Brazil Value Talks: Sergio Machado (MAG Cash FIRF LP)
Performed 109% CDI with Low Vol in 10 years
Today I have the pleasure of interviewing Brazilian investor Sergio Machado.
From Octorber 2014 to November 2024 his historic performance will be the envy of anyone.
His portfolio returned more than 157.54% in the period, versus 144.71% for CDI.
This guy knows how to generate real value.
Shall we meet him?
BS: Sergio, could you tell us a little about yourself?
SM: I graduated from GV and have been working in the financial market since 1978. I started as an analyst at a brokerage firm and then joined Bank America as a trainee in 1980. Since then, I have been working in the banking trade area, always working on different desks, until I became a treasurer in 1990.
I worked at several banks as a treasurer and, in 2005, I left, opening my first asset management company in 2006. At first, I focused more on high-volume products, until, in 2012, I was invited to work at Jive Investments to develop low-risk and low-volume products. It was quite a turnaround.
At the end of 2014, I set out on a new venture by opening a new fund whose objective would be to optimize the risk/return binomial, but with special care for the constant minimization of risks.
This product is now 10 years old: MAG CASH FIRF.
BS: What is your strategy for making money in the financial market?
SM: I think the way forward involves humility and discipline, and the ability to adapt to the high volatility and large amount of uncertainty in the Brazilian market.
We have a structural problem of economic uncertainty that has only gotten worse over time. Long bets have been extremely cruel to managers. So, focus where your arm reaches.
BS: What mechanisms do you use to provide such a stable and consistent return on your funds? (Special question from David Gotlib)
SM: We maintain a very short-term vision, as the speed of change generates a lot of instability in assets with extreme volatility and increasing uncertainty.
Instead of focusing on generating maximum alpha, we focus on minimizing the possibility of losses as much as possible.
BS: Why is the banking business so good in Brazil, while in developed economies it is not so good?
SM: First of all, we have one of the most advanced financial systems in the world, and certainly one of the safest and most robust.
Here, banks learned the hard way in an unstable, insecure and hyperinflationary economy. There was a major cleansing when the Plano Real came into effect, and from there emerged this new reality of extremely competent banks.
Of course, with the cleansing came concentration and with it the spreads are extremely high, which helps to make the sector profitable.
BS: A major stock investor often says that the big banks are the 4th power in Brazil, after the 3 powers that we already know. What do you have to say about this?
SM: I think it's a nice figure of speech to sell newspapers, but in fact I don't see any real political action from the sector.
BS: How is it possible that such large and traditional banks in terms of credit have lent billions to a large retail chain that was falsifying its balance sheets? Can credit analysis be more subjective than objective?
SM: Sometimes size can breed leniency. The “too big to fail” story.
BS: Despite the high level of regulation in the sector, it is said that bank balance sheets allow for a lot of creative accounting. Which important items are more reliable and less subject to such juggling?
SM: I think that has been greatly reduced. In the past, it was really a sieve, but today I don't think that can happen without some kind of unorthodox behavior.
BS: What do you think about analyzing a bank's financial performance over time by increasing net equity and distributing dividends, given that net income does not show the entire real result?
SM: We have to make our decisions based on the facts that are available.
BS: In addition to the classic metrics in the analysis of bank balance sheets, such as DTA, default, coverage ratio, Basel ratio and ROE, what would you recommend looking at and how is it analyzed?
SM: It is vital to know which sectors and operations are most representative of the banks analyzed.
Furthermore, I remember an old saying from the banking sector: “banks are people and paper”, so get to know the people... Real bankers are vital for us to have healthy and competitive banks.
BS: What are the accounts that do not go through the banks' net profit, going directly to equity and how to analyze them?
SM: These are just some specific reservations, I don't think they are that important for the evaluation.
BS: If you had to choose 3 Brazilian bank stocks to hold for 10 years, which ones would you choose?