Warren Buffett, one of the most important and admired investors in the world, is a figure renowned for the success he has achieved in multiplying his capital. Applying the premise that “the ideal investment is the one that lets you make money while you sleep,” Buffett is one of the leading advocates of the Buy and Hold strategy, well known in the equity market. 

“If you don't find a way to make money while you sleep, you will work until you die.”
Warren Buffett

“Buy and wait” may not seem to carry the glamour of the connected, fast-paced modern world, and it is no coincidence that we are constantly bombarded by news and courses on “stock trading” that promise quick gains. But the very focus of the Buy and Hold strategy is not a potential short-term speculative gain, which can depend on external factors such as a “bad mood” in the market, but rather a real appreciation of the invested asset, based on sound fundamental analysis. 

“Beware the investment activity that produces applause; the great moves are usually greeted by yawns.” 
Warren Buffett

How Buy and Hold works and its characteristics 

In the traditional financial market, the way Buy and Hold works is relatively simple and is based on the acquisition and long-term holding of stocks in the portfolio. Thus, instead of buying and selling at the first positive or negative swing, the idea is to hold the assets for years or even decades. 

This approach is anchored in the fact that solid companies tend to overcome crises and difficulties and, as a result, appreciate over the years. In other words, despite the usual price swings, the value of investments over the long term tends to behave far less volatilely, with a dilution of risk that accompanies the maturation period of the investment. 

“Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.”
Warren Buffett

It is important to stress that these short-term price fluctuations should not be a reason to sell assets for anyone who adopts Buy and Hold, since, according to the principles of the strategy, such adjustments should only be made if the fundamentals of the companies change drastically and make the investments too murky for the long term. 

Although it seems simple in theory, it requires considerable caution, analysis and judgment when applying this strategy, since the idea is for the invested assets to remain in the portfolio for several years. In this way, sound decisions demand prior research to carefully select the assets that will make up the portfolio, as well as constant monitoring of them. 

The strategy also makes it less likely to make untimely decisions driven by emotion. Thus, the tendency is not to worry about short-term movements, such as an oil-workers' strike or a hurricane in the U.S. Let us use the case of Magazine Luiza shares as an example. 

A share of Magazine Luiza (MGLU3), which cost R$ 11.93 on December 30, 2019, already accounting for the recent stock split, saw its price fall to R$ 7.20 in March due to the pandemic. A short-term investor might have panicked and made a hasty decision, while a disciplined investor was able to watch the share price climb to R$ 23.38 at the end of November 2020, nearly double the price at which the previous year had closed. 

Analogous cases occur daily, such as the movements of Petrobras shares (PETR4) during the 2018 truckers' strike, of Vale (VALE3) with the Mariana and Brumadinho disasters, and of Azul (AZUL4) and Gol (GOLL4) due to the pandemic itself. 

“Remember that the stock market is a manic depressive.”
Warren Buffett

This is one of the reasons why Warren Buffett remarks that he would like the stock market to bar trading of the capital he acquires for a decade or more, because he believes that companies should focus on real value creation, and not on speculative appreciation of the share value. 

Warren Buffett's strategy applied to the U.S. real estate market

The private income-producing real estate market, a segment of Ativore's investment thesis — described in greater detail in this other article — already intrinsically carries several of the characteristics and advantages mentioned: 

But beyond this, there is an additional factor intrinsic to the private real estate market in the U.S. that further optimizes Buy and Hold: the illiquidity of the assets. 

Illiquid investments generating income in U.S. dollars

In simple terms, illiquid investments are those that cannot be quickly converted into cash. Because of this “obstacle,” the expected returns for these assets are normally higher than for liquid investments of the same risk profile. This happens because the impossibility of immediate conversion requires financial compensation, the so-called illiquidity premium. It is no coincidence that we have observed strong results in this market. 

“If investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring.”
George Soros

Demand for illiquid investments in U.S. real estate assets with income in dollars has grown significantly, owing to their advantages over traditional fixed-income and equity products. In 2018, Yale's annual letter cited the dramatic migration of investments toward non-traditional asset classes on account of their high potential return and diversification power. According to the document, alternative investments offer the possibility of better exploiting price inefficiencies, through active management with long-term horizons, with tactical (short-term) allocations being less important in building a portfolio. 

It is also worth noting that, for the most part, illiquid alternative products benefit directly from low interest rates by employing more sophisticated leverage structures, insofar as they create arbitrages between the real economy and financial assets. 

Because of this, environments like the current one further encourage the structuring of, and subsequent investment in, assets such as these, providing asymmetries with good risk-return profiles and, consequently, enhancing portfolio returns over the long term. 

But although it may seem that this type of investment attracts investors who accept a higher level of risk because it requires a “long-term marriage,” in many cases the opposite is true. This is because real estate investments move more slowly and are less volatile over longer time windows. And the reason for this stability is the fact that the prices of real assets are not constantly adjusted. Add to this the fact that the lack of liquidity is mitigated by the cash flows and by the possibility of investing in different parts of the capital structure (debt or equity). 

In the world of investing, it is normally quite challenging to achieve profitability, safety and liquidity all at once. If you give up your liquidity, it is possible to obtain a higher return with adequate safety. If you give up safety, you may be able to have greater liquidity and a higher return. Thus, real estate investment seeks to focus on the first two factors, on the premise that the need for quick cash is nonexistent. 

Why accept waiting five or ten years to realize the gains? 

The advantage of an illiquid asset in the U.S., for someone willing to wait for it, is that the potential results can reach very high values. Real estate, for example, has values that can vary considerably, but if people hold through a period of declining values instead of selling in a panic, they may make a profit in the future when values recover.

The clear disadvantage of these types of assets is that, when someone needs cash urgently, illiquid assets are not up to the task. Someone may sell these assets at a steep discount out of desperation, if there are no other ways to raise funds, or someone may struggle to sell illiquid assets in time to meet other obligations or seize an opportunity. 

This issue is an excellent illustration of why it is extremely important to diversify investments and holdings in order to obtain maximum flexibility and profit potential. Hence the importance of establishing a portfolio composition that suits the investor's needs, with a portion of the wealth allocated to more liquid assets for emergencies and illiquid investments for greater capital appreciation. 

The importance of manager selection for U.S. investments

It is important to note that, despite offering a higher potential return, the factors described above make it even more essential to carefully select the managers who pursue these strategies, since they are the ones who will determine the success, or failure, of the investment theses. 

Since an illiquid alternative investment may sometimes take a decade to maximize its value, it is necessary to perform a detailed analysis of the asset before making the purchase. This also requires patience, time and discipline to analyze various indicators, which, for beginners, may not be an easy task. Another relevant matter, also for beginners, is knowing when to sell the assets, which is why working in partnership with specialists in this market is so important. And Ativore, having already engaged with hundreds of companies in this segment, makes this step easier for the investor. 

Why do we prefer the U.S. for investing in this market? 

Long-term forecasts are difficult in any country, but it is possible to mitigate some risks by investing in solid and enduring democracies, with stronger institutions than in Brazil.  It is important to highlight that we strongly believe in the power of wealth diversification to build and protect our clients' legacies. It is essential to remember that Brazil represents only 3% of global GDP, so by investing only locally, one loses the opportunity to gain exposure to the world's largest economies, such as that of the U.S. (which represents 23% of global GDP), where Ativore has a presence in 32 of 50 states. 

“In Brazil, the future is doubtful and the past is uncertain.”
Pedro Malan

“We have always lived in an uncertain world. What is certain is that the United States will keep moving forward forever.” 
Warren Buffett

Beyond this, it is widely recommended to hold within your global investment portfolio an income stream in a hard currency such as the dollar to mitigate currency risks in Brazil. This was, in fact, the main theme of our annual magazine, a reference in private real estate investments in the U.S., the Ativore Magazine 2021, whose digital version you can download by filling out the form below:

We believe that, by applying Warren Buffett's winning strategy from the stock market to other markets, adding an illiquidity premium, it is possible to earn considerable capital gains. The most important thing is to always rely on fundamental analysis and to invest with managers who are deeply knowledgeable about the market in question, in order to know how to navigate the investments in any scenario. In this way, it is possible to grow your wealth just as Paul Samuelson advised, considered by many the greatest economist of the 20th century: 

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” 
Paul Samuelson



Published by Ativore Asset Management