%, respectively.

An investment of R$1,660.00 in this strategy in October 1999 would result in an amount of more than R$1 million today. The same investment in the Ibovespa or in the CDI alone would have reached only R$ 17 thousand and R$ 21 thousand, respectively.

The graph below shows the evolution of this investment of R$ 1,660.00 in the strategy, in the Ibovespa and in the CDI, since October 1999. Note that the investment only in the CDI or in the Ibovespa hardly appears in the graph.

In addition to presenting a higher return, this strategy had a risk measured by the volatility of returns that was lower than the risk of investing only in the Ibovespa. The volatility of annual returns for this strategy was 18% per year. While Ibovespa’s volatility in this period was 27% per year.

Therefore, the risk-return ratio of this methodology was incredible and it is very simple.

The strategy boils down to investing in the Ibovespa only when it is in a positive trend. When the trend is negative, the investor would switch the investment to the CDI.

Put like that it seems almost obvious that she would work.

The important thing is the indicator that points out the positive and negative trend. This indicator is simple to calculate.

The indicator is just the 200-day moving average of the Ibovespa.

So, when the index is above the 200-day moving average, it would indicate a positive trend. When it is below, a negative trend.

The chart above shows that the Ibovespa has just crossed the 200-day moving average. If the indicator is correct and does not show itself as a false signal, as it has several times, this would be the market entry point.

Did you like this strategy? Comment here which strategy you have been using and I will test it, sharing the result with everyone.

I emphasize that this is a simulation with past returns. There is always the possibility that a strategy that has proved profitable in the past will not deliver similar returns in the future.

Investing in stocks presents high risk and should be carried out considering your investor profile and a long-term investment horizon. Always count on an investment advisor to explain the risks and guide your investments.

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

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