You shouldn’t invest in the same way you choose food in a restaurant – 09/28/2024 – From Grão to Grão

Imagine that you enter a restaurant and, without even looking at the menu, you ask the waiter what the most popular dish is. He responds quickly, and without thinking twice, you decide to choose the same one, believing that if everyone is asking for it, it must be a good choice. Later, you realize that there were better and even cheaper options, including in neighboring restaurants. In the world of investments, this behavior is also common, but it is more risky and can be more damaging to your assets than a simple choice of dish in a restaurant.

Many investors make purchasing decisions without evaluating the real value of the asset. They just trust the popularity of the moment, believing that if everyone is buying, it’s worth going with the flow. Many consider that since so many are buying, the price is supposed to be correct. This behavior may seem harmless at first, but paying too much for an investment can result in significant losses. The illusion of security generated by high demand often hides the true risk of entering the market at the wrong time.

In the real estate market, this error is even more common, as it is a market with less information. Therefore, investors usually base their decision on deals that have occurred recently. We saw something similar, for example, with vacation properties. During the pandemic, with the increase in home officedemand for homes in beach and country areas soared, inflating prices. Many people bought properties in these locations believing that the value would continue to rise. Now, with the return to in-person work, higher interest rates and less demand for these properties, prices may stabilize or fall, bringing losses or lower-than-expected returns to investors. Check out this risk in an article from Folha de São Paulo.

In the stock market, the situation is similar. Many investors buy shares in companies that are on the rise, believing that the appreciation will continue. However, the price paid in moments of euphoria can be much higher than the real value of the share. When the market adjusts, these investors are faced with significant drops, as they did not correctly assess the entry price.

Regarding the exchange rate, many Brazilians buy dollars when the currency is on the rise, hoping that the value will continue to rise. This movement, often driven by the fear of missing opportunities, can result in losses when the dollar price falls. The entry price, in this case, defines whether the investor will achieve protection or accumulate losses.

Even in fixed income, price matters. Imagine investing in a bond linked to the IPCA in a low interest rate scenario. At first glance, it seems like a good deal, but if interest rates rise, the market value of the bond falls. Investing without considering the entry price and future scenario can reduce your yield and increase the risk of loss when selling before maturity.

It is not simply the choice of the type of asset that defines the risk you take. Investing at the wrong price can transform assets that are known to be conservative into aggressive ones.

Therefore, whether in real estate, stocks, dollars or fixed income, the crucial point is the same: the entry price is what defines the success of the investment. No matter the asset, if you pay too much, the risk may outweigh the benefits. In the end, the real question you should ask yourself is not which asset to buy, but rather: am I paying a fair price? In the world of investments, this is the difference between guaranteeing a satisfactory return or running the risk of paying dearly for a mistake.

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

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