Gustavo Ballvé on July 19th, 2013
Food for thought, Home, Investment Themes, Mental models, Portfolio Management, Risk management, Signal or Noise

I’ve thought about not writing to comment the latest bullish posts on “Brazil” by the otherwise interesting blog Reformed Broker. In one post,  he argues that if he had a gun to his head to pick one market to be invested in for the next 10 years, with no option to get out before these 10 years are over, he would pick Brazil. In another post he shares “analysis” that shows how buying “Brazil” after 20% drops has had great “performance” in ages past.

OK, I’ve always known that his blog is much more trading-oriented than value investing-oriented. I also wondered about writing because it’s one of those things you don’t quite want to spend energy debating because you just know better – just as much as I would never argue with him about “trading” opportunities in the S&P or Dow Jones or whatever index in his country. Let’s just say that few Brazilians have any conviction about the Global macro environment, its impacts in Brazil, Brazil’s “micro” fundamentals and how the heavy hand of government has affected / is affecting them, and especially what the politics will look like in next year’s election – especially in 10 years, “gun to the head” conviction levels. It is precisely the time to shun indices and be very selective, investing in businesses that are not terribly dependent on macro “improvements”, are run by very capable and aligned managers and are trading at prices that allow for decent margin of safety.

And yet, let’s discuss the post.

First: I am a partner in a Brazil-based, Brazil-only hedge fund, so I obviously believe that, in 10 years’ time, Brazil has a decent probability of being ahead of where we are today economically.

Second: This doesn’t mean that “the Brazilian stock market” should necessarily be the world’s best-performing or safest in the next 10 years (in all honesty, the author didn’t say whether the call sought investment returns, safety or what combination of these factors). It may mean that some great companies may outperform because they have been punished alongside the market while retaining significant growth and profitability prospects and so on (not that many opportunities like this even with the “22% fall”, which wasn’t across the board anyway, but you get my point). Some of these companies may have great performance in the next 10 years. To say the same of a vaguely defined “Brazilian market”, on the other hand, is harder – again, it’s something feasible but certainly not “gun-to-the-head” true.

Third: Buying “Brazil” and buying the Bovespa index are two very different things. This point is vital for foreigners looking at “Brazil” (if you truly MUST look at countries rather than specific companies – I don’t, and never will).

Fourth: That “study” of the index’s rebounds after falling by 20%… drop it quickly. Forget about it, erase it from memory. It means nothing, it proves nothing.

Fifth: Nah… Like I said, it’s one of those things… If anyone is convinced of his/her ability to make such calls about some place he/she knows very little about with “gun-in-the-head” conviction, my opinion probably won’t change anything.

The whole point is that it is extremely, excruciatingly hard to KNOW something that allows investment edge/margin of safety about even individual companies in your own city and for the short term. When you make the leap to a “country” index for 10 years with no option of getting out, well, I simply wouldn’t accept that proposition even in hypothesis. That’s a very important sub-point: the whole “gun to the head” analogy is something money managers and individual investors should avoid at all costs: you do NOT want to get into those situations. Instead you should structure your investment processes/ your business/ your life so you can wait for fat pitches (see below).

“Wait for the fat pitch” is a Warren Buffett metaphor that I wrote about in a post about a brief market “panic” in August 2011:

“What to do now?

First of all, remember the “fat pitch” metaphor: in the baseball analogy, investing is like being in the batter’s box in a game where there is no strike count. That is, you can wait for the “fat pitch” in your hitting sweet-spot – and when it comes, swing at it full-power and knock it out of the park.

(For baseball-challenged readers, think of a tennis match in which you get to choose which serves you want to return. When a serve comes in with the the right speed, spin and height you hit it hard for that great return winner.)

(…)

And if you’ve read this far, this is what Buffett had to say regarding his “fat-pitch” approach in a 1974 Forbes interview (H/T to Todd Sullivan):

“I call investing the greatest business in the world,” he says, “because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.” “

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