Brazil Value Talks: Anderson Lueders (Real Investor Asset Management)
The Brazilian Charlie Munger
Today I have the pleasure of talking a little with one of my references for investing in stocks in Brazil: Anderson Lueders.
Also known as Small Caps, or simply Small to those close to him, he began his journey as a stock investor more than 20 years ago, when he was still Director of the Secretariat of the Federal Justice of Santa Catarina, analyzing balance sheets until late at night, after working hours.
I have been following his career for over 15 years, since he shared his investment ideas on the infamous Small Caps blog, in search of the despised treasure, a reference at that time.
Anderson was self-taught in investments. Following the school of Benjamin Graham, Warren Buffett and Charlie Munger, he studied Brazilian companies listed on the stock exchange in depth.
In 2008, he wrote the book Investing in Small Caps: a complete roadmap to become a successful investor, which, even without much publicity, was a sales success due to the quality of its content.
In 2021, he received an invitation that would change his life. His long-time friend, César Paiva, founder and manager of the super successful Real Investor Asset Management, invited him to be Partner and Co-Manager of the funds.
Because he works in Londrina, far from the hustle and bustle of Faria Lima and Leblon, they say that César Paiva is the Brazilian Warren Buffett, as the old man lives in Omaha, far from the financial center of New York.
If César is Warren Buffett, then Anderson Lueders is the Brazilian Charlie Munger.
Below, not a mere interview, but a true masterclass.
Enjoy.
BS: What made you start investing in stocks in the "fixed income country"?
AL: I started my investments in savings when I was 18 years old, then I went to fixed income funds. When I was 19 or 20 years old, in 2000, there was a public offering by Petrobras. I found it interesting, because it came with a discount, so I studied it further. I started looking at graphs, but it didn't make much sense to me. I discovered a website called Action and Reaction, which still exists today. There were several texts by Buffett, Peter Lynch, Graham, texts talking about margin of safety, fundamental indicators, and to me that made perfect sense. I started studying, I saw the performance that the owner of the website had, and let's just say it was love at first sight.
At that time, fixed income was paying Inflation + 10% with a 30-year term, a very high return. Meanwhile, several stocks were trading at 2-3x earnings and with dividend yields of over 10%, having an implied risk-adjusted return even higher than that of fixed income. The small cap market was very little followed. Whoever allocated to these assets had a very high implicit return.
Investing in stocks was an opportunity for me to increase my return substantially. As my career was very safe, I could increase the risk a lot. It made perfect sense. I was young, with a relatively high income for my age, in a secure job, without many obligations, without a family or children to support. So it was the right time to take more risk. I started studying very hard and then I never stopped.
BS: How do you maintain the discipline of coldly following your analysis of buying or selling a stock and not getting carried away by emotions in moments of market depression or euphoria?
AL: Certainly controlling emotions is one of the main qualities of a good investor, because, when the moment comes when things are extremely cheap, there will be a series of reasons for you not to invest in stocks: the scenario will often be troubled, there will be negative news popping up all the time, there will be macroeconomic distrust, political distrust in the country. But the prices will already reflect all of this. Everything that is excessively priced for better or worse ends up generating an opportunity.
It is much easier to find many opportunities when there is pessimism than when there is widespread optimism. For example, at the end of 2019, everyone was optimistic, Brazil was going to skyrocket, it was going to take the trail, but the stocks were very expensive. Companies whose shares are currently traded at R$20 and which are more profitable than at that time, in 2019 were traded at R$50, with no margin of safety.
The market is extremely cyclical and the only way to avoid getting carried away by this emotion is to be rational. You have to think mathematically about the attractiveness of the investment, you must see what risk premium you are receiving to buy that asset at that moment, how much more you earn than an NTN-B (Brazilian Tips) pays. This rational analysis, without getting carried away by the heat of the moment, will determine whether you will make good investments or whether you will let yourself be carried away by the herd.
Having independent thinking is essential. For example, not getting into the heat of Faria Lima or Leblon, where everyone is discussing the same scenario, the same theses, makes it much easier. The market is the average of people's opinions, nothing more than that. The average opinion of people is in these large centers and, if you don't get carried away by this, you will have a very high competitive advantage.
BS: Do you believe that graphical analysis, together with fundamental analysis, can help with the buying and selling points of shares?
AL: As soon as I started investing, I even took a candlestick course offered by a broker, but I soon realized that it wasn't my cup of tea. There is a debate about what makes a chart look good, whether it is a good time for the company or the opposite, but what really brings a margin of safety for the investor is knowing how to establish the difference in price and value. If you pay less than it's worth, at some point you will make money. If you build a broader portfolio of these opportunities, the probability of several things going right is greater, making you outperform the market.
The graphics end up having an influence more due to the number of people who follow, reflecting market sentiment. If a company is doing well, exceeding market expectations quarter by quarter, as happened with Vulcabras recently, the graph ends up reflecting this, with a medium-long term rise.
Sometimes the graph exaggerates for the good. For example, like the case of Magazine Luiza, which was worth more than R$100 billion, but it was a business that made practically no profit. The graph ends up encouraging people to enter because of the momentum, because it is going up. This attracts more people, who pay more, and this attracts even more people, who pay even more, and so on. It's a different game from the basics.
For a fundamentalist investor, the more expensive the stock becomes, the worse it gets. Now, for a graphist, sometimes it is better, because the trend of the action is positive. You should not despise the existence of this, but rather enjoy it. As long as there are people taking an asset at prices much higher than its worth, you don't need to sell it all at once. Let irrationality take over, let it reach 5-10x more than it's really worth and start slicing up sales.
BS: Do you believe it works to carry the same stock for more than 10 years in Brazil with all the macroeconomic fluctuations we have?
AL: It is essential for investors to understand that Brazil is a very different country from the United States. Here we do not have companies, with rare exceptions, that from Brazil will dominate the rest of the world, as we do in the United States. There, for example, there are Microsoft, Google, Amazon, which are American companies present in Brazil. They have access to much cheaper capital, tax advantages, and much better qualified employees. So companies there are much more competitive and it is possible to invest in winning theses for much longer periods.
In Brazil, the macroeconomy is unstable and the political environment is extremely unstable. There is no culture of prosperity in this country, everything is just the way it is. It's been a long time since we've had a real statesman, dominating and leading this country into the future.
This is reflected in an economy that grows little, inefficiently, with a lot of taxes and consequently our companies are unable to compete adequately with foreign companies, except those in sectors where the country has natural advantages, such as commodities, industries when the currency is very devalued. , as currently, the financial sector, benefiting from the high cost of capital.
It is very important to closely monitor cycles, governmental and political attitudes, because they influence much more in Brazil, an unstable country with an economy dependent on a few sectors, than in the United States.
All these distortions generate many opportunities on the stock market. So, with rare exceptions, you need to adapt to the idiosyncrasies of the Brazilian market.
It is very common in Brazil for people to be mistaken, thinking they have found an excellent company, but, over time, it ends up showing itself to be a poorly performing company.
BS: What are the main analytical errors you see when applying North American investment literature to investing in shares in Brazil?
AL: Excellent question, complementary to the previous question. In Brazil, the duration of the investment cannot be that long, that is, those actions with a secular thesis, blue ocean, addressable market are dangerous here. In the United States, technology dominates stock market indices. What are there really good technology companies here in Brazil? People at some point thought that e-commerce was technology. Just because the company sold on e-commerce was already considered a technology company. This is absolutely ridiculous. These companies even started to have multiples as if they were competitive American technology companies that were going to dominate the world. That didn't make any sense.
It is common for foreign literature to not like utilities or the financial sector, but here in Brazil they are more competitive investments due to market security, due to the competitive conditions we have here. In Brazil, the commodities sector is also more relevant than in developed countries.
Foreign literature ends up focusing a lot on qualitative aspects, which I think are essential, but we cannot give this weight to such a long future as can be done in other countries, because here the instability is much greater and it is not in this area that Brazil is extremely competitive.
In Brazil, you can find much cheaper assets in the old economy sectors, with shorter durations. If you can buy something cheap, inadequately priced in relation to the profit it will generate, you greatly reduce your risk, because your payback on the investment becomes much shorter. Considering the risks of investing in Brazil, this is essential.
BS: Do you have any objection to investing in any sector? Why?
AL: I have no objection, but there are things that we see over time that the market thinks is much better than it actually is. A classic example, which just turned out to be a very losing thesis, were companies linked to retail. People thought that Magazine Luiza, Via Varejo, Natura, Alpargatas, several domestic consumer companies were much better than they actually are. These companies have always had very high multiples. While the stock exchange was trading at 10-12x earnings, they were trading at 25-30x earnings because they appeared to be dominant companies.
Today there is great distrust in the banking sector. The competition got really tough. But at the prices of some assets today, they are not necessarily bad investments. The market has already discounted the price due to this risk scenario.
In the case of companies with a very favorable scenario, such as fintechs, where Banco Inter was seen trading at 8-9x the book value, there was an excess of optimism. For these companies to reach these value levels, they would need to have an ROE of 40-50%, but they never came close to that. So it's important to adjust this in expectations.
My biggest objection is actually the retail sector, but that depends on price. Guararapes, for example, was very cheap for a long time, growing, but today the competition has changed. Therefore, in a sector analysis, you need to see when competitive conditions change, even to know the right time to start selling an asset.
On the other hand, there are sectors that I find very interesting, such as utilities, which have additional security in Brazil. Although there is government interference in regulating tariffs, it ends up having an advantage, which in the long term is very important in the country, which is the assured market. A distributor, for example, has no competition within its concession area. This ends up bringing greater result resilience over time. Even not-so-efficient companies, such as state-owned companies, end up making good profits in this segment, showing that it is not as difficult a segment as retail, which is extremely competitive.
Another sector in which Brazil ends up benefiting greatly is finance due to the high cost of capital. Historically, it is the sector with the highest return on the Stock Exchange.
And also, of course, the commodities sector, buying at the right time, you end up having a good carry. In the case of mining, Vale's extraction cost is well below the market average. The same can be said for cellulose production, where Brazil is also very competitive. We cannot fail to mention Agro, also excellent.
BS: In major commodity down cycles, which last approximately 7 years, how can you invest in shares in Brazil and obtain higher returns than fixed income?
AL: In commodity down cycles, it is even easier to outperform the Ibovespa, because it is enough not to have exposure to commodities. But it is important to see what is priced, as sometimes these companies are already being traded at less than half of their book value, at a low point in the cycle where there should be a return to profitability.
Apart from these aspects, just don't have commodities, as many funds did in the past, until the commodities cycle arrived, then it becomes more difficult to beat the index, as it is heavy in this sector and the fact that you don't have it ends up being detrimental to portfolio performance.
As I mentioned previously, there are sectors where Brazil is truly competitive, such as mining, cellulose and, at times, animal protein production. In the latter, the cycle needs to be very specific, because we do not have such a high cost advantage as in ore or cellulose.
If, in the case of ore, the market price falls, there is a need to close capacity in several places around the world where production costs are higher. In cellulose, it is analogous.
The commodities sector is much more difficult to invest in, because when multiples are very cheap, it is generally at the top of the cycle. You need to be more careful. In commodity stocks, selling too early is bad and missing the right time to sell is also complicated…
It is a very cyclical sector. You can make a lot of money if you get it right, as valuations are much more elastic than in the rest of the economy. They are active and high beta. It's worth checking out from time to time.
Right now, commodity companies are less leveraged, so it's easier to hold. In the past, Vale itself was more leveraged and was more risky, because if you have a leveraged cyclical business, the chance of problems is high. If you have an unleveraged cyclical business, you can wait to go through the downside of the cycle and then ride the positive wave.
It is a sector that demands a lot of attention. At the appropriate time, it is worth having an exhibition.
BS: Do you feel comfortable buying and carrying an excellent company like Weg, but one that is priced for perfection (with no safety margin)?
AL: People often confuse investing in a quality business with a good investment.
Without a doubt, Weg is an exceptional company. It is one of the few companies that truly deserves the title of Quality, presenting excellent results, in line with the confidence that the market places in it.
Recently, many companies that were priced by the market as Quality were very disappointing, such as Alpargatas, Natura, etc., even posting losses. Some were heavily indebted, or had a worse operation than they seemed, or grew unprofitably through acquisitions, but the market believed they were perfect companies.
In the case of Weg, despite being Quality, saying that it is a good investment is another story. Hypothetically, if the stock is pricing that the company will grow 50% per year, for you to make money the company will have to show growth of 60% per year.
The same applies in the case of loss. If the price says that profit will fall by 70%, but profit only falls by 50%, you make money.
The appreciation or devaluation of an asset comes precisely from the difference between the expectation of what is in the price and what actually happens.
Consequently, it is a very big risk for you to take a stock priced to perfection (without a margin of safety) because even if perfection happens, you may not have an additional return to extract from that asset, or it is the person who has already extracted all that growth that is selling the share.
In these situations, much of the price you are paying is a promise that may not come true. Then, all it takes is a disappointing result for the company to fall 80%, as happened at Magazine Luiza and in shares of fake tech companies. Almost all of the price of these shares was a future expectation and not a delivery that was already happening.
When the investor buys a share with very stretched multiples, he really needs to believe that the company will deliver even greater profitability than what is already in the price. So, the chance of making a mistake is much greater.
When you take a company that only costs 5x profit, it accepts much more abuse in its thesis, due to a deviation in results, than a company that already has 40x profit. The company that is in this situation of 40x profit, analyzing it in a very simple way, disregarding profit growth, will give you a return of 2.5% per year (1/40 = 0.025 = 2.5%). If you are paying 5x profit, it is as if your return was 20% per year (1/5 = 0.20 = 20%). The carry of a company with a low multiple is usually much better. Of course you need to analyze the future of the business and other factors.
Value investors generally do not like to take this type of risk, but, if they decide to take it, it is important to know how much better the result needs to be in relation to what is already in the price.
BS: Do you believe that the pattern of the Ibovespa cycle chart in USD will continue?
AL: Firstly, there is a difference between Brazil and the United States. It is common for people to think that the correlation is high over time. An increase in interest rates in the United States influences prices on the Brazilian stock exchange, but, in the long term, we can see that the correlation is very low.
The composition of the indices is very different. Ibovespa has many commodity companies and banks and out there it is mainly technology. There, a large part of the price is an expectation of growth in the future, different from here.
Between 2000 and 2010, Brazil grew more or less 17x in dollar terms. The United States gave zero in this period.
From 2010 to now, the United States gave 4-5x in dollars and Brazil shrank 50-60% in dollars.
So, the correlation does not exist. But, based on historical cycles, Brazil is at a good entry point given all this time that has passed without appreciation.
We have several businesses being negotiated at prices below replacement cost.
It is not possible to say with certainty that there will be a return to the cycle, but the probability is that the return potential here will be greater than abroad due to prices. The price here is below historical figures in several sectors, such as real estate, banking and utilities. Just going back to the historical average would give a good valuation.
On the other hand, in the US, there are many shares of companies with multiples above the historical average. Any breach of confidence should cause prices to fall towards the historical average. The resilience of the S&P 500 has been surprising considering the rise in interest rates we are seeing there.
BS: How do you like to build your stock portfolio, considering the number of companies, sectors and concentration?
AL: It is essential to have a portfolio with decorrelation between assets. For example, if you have a lot of companies that benefit from high interest rates, you may have some that will have more difficulty in this scenario balancing. If you have companies that benefit from a stronger domestic economy, you can counterbalance with exporters, which do better when the Real is more devalued.
In this portfolio construction game, it is essential to have different risk factors.
You can have a part of the portfolio made up of companies with more resilient, predictable results, such as utilities, banks, and another with more cyclical companies, such as construction and commodities. You can also have some shopping malls, which have been resilient, but with a certain price volatility due to macroeconomic reasons (proxy-bond, responding a lot to future interest).
There are several ways to build a portfolio, but it is important to always be well balanced so that you do not gamble your future on a single uncontrollable risk variable. You must diversify every variable that is uncontrollable. Understand uncontrollable variables: inflation, GDP growth, exchange rate.
The portfolio must respond well to these external stimuli and have a good margin of safety.
The portfolio will be shaped over time. The entry and exit windows for assets change depending on market sentiment, narratives, and emotions.
When there is a lot of uncertainty in the economy and the margins of safety are very high, you can have more assets, increase diversification. A professional investor can have 30 assets in his portfolio, as long as he monitors it well, as long as he works with it. If you are an investor with less access to information and less time available, you should have a portfolio with a quantity of assets that you can keep track of, or delegate it to someone who does this professionally in order to have a higher profitability, taking into account the difficulty to find professionals who beat the market in the long term.
It is essential to have a portfolio diversified by risk factors. There is no point in having 30 assets from the same sector, because then you will not be diversifying the specific risk of that activity.
Furthermore, it is interesting to diversify the micro risk of that activity. For example, in the case of civil construction, there are companies more focused on Minha Casa, Minha Vida, and others focused on medium-income. They are different businesses. In the electrical sector, there are energy generation companies and energy distribution companies. Each of these sub-segments present different risk factors. By finding companies with the same margin of safety, it also doesn't hurt to diversify this risk factor.
Therefore, the most important thing is to have a good portfolio with several uncorrelated risk factors and all assets with a good margin of safety so that over time you have appropriate profitability.
BS: Some investors do not like investing in commodity companies claiming that they require more complex analysis. Do you like investing in them? How do you usually do your price analysis?
AL: I agree that investing in commodities, as I mentioned previously, has a higher risk.
Sometimes the company controls the cost, sometimes it doesn't. But it never controls what price it will sell at, because it is given by the international market. She is a price taker.
As a result, the result tends to be much more volatile. The company can go from losses to hyper-billion profits in 1 year. That's why it is said to be a somewhat unpredictable business and, when investing in this sector, it is good to choose companies that have clear competitive advantages, especially in terms of cost, in relation to the competition. If the market gets into difficulty, they will survive well, while competitors will need to reduce their production capacity to avoid operating at a loss.
The reduction in production capacity causes the price of the commodity to rise, returning to equilibrium in the medium-long term. Read supply and demand.
It is a more complex sector to invest in, more complex to predict the result as it has a greater range of variables uncontrollable by the company itself.
If, for example, China decides to flood the steel market below their production cost, competitors will be able to do little to improve their results.
In the commodities sector, it is good to avoid companies that are heavily indebted. Historically, those who tried to get into a lot of debt ended up doing badly. They needed to call shareholders' capital.
After the pandemic, it was very profitable to invest in this sector due to the high dollar and high commodities. Generally, the correlation is inverse. When one rises, the other falls. This happens because, with the inflow of resources from the sale of commodities, there is a large influx of dollars into the country, putting pressure on the exchange rate downwards. This time, right after the pandemic, it didn't happen.
It is a sector that requires much more monitoring. It is very difficult to predict, almost no one knows what the future price of the commodity will be. It brings a lot more uncertainty, but it's worth it to build your portfolio considering all this.
I don't think it's interesting to make up the majority of the portfolio, especially for those who are starting to invest, who should start with the most resilient and stable sectors, but when you make an investment in commodities, you get a higher return.
BS: What is the cheapest company on the stock market today?