The Ibovespa rose 4.58% in the last 12 months until the close of this Tuesday. However, of the 85 stocks that make up the index, more than half, more precisely, 47 are still in negative territory in this period. Stocks that in the past were acclaimed as Magazine Luíza, Natura and Alpargatas lost more than 55% in value. With this, investors wonder: when is the time to throw in the towel?
The table below presents the ten biggest increases and biggest drops in the last 12 months. The intensity of the variations is impressive.
Many believe that because a stock has already reached a certain price, it must come back. Thus, they anxiously await the moment when they would recover the capital invested.
This attitude is not recommended.
Among all the reasons that would justify the maintenance of an action, the explanation for the loss is not rational.
As the third Zurich Axiom says, that of hope: “When the boat starts to sink, don’t pray. Abandon it.”
As author Max Gunther puts it, “about half of your investments are going to fail, so you have to know how to lose.”
Remember, the value you own in a stock is instantly exchanged for cash. If the asset is marked-to-market and shares are, then the fact that it didn’t sell doesn’t mean it didn’t make a loss.
So avoid falling into the trap of loss aversion behavioral bias.
In this sense, the most recommended thing is to think coldly as if your entire wallet was money.
Just because a stock has gone down doesn’t mean you should buy it, nor does the fact that it’s appreciated make it worth selling.
Search the valuations of the assets in the portfolio and others. Analyze company, industry, and economic outlook.
Then reflect on what would be the ideal portfolio to build from today.
If the asset you have in your portfolio is not part of the ideal portfolio, it must be sold and this ideal portfolio must be built. Professional investors are constantly revisiting their expectations and considering whether there is a better decision to be made. What are you waiting for to act like the pros?
Michael viriato is an investment advisor and founding partner of Investor’s House
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