Brazil Value Talks: Fernando Kling
Multiplied Invested Capital by 18x in 2 Years
Today I have the pleasure of interviewing Brazilian investor Fernando Kling.
From September 2022 to September 2024 his historic performance will be the envy of anyone.
His portfolio returned 1726% in the period, versus 23.83% for Ibovespa.
He multiplied the invested capital by 18x!
This guy knows how to generate real value.
Shall we meet him?
BS: Fernando, could you tell us a little about yourself?
FK: I was born in Petrópolis (RJ), I'm 34 years old.
I have a degree in computer science and then a master's degree in computer engineering, but it was in the financial market that I found what I really wanted to do for the rest of my life.
I got an MBA in finance and stock analysis, then CNPI and CGA.
I've always liked mathematics and economics. When I learned about options, they changed the way I see the market.
BS: What is your strategy for making money on the stock market?
FK: Basically, it is a mix of:
Strategies that enhance the profitability of the portfolio, always working on the selling side of stock options, cyclical or more “heavy”.
Search for asymmetric return opportunities in assets to explore through directional positions with options.
BS: What is your process for finding a new buy opportunity? What filters do you use?
FK: The framework takes into account 5 major layers:
Macro
Micro
Sentiment
Volatility
Price action
Each asset passes through several filters within each of these layers, and when there is an alignment, we take the risk, always taking care of sizing management.
BS: What is this base portfolio that can later be monetized with options?
FK: Basically, it can be anything that opens up margin at brokerages:
Fixed income
Stock portfolio
Cash
It is best for it to be fixed income, as it facilitates any management later, if necessary, given that we are working with options that imply possible purchases and sales of assets in the future.
When the investor uses the stocks in the portfolio, the ideal is for them to be stocks with liquidity in options. There is no point in having those portfolios full of small caps, for example, because there are no liquid options for that.
BS: How do you make a profit by investing in these heavier stocks?
FK: Most portfolios in Brazil have common names, such as Petro, Vale, Banks, B3, Electricity companies, etc.
These are either cyclical stocks or proxy bonds, so it makes working with and managing options easier.
Then we use the concepts of options, along with technical analysis points and macro and micro factors to sell options that we believe have a high chance of not being exercised, creating an extra cash flow from the collection of these option premiums.
BS: When you set up a directional position with options, do you buy dry calls or puts, or do you do something different?
FK: 90% of the operations in the Room are dry options or debit locks.
Over time, I have come to understand that the less I invent new trends, the better.
There are more than 150 structures with options in some books, but in our daily lives, we use a maximum of 6:
Buying calls
Buying puts
Bull lock with calls
Lower lock with puts
Bull lock with puts
Lower lock with calls
BS: Is it worth calling the brokerage desk and asking them to create an option for you or is it better to stick to the most liquid options?
FK: They will hardly open a strike or series just for you.
It may be worth it in rare cases. Normally you will be stuck with a spread that significantly hurts your profitability.
BS: What precautions should a new options investor take?
FK: The main thing, in my opinion, is not to get emotional.
These instruments allow for percentage gains that are much higher than any other, but they carry risk.
There is no magic in the financial market, so it is important to understand that what kills investors is leverage.
Because they have asymmetric risk/return, you can very well trade options with a small portion of your capital (<3%) and still generate a very significant alpha over any benchmark, because a few successes will pay for many mistakes.
BS: What is the maximum sizing of an operation for you?
FK: An operation that has a risk of total loss is a maximum of 1% of the portfolio.
According to Kelly's criterion, it would be possible to go higher, up to 4%, but I think it is unnecessary.
And this assumes that the investor knows his hit and payoff rates.
Most have no idea.
BS: What guarantees do you recommend when investing in options?
FK: Fixed income.
Always operate covered, either with stocks or with cash to cover possible positions.
Never leverage with notional above what you can handle, and always take into account that stressed markets may require guarantees above the standard in times of normality.
BS: If a stock is cheap, I can buy a call on it instead of buying the stock itself on the spot market. One important difference I see is that you put the time factor against you. Wouldn't that be bad?
FK: Yes.
This time factor is what makes it so difficult for most people to profit consistently from options.
The secret, in my opinion, is to stop looking for what is cheap and look for what has a trigger to move.
It's not like with spot where you buy and wait indefinitely for it to go up.
That's why I developed that layered framework we talked about at the beginning, to help me decide where to enter and where not to enter.
BS: How do you value a stock: DCF, Multiples, implied IRR, a mix of the previous ones, …?
FK: I don't like running complex DCF models, because they work with many variables and assumptions of hypothetical things, which, in my opinion, is a lot of guesswork.
I prefer to look at the reports of the main buy side / sell side players and see the assumptions they are using and evaluate from there, or simply work with the analysts' median for target prices. On the other hand, a good and simple comparison of multiples helps to avoid many pitfalls.
BS: Do you believe that graphical analysis, together with fundamental analysis, can help with the buying and selling points of stocks?
FK: Graphical analysis helps me a lot, and as I mentioned before, it is one of the layers of my model, generally the one that helps me to determine the timing of entry into operations.
BS: Would you like to give a message to our readers?
FK: I always like to emphasize the importance of investors learning about options.
It is the glue of the financial market, it is what helps to remove risk from portfolios and helps to understand various movements in the spot market.
It allows for positions with the same exposure and lower risk, as it uses much less capital.
It opens up the chance to profit in any type of market, rising, falling or sideways.
Risk/return asymmetry, when used appropriately.
BS: What is the cheapest company on the stock market today for setting up an options strategy?