The recent rally in the market has brought back something many investors have been missing, faith. Several stocks that had dropped more than 80% in the last 12 months, rose by up to 50% in a space of just over 30 days. We have all heard that the investor with patience is rewarded, but it is necessary to know how to differentiate patience from faith.
If you invest in the stock market, you have probably heard the famous quote by Warren Buffett:
“The market is a machine that transfers money from the impatient to the patient.”
The big problem is the confusion between patience and faith.
When Warren Buffett makes any investment, he first spends a lot of time studying the company and its market.
In this case, when an asset does not perform as expected at the beginning, it makes sense to have patience and wait, as it knows the fundamentals well, that is, what should make the asset go up and what its objective is.
Often, investors buy a stock on the recommendation of a friend, relative or by reading on social media. In this case, they do not know the implicit assumptions, the basis or purpose of the purchase.
For example, today, a doctor friend confessed that one of the stocks he had bought was on the recommendation of his doctor. personal trainer.
When a share that was worth R$100 falls by 80%, its price becomes R$20. After this drop, if it appreciates 50%, the share is worth only R$30. Therefore, it is still a devaluation of 70% of the starting price.
I asked my friend what he would do. He said he would be patient and wait for the return.
I don’t call it patience, but faith.
As he did not study the company in depth, nor did he calculate the fundamentals that would explain the purchase, he has no way of knowing if it is appropriate to keep the asset. The goal becomes just to recover the loss.
But why being in this asset would be the best way to recover the investment?
Don’t expect faith to be rewarded. Patience is rewarded, because tied to it, one knows the upside potential.
The maximum that an action has reached cannot be considered its objective. Even so, if it takes too long, you could be better off with less risk.
Note that if your investment takes a long time to return to its initial value, you had a great opportunity cost, as you could invest in the Ibovespa with much less risk and do better.
As John Bogle says, “Don’t look for the needle in the haystack. Just buy the haystack!”
Bogle and Buffett argue that if you don’t spend a lot of time researching each of the stocks you invest in, you should invest in a diversified index like the Ibovespa, the Dividends index, small caps and others.
Most of the time, by investing in an index, you will earn more and with less risk than applying without proper research.
There are also active equity funds that have managed to present an interesting performance with less risk. In this case, there is a structured team, in which the job is to research the best alternatives.
Michael Viriato is an investment advisor and founding partner of Investor’s House
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I have over 8 years of experience in the news industry. I have worked for various news websites and have also written for a few news agencies. I mostly cover healthcare news, but I am also interested in other topics such as politics, business, and entertainment. In my free time, I enjoy writing fiction and spending time with my family and friends.
