Brazil Value Talks: Diego Sullivan (Simples Investidor)
Multiplied Invested Capital by 6x in 6 Years
Today I have the pleasure of interviewing Brazilian investor Diego Sullivan.
From January 2019 to September 2024 his historic performance will be the envy of anyone.
His portfolio returned more than 510.09% in the period, versus 51.47% for Ibovespa.
He multiplied the invested capital by 6x!
This guy knows how to generate real value.
Shall we meet him?
BS: Diego, could you tell us a little about yourself?
DS: I have lived in Vitória/ES since 2006, married and father of two princesses. I started investing in 2013, when I worked at a logistics company that did market research. I followed the prices of some client and competitor shares, in addition to consolidating quarterly balance sheets for these companies.
My first stock was Locamerica (LCAM3). I only had R$5,000 and a dream, lol.. I bought everything in LCAM3 at R$5.00 per share. It reached R$7.50, but I held on until I saw the price plummet to R$2.50. I lost half of the invested capital. From that day on, I promised myself that I would learn to control risk better and never go through the same situation again.
Since then, I started reading several books on investments and testing strategies that worked for great investors in the American market such as Peter Lynch, Charlie Munger, Mark Minervini, Howard Marks, Richard Love, Stan Weintein, etc. I always had good knowledge of the fundamentalist part, but I saw the need to improve risk management, minimize my losses and books were my great teachers, in addition to practice, obviously.
BS: What is your strategy for making money on the stock market?
DS: My approach is simple: I focus on stocks that are rising and avoid those that are falling. I look at stocks that are gaining momentum in the market and try to understand the catalysts behind this movement, whether it is a turnaround, share gain, current theme, etc. I usually find companies that are emerging from difficult situations, acquiring competitors or being acquired. The central idea is to always trade in favor of the market trend.
BS: What is your process for finding a new buy opportunity? What filters do you use?
DS: I read and research every day, including on weekends. I use technical filters, such as moving averages, to identify potential opportunities and, from there, I do a fundamental analysis focused on the company's operating moment.
For example, the Americanas fraud created a good opportunity in MELI, and the collapse of Silicon Valley Bank in the US opened space for JPMorgan to expand its market share. These events are unique opportunities if you are aware of the moment and capture value.
My main filters include revenue and profit growth, in addition to price action. Then, I talk to IR, read bank reports and talk to other analysts and investors to validate whether the thesis is solid and has the potential for great returns. The investor community on social media can also provide valuable insights, and I have already identified opportunities like this. I never underestimate a stock because it is off the radar of most people.
BS: How do you value a share: DCF, Multiples, implied IRR, a mix of the previous ones, …?
DS: I know how to do it, but it takes time and things in the market tend to happen overnight, so you run the risk of seeing an opportunity pass you by, but you let it pass you by because you haven't finalized the valuation yet. So, I delegate this task to reports from banks and experts. At most, I use forward multiples and compare them with peers in the sector. In 2023, I bought CEAB3, which had multiples below AMAR3, a company with much lower operational performance. I didn't need complex calculations to see that there was value there.
The valuation factor ends up getting in the way of the investor, because they think they have to know the method to invest well. And it's not that simple. You can do valuation using multiples, DCF, Gordon, whatever... In the end, what really matters is the market's verdict.
BS: How do you like to build your stock portfolio, considering the number of companies, sectors and concentration?
DS: I usually have between 8 and 10 stocks in my portfolio. I think this number offers a good return ratio, in addition to allowing for interesting diversification between sectors, while reducing volatility and risk concentrated in a single asset or sector.
When you have a lot of stocks, it becomes more difficult to monitor the performance of each company and make quick decisions when necessary. In addition, you lose focus on the assets that have the greatest growth potential. Diversification helps reduce risk, but if it is excessive, it limits the potential return, not because of the quantity, but because it becomes impossible to monitor everything that happens in each asset.
BS: How often do you like to rebalance your portfolio?
DS: I rebalance when a stock is significantly outperforming the others. I usually distribute 10% equally between each position, but if a stock is on a very strong trajectory, I have no problem being more aggressive and increasing the stake to 15%, 20% or even 25% in each asset.
BS: How long on average do you hold a position in your portfolio?
DS: It depends on the momentum of the stock. If I miss the entry timing and the stock loses momentum, I can exit quickly, avoiding losses of more than 15%. But, on the other hand, I have held PRIO3 for more than 3 years.
BS: Do you believe that graphical analysis, together with fundamental analysis, can help with the buying and selling points of stocks?
DS: I have always been a fundamentalist. But my risk management and asset selection have improved a lot since I started using technical analysis.
Today, I am more selective and use patience to wait for the best moment to buy. In the past, I would enter the theses too early, which resulted in a lack of traction in the short term. Or I would exit too late, giving back all the gains in a short space of time.
BS: What are your favorite sectors on the Stock Exchange? And the ones you avoid? Why?
DS: I don't have a favorite industry, but I avoid industries like steelmaking because they are outside my circle of expertise.
I like to refer to a baseball batter: if the ball coming my way isn't a good ball that I can hit consistently and hard, I don't hit it. I prefer to keep my money sitting there, waiting for the opportunity for that good ball.
BS: Do you use derivatives? What is your strategy?
DS: I don't use it. I've tried, but for my method of investing, it's a lot of effort for little result. I prefer to focus on the 20% of effort that generates 80% of the results.
BS: What is the cheapest company on the stock market today?