Why individual investors rarely beat Wall Street when choosing stocks, according to Bruno Perini
Host of the podcast Os Sócios argues that the efficiency of the American market makes indexed ETFs the best strategy for most investors
BY THE X-TRADER NEWS NEWSROOM · REPORTING FROM BRUNO PERINI · 3 MIN
Individual investors who try to outperform the big Wall Street players by choosing individual stocks tend to obtain returns below the market average in the long term. The assessment is by Bruno Perini, host of the podcast Os Sócios, in an episode dedicated to the book "Rich, wise and happy", by William Green.
According to Perini, the starting point is the hypothesis of efficient markets, formulated by economist Eugene Fama, from the University of Chicago. According to the thesis, when there are many participants with access to information and low cost to change positions, prices tend to reflect the fair value of the assets. The presenter also mentioned investor Howard Marks, interviewed in the book, as someone who deals with the topic.
Perini offered a simple reasoning to illustrate the concept. If a stock like Banco do Brasil is seen as cheap and a lot of people hear this, the mass purchase would raise the price to a neutral level. Likewise, if Nubank is considered expensive, investors could set up short positions (renting shares to sell) and pressure the price down. For him, the question is whether this movement is not already occurring.
Brazil and the United States: markets of different sizes
In the presenter's assessment, the Brazilian market is not as efficient as the American one. He stated that the United States has almost 200 million investors, while Brazil has around 5 million CPFs on the stock exchange. Foreigners, according to him, also have a limited presence here.
As an example, Perini mentioned the record inflow of foreign capital in a single day, after the first round of elections: 10 billion dollars. According to the presenter, it is a volume that Apple negotiates in minutes.
In the American market, he stated, Brazilians, Latin Americans, Europeans, Africans and Asians operate, as well as young analysts from Wall Street, algorithms and, increasingly, artificial intelligence tools. Everyone is constantly looking for discrepancies between price and value.
Another factor cited is the cost of changing your mind. Individual investors, Perini noted, tend to pay income tax when making profits, which can lead them to hold positions. Investment funds set up and dismantle positions without taxation for each operation, which only applies when the shareholder redeems the money.
What does this mean for the investor
For this reason, Perini considers it "completely crazy" to try to imitate the great managers by concentrating the portfolio in a few names abroad. He gave the example of a doctor who spends his day in surgery and tries to pick American stocks in his two free hours on the weekend. In short terms, he admitted, the result may even be positive, but over long periods the tendency is for returns to be below average.
The presenter recalled that William Green, author of the book, states several times that most of his own money is in an indexed fund, the ETF. For Perini, ETFs are usually the best strategy for individual investors.
He cited John Bogle, who argued that there is nothing wrong with earning the average market return. According to Perini, repeating this result over a long period, above the average of those trying to do more, takes the investor to the desired destination. The opinions are those of the presenter and do not constitute investment recommendations.
Automatically translated from Portuguese.
