He Bought A Single Stock In Brazil. This Is What Happened!

by Corey Philip
August 27, 2016

Back on July 8th.  I had dinner with a friend a few weeks ago who couldn’t wait to tell me about his recent investment.  With eyes lit up and the confidence of a jockey, he told me about his investment in Brazil Resources INC (BRI).  According to their website:

Brazil Resources Inc. is a public mineral exploration company with a focus on the acquisition and development of projects in emerging producing gold districts throughout the Americas. Currently, Brazil Resources is advancing its Cachoeira and São Jorge Gold Projects in northeastern Brazil, its Whistler Gold-Copper Project in south-central Alaska and its Rea Uranium Project in the western Athabasca Basin in northeast Alberta, Canada.

His logic behind the investment was that Brazil’s economy is set to take off.  I’d agree with that based upon the cape ratio, and expected real total return of emerging markets at about 7%.  He also believed that the company was fundamentally strong, based on what he read about them – nothing specific just what he read.  I cringed at the thought of this investment, and commented that it was a “horrible move”.  I had a smarter moved in mind.

Lets see why I thought this was such a horrible move:

  • Risk was concentrated. The investment was in a single company.  Here you are not just exposed to the risk of sector or market, but also to the risk of the business and the extraordinary events they deal with, from wrong forecasts, to natural disasters affecting operations.  When dealing with a company in a ‘not so established’ emerging market, you’re exposed heavily to fraud in the financial statements and insider trading, which is highly illegal and less prevalent in the US.
  • The stock had just experienced a major HUGE bull run. Brazil Resources INC (BRI) had been on a mega bull run recently.  In the Last 6 months it was up a smoking 485%.  In the words of Baron Rothschild “The time to buy is when there is blood in the streets”.  At this time there was no blood in streets, only gold.
  • It had made the news. If a stock is catching your attention based on a headline, its too late.  Winners are caught from a screener, quantitative factor or inside source, before stock market pundits are providing commentary.
  • It was a gamble. Investing without a systematic strategy that quantifies purchases and sales is generally a horrible move.  You can find my simple ‘Beat Your Target Date’ system here.

SO how has BRI done since the July 8th investment?  In short, not good.  It is down 21%.  Not such a bull run after all.

What would a smarter move have been?

My friend was right on Brazil.  Fundamental Brazil was (is) a buy based on global quant strategies using the CAPE Ratio.  Exposure to the brazil market would’ve been better achieved through a Brazil ETF such as iShares MSCI Brazil Capped ETF (EWZ) which has 61 holdings across all sectors, rather than just 1 single company in the natural resources industry.  EWZ was up 58.45% before he made his investment and since then it is up 15.42% .

Its important to stick to rules based investing, whether thats a buy and hold allocation, or some type of active quantitative system.

In fair disclosure his investment was extremely tiny relative to his net worth, so this could be looked at a ‘fun gamble’.

About the author

Corey Philip

Corey Philip is a small business owner / investor with a focus on home service businesses.

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