Opinion – Grain in Grain: I bought Magalu shares and only lost; should i sell?

After a rise of more than 6,500% until the beginning of last year (2021), Magalu’s share attracted the attention of several investors. The strong appreciation led many to imagine that buying the stock represented an easy path to low-risk fortune. However, what seemed like a great promise turned into a nightmare in the short term.

As if the devaluation of more than 70% in 2021 was not enough, in the first three days of 2022, shares have already lost more than 11%.

At this point, several investors ask themselves: should I sell?

The example was with the actions of Magalu, but this doubt occurs with several actions at the moment.

Due to legal restrictions, I cannot give a buy or sell recommendation for a stock, as I am no longer an accredited analyst, as I have been in the past. However, I can help you decide in situations like this.

The decision must consider three elements. But before talking about them, it is very important to be aware of a common mistake among investors.

One of the biggest mistakes investors make in this situation is to stick to the past trajectory of the asset.

What happened to the stock price in the past should not be reflected in your decision now. In other words, just because a stock went down doesn’t mean you shouldn’t sell it, and it’s not because it went up that you can’t buy more.

The decision must always take into account the perspective of future returns, based on today and the scenario ahead. And this scenario is the first element that you should consider.

Just because a stock went down doesn’t mean it’s cheap now. Also, just because she fell doesn’t mean you got your position wrong. But, you may need to revise the position for a change from the previous scenario.

Evaluate what scenario you considered when you made the decision to buy the asset. Put the new scenario in perspective. Even with devaluation, the asset may today have a lower return potential than when you bought it, because with a worse scenario, logically, the stock loses value.

Analyze whether, with the new scenario, you would buy a share in the company’s sector, disregarding the fact that you have it in your portfolio. Will this sector be harmed with higher interest rates? How does higher inflation penalize you? How sensitive is this sector to economic growth revisions such as those that have taken place? Is this company the cheapest in its industry?

It is not appropriate to look at how much a stock has fallen and thus believe that the amount of negative change reflects the value to be captured in the future. It is important to analyze valuation metrics such as cash flow and relative multiples.

The second element to evaluate in the decision is the diversification of your portfolio. Analyze whether this action makes sense in a diversified portfolio. One should not only evaluate the stock individually, but it is also important to consider the diversification of the portfolio. Did you focus the exposure too much on an individual action?

The third element is related to the investment profile and horizon. Think about whether the size of the stake you acquired is in line with your investor profile and long-term horizon. If not, consider reviewing for exposure suited to your profile.

Evaluate these three elements, disregarding that you already own the asset and its loss. Make the decision assuming you own the money and not the stock and consider whether you would buy it now.

The fact of already owning the asset often hinders a rational decision. When investigating the position in the action with the three elements discussed, there is a criterion to decide whether the current position makes sense, that is, whether to keep the actions.

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

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