I’m an avid student of market history, particularly of investors who have achieved great success over long periods of time.
One of the best investors of the last century was Sir John Templeton, who used a global approach to value investing that earned an average annual return of about 14% across fifty years. One of his investing maxims was to look for the period of maximum pessimism and buy heavily, which eventually made him a billionaire.
That might sound like a simple strategy, but in practice it’s much more difficult. Buying at the point of maximum pessimism means buying US stocks in late 2008 and early 2009. It means buying European banks at the height of the crisis, or internet stocks in 2003. You are buying stocks that no one else wants to touch — ones that are falling like barbed-wire-wrapped stones. Friends, neighbors and spouses will think you have lost your mind.
The stocks are likely to down before they go up but if you have a long time frame and strong stomach you will usually make a lot of money by stepping in when others are running out.
That is exactly the situation I see developing right now in Brazil. The economy has fallen apart, and the country has gone from one of the fastest growing markets to a stagnant economy with looming inflation problems. The government has inserted itself into the financial system and controls some of the larger corporations. Riots are breaking out in the streets as the populace loses faith in the government. In a lot of ways, it reminds me of the United States in the late 1970s.
The country is a mess and near the point of maximum pessimism. The stock market has declined almost 20% in the past year and is well below the 2008 highs. Investors who are willing to step in and buy Brazilian stocks should expect to see them decline before they move higher. However this is the fifth-most-populous nation in the world with a developing middle class and a very young population. The international l exposure and economic impact of the World Cup in 2014 and the Olympics in 2016 could very well be the impetus for renewed growth.
I am buying a basket of the cheapest Brazilian stocks. I favor the large oil and gas company Petrobras (PBR) at 80% of tangible book value, Banco Santander Brazil (BSBR) at tangible book value, homebuilder Gafisa (GFA) at 60% of tangible book value, and electric company Companhia Paranaense de Energia (ELP) at 70% of tangible book value. I will add to them if the market declines further and will be searching for new names to add to the basket.
Markets fluctuate — look at how far the U.S. market has come since early 2009. My time frame is pretty much however long it takes for Brazil to regain its economic momentum and become a darling of the emerging markets crowd once gain. I have no idea how long that will take, but at some point in the future and I expect to wake up and be very pleased by my long-term profits from my Brazilian expedition.
As of this writing, Tim Melvin was long ELP, GFA, PBR, and GFA.