Is it worth taking stock market risk in Brazil? – 08/17/2023 – From Grain to Grain

Exactly four years ago, on Friday, 8/16/2019, the Ibovespa closed the trading session at 99,806 points. Considering today’s closing at 114,982 points, the yield of the country’s main stock index was equivalent to 3.6% per year in this 4-year period. In the same period, investments that yield the CDI appreciated by the equivalent of 7.42% per year. With this performance, the question arises: is it worth taking stock market risk in Brazil?

If you evaluate the Brazilian past, not only in the last 4 years, the answer is no.

Over the past 20 years, the Ibovespa has yielded the equivalent of 10.6% per year. While the CDI has appreciated 10.8% per year over the last two decades.

This cold assessment discourages any appetite for the Brazilian stock market. However, it is necessary to consider three points in this evaluation.

First, the Ibovespa is an average. When we evaluate averages, there will always be investors who did much worse and others who performed better. Therefore, the fact that the Ibovespa performed worse does not mean that all of them did poorly.

Second point to consider is that this is an assessment of the past. Care must be taken when making decisions about the future based solely on the past.

More than half of companies fail in the first few years of life. However, that doesn’t mean entrepreneurs don’t start new businesses every day.

The fact that past statistics are unfavorable signals a risk that needs to be taken into account.

This issue of risk is very important to understand.

Many people are mistaken and change the order of the following sentence. You’ve probably heard the phrase: more risk means greater return. This sentence is wrong in this order.

If more risk meant greater return, there would be no risk.

The correct thing is: higher return means higher risk. The risk doesn’t always materialize, but it doesn’t mean you didn’t take it if you won more.

It may sound silly, but it’s important to understand that whenever you’re looking to win more, you’re accepting some probability of losing. And she can materialize.

Investing in the Stock Exchange is a way of seeking greater returns. However, the risk added by this is relevant as we saw in the past result. So it needs to be done with caution.

The last point to consider is the question of timing and intensity. In the last two decades, there have been moments of high and low interest rates.

In times of falling interest rates, the stock market performed better.

Currently, we have started a cycle of falling interest rates, from the Selic. It does not mean that the stock market only goes up for the entire period, but the medium-term trend is favorable.

Therefore, better than evaluating the average of the past result is to separate these intervals in which the scenario is more likely to be positive. That is, those in which the risk of loss tends to be lower.

I am not saying that we are in the best moment to invest in the stock market. Because this moment is only known later. However, it is not appropriate to look at past averages and chart performance for the future.

Perhaps we are not in the best of times, as there is still a lot of uncertainty abroad. But, possibly, next year, when US interest rates start to fall, the scenario may be more aligned to result in a more promising Stock Exchange.

Anyone looking for a higher return will have to run some risk of loss in this case.

Therefore, you can take advantage of the slumps of the moment, to very slowly increase your share in the Stock Exchange. But don’t forget that there is still a lot of opportunity in fixed income, which has less risk.

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

Talk directly to me via email.

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