Getting a big investment right once is easy, it’s hard to repeat it – 03/30/2023 – From Grain to Grain

Who hasn’t seen videos on social media of ordinary individuals hitting basketball hoops or shots on goal from seemingly improbable distances? We know that these moves are unlikely, but we often believe that that person has the ability to repeat the feat. The same is true in the investment arena, and as a result, many fall into traps.

Would you know how to take advantage of 3-point shots in professional games?
a) 35%
b) 45%
c) 55%
d) 65%

The 3-point line in basketball games was created by the defunct American Basketball League (ABL) in 1961. The 3-point line is just over 6 meters away. Doesn’t look like much.

When we see individuals throwing distances greater than two or three times, many think: how can those professionals not do it?

That’s right, experienced professionals who train all day and make mistakes by a simple distance. It seems easy when you watch the average person get it right.

In investments, something similar happens.

More and more I observe promises of explosive earnings in a simple way. Possibly, you have come across promises like these. They show some alleged successful financial operations and imply that the success rate is high.

This leads many to buy trading systems, robots, training, subscriptions and others. Money thrown away.

There are some equity investment funds on the market that have become very famous for having successfully made an investment and having produced a great result.

In our office, we study very carefully the ability of the manager to reproduce what he did. How was his decision at the time? How did the idea come about? What is the decision process? These are some questions to be answered to understand their ability to repeat the feat.

To all our customers who arrived with these funds that looked spectacular, we explained the risks and suggested more suitable alternatives. It was the best decision.

According to an article by Frederico Santos and Fernanda Souza, the average use of 3-point shots by professional athletes is around 35%.

We often complain about funds in which the manager lost a reference index such as the Ibovespa or the CDI for a short period, but we believe that if it were us, even without experience and without a team behind us, the result would be different. You doing it alone tends to be even worse. All you have to do is really measure the result.

There is a financial bias called overconfidence bias. This behavioral bias occurs when the individual is overconfident in his own ability to analyze and make decisions.

This often comes from observing that it is easy and simple to make money from stock exchanges or derivatives. After all, it’s just buying when it goes down and holding it until it goes up, right?

As Bruno Giovanetti points out in his academic work, the vast majority of investors lose money with trading operations. day trade and the majority lose from the Ibovespa in longer-term operations.

Just as you shouldn’t be fooled by those spectacular ball pitches, don’t be fooled by the presentation of some options operations, stocks, cryptoassets, real estate or other assets with astronomical gains.

They might have got it right once. However, even experienced professionals cannot repeat feats very often.

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

Talk directly to me via email.

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