Opinion – From Grain to Grain: Before making any investment, consider these two factors

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The difference between investment and betting is not understood by the vast majority. The recent case of the USP student suspected of stealing her graduation fund is an example. There are two factors that need to be considered when making any investment so that it does not qualify as a bet. I comment on these factors and how they relate to the example cited.

A student of the USP medical course, dissatisfied with the returns obtained from the graduation fund, used the students’ savings of almost R$ 1 million to place bets in lottery houses and on the stock exchange.

According to COAF, she bet BRL 397,000 on lottery tickets and won BRL 366,000 between April and July of last year.

Why can this attitude not be considered an investment, but a gamble if many investments were even worse?

There are several definitions for investment, speculation and betting.

According to the renowned British economist, John Maynard Keynes:
“Investing is an activity of forecasting the yield over the life of the asset. Speculation is the activity of forecasting the psychology of the market” of designing the psychology of the market).

Following Keynes’s definition, it is clear that many waste time and money trying to guess the mood of the market. Only after losses do they realize that predicting the mood of the market is like predicting the weather well in advance.

It is already known that, even with all the technological tools available, it is only possible to predict the climate, in a reasonably reliable way, for a short period of time. But, market moods change faster than the weather.

According to the book Investimentos, by authors Bodie, Kane and Marcus, what differs investments from betting is that there is a risk premium that compensates for the risk incurred.

I consider this definition to be the most appropriate.

An investment has a positive risk premium if its expected return is greater than the return obtained by investing in a risk-free asset.

Lotteries are a gamble, because when you consider the probability of winning and the amount paid, it turns out that the expected result is less than the ticket price.

To arrive at the expected result, all scenarios of gains and losses must be considered and multiplied by their respective probabilities. Making this account, it is possible to clearly see that lotteries are a gamble.

Also acting as a gambler is the one who invests in a financial asset, but has not calculated the possible scenarios and their probabilities. That is, the one who simply bets that “things will get better” or that “this is a good company”. In both cases, that gambler may be buying an expensive ticket.

When making an investment, one must estimate the most likely scenario, as well as alternative scenarios and their respective probabilities.

For example, when thinking about investing in the stock exchange, it is necessary to estimate a scenario that involves, among other variables, revenue growth and the evolution of profit margins, investments and interest rates.

Undoubtedly, we are often surprised by the occurrence of a scenario that was largely improbable before it occurred and, therefore, was disregarded. For example, the recent scenario of fraud on Americanas’ statements.

In these cases, the application should be reassessed in light of the new information. The act of holding on to an investment just because it has already been made can become a gamble if the outcome scenario now points to a negative risk premium.

Therefore, in investment decisions, it is fundamental to consider the possible scenarios and their respective probabilities to verify whether the risk premium compensates the risk incurred. I understand that this calculation is not easy, but betting can cost you if you don’t.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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Book: The Journey to Financial Independence

summary

Introduction
Understand how you will achieve your financial independence
Living on an income is the last step on the journey to financial independence
These are the biggest questions about the journey to independence

Part 1 Construction of the plan

Chapter 1 The first step in building the blueprint for financial independence
Chapter 2 How do you define the rate of return in your plan for independence?
Chapter 3 Find out what equity you need to achieve your financial independence
Chapter 4 On your journey to independence, don’t overlook the importance of this factor
Chapter 5 Understand the two ways I applied to increase my saving capacity
Chapter 6 If You Double This Factor, Your Equity Can Multiply Much More
Chapter 7 Connecting the dots to build your plan

Part 2 Assembling the portfolio to lead you to financial independence

Chapter 8 Before making any investment, define these two factors

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