Brazil Value Talks: James
Multiplied Invested Capital by 132x in 4 Years
Today I have the pleasure of interviewing Brazilian investor James.
From September 2020 to November 2024 his historic performance will be the envy of anyone.
His portfolio returned more than 13129.39% in the period, versus 24.54% for Ibovespa.
He multiplied the invested capital by 132x!
This guy knows how to generate real value.
Shall we meet him?
BS: James, could you tell us a little about yourself?
J: Today I am an avatar, I am 56 years old, I graduated in computational mathematics from UFMG in 2003 and I worked as an employee at Banco do Brasil in the technology department until the pandemic, when I joined the voluntary retirement program. I have a wife, 2 children and a granddaughter. I live in Brasília, but my family is from the city of Pitangui, Minas Gerais.
I have invested in Brazilian stocks since the Mexican crisis, often called the "Tequila Crisis", which began in December 1994.
I take care of my family's assets in a closed investment club started by my grandfather.
Otherwise, I prefer anonymity on social media because I have always kept a low profile in the financial market. Many people know me or my grandfather and I am not here for fame. I use Twitter only to organize my ideas and trades, writing and perhaps helping those who are starting out on this path.
BS: What is your strategy for making money on the stock market?
J: The backbone of my strategy is quantitative trading. I use data from APIs provided by Central Banks, Securities and Exchange Commissions, Securities and Exchange Commissions, IMF, and BIS, which are my main sources for macro algorithms.
The moment I obtain a macro conclusion about the short-term scenario, I start selecting companies.
For example, before buying a meatpacking plant, I already obtained data on the seasonal cycle of cattle. The same goes for oil.
For retail, I look at credit data, etc.
BS: What is your process for finding a new buy opportunity? What filters do you use?
J: Step 1: What is the macro period of the sovereign bond, credit and inflation market cycle?
Once the macro view is established, I assess whether we are in a period of directional trades or sideways trades. This is very important.
Directional periods are periods in which positioning is simpler and traders do not need to work with many derivative structures. Or, if you prefer, in a more simplified way, they are optimistic/bullish (bullish) or pessimistic/bearish (bearish) periods. They are much easier to operate.
In the bullish directional period, many retail traders make money during this period by buying volatility. Buying Theta (time) and Vega (volatility) is easy. I can give you 2 examples: from 2017 to 2019, here in Brazil, and from 2020 to 2021, worldwide, and from 2023 to 2024, in cryptocurrencies. This is a fertile period and money grows on trees.
We have liquidity from central banks and/or governments pouring into the gears of the economy. This is a time when alternative assets, memes, and other aberrations appear. People who don't know anything about investing get involved in these things, make and/or lose money. But, in general, the investment industry gets rich.
During the period of sideways trades, the selection has to be more rigorous or it's even worth staying out of the market and investing in short rates, such as Selic/CDI. This is a period of selling Vega (volatility) and Theta (time). Individuals tend to lose a lot of money.
2nd Step: Knowing the period of the trade and the macro cycle, I start selecting the assets. I classify revenue growth in the 12 months and quarter over quarter and give a score from 0 to 100 using a criterion similar to the PMI (purchasing managers index) classifications from S&P Global. Above 50, the numbers are growing. Below 50, the numbers are contracting. Therefore, I need to plot the graph for at least 5 years, removing seasonal and non-recurring factors.
Then I do the same thing with EBITDA, EPS (Earnings per share), Net income, EBITDA margin, Gross margin, Net margin, Free cash flow and CAPEX.
Then I go to multiples such as ROE, ROIC and ROA.
And finally, to debt ratios.
Normally, only 30 to 50 companies survive in a universe of 500 companies in my database, American and Brazilian.
In the United States, when there is a directional sector and I don't know which one will win, I choose ETFs. There I also made a lot of profit with macro ETFs such as $USO in long oil and $SCO short.
3rd Step: Backtesting in Python -> I backtest each classified company, using technical indicators.
4th Step: Graphical analysis and entry points, stops and possible exits if the scenario does not materialize, or if the profit-taking points materialize very quickly.
BS: How do you value a share: DCF, Multiples, implied IRR, a mix of the previous ones, …?
J: It depends on the industry. In step 2 mentioned in the answer to the previous question, I usually do:
DCF (Discounted Cash Flow) Valuation
The DCF method for industries where it is possible to predict future cash flows with a reasonable degree of certainty:
Technology Industry: Companies like Microsoft and Apple, where there is predictability in cash flows due to subscriptions and recurring sales.
Healthcare Industry: Pharmaceutical and biotechnology companies, where products have long and predictable life cycles.
Utilities Industry: Energy and water companies, where cash flows are stable and predictable.
Multiple Valuation
The multiples valuation method is best suited for industries where there are many comparable companies and where market multiples are widely accepted.
Retail Industry: Companies like Walmart and Amazon, where P/E (Price/Earnings) and EV/EBITDA multiples are widely used.
Consumer Sector: Consumer goods companies, such as Procter & Gamble and Unilever, where market multiples are well established.
Financial Sector: Banks and insurance companies, where P/B (Price/Book Value) and P/E multiples are common.
Implied IRR Valuation
Implied IRR is best suited for sectors where cash flows are uncertain and where expected return is an important consideration.
Startups and Venture Capital Sector: Early-stage companies, where future cash flows are highly uncertain.
Renewable Energy Sector: Solar and wind energy projects, where cash flows can be uncertain due to regulatory and market factors.
Real Estate Sector: Real estate development projects, where cash flows can vary significantly.
Electric Power and Utilities
BS: How do you like to build your stock portfolio, considering the number of companies, sectors and concentration?
J: Once I have assembled my list of companies with the ranking developed in my four steps, I use the Python library for maximizing portfolio results called RISKfolio. There it builds the best allocations for the moment and based on quantitative statistics.
BS: How often do you like to rebalance your portfolio?
J: Every quarter I look at the results and the rankings change. Or when a macro event requires it.
BS: How long on average do you hold a position in your portfolio?
J: There is no fixed time for a good trade. There are Brazilian stocks like WEGE3 that I have held since my wedding and have never had to sell.
In the US, I always held Microsoft. At a time when Facebook was not even known in Brazil yet.
Macro trades tend to be faster, taking between 2 weeks and 3 months.
The macro scenario is very volatile.
BS: Do you believe that graphical analysis, together with fundamental analysis, can help with the buying and selling points of stocks?
J: From my previous answers, definitely.
BS: What are your favorite sectors on the Stock Exchange? And the ones you avoid? Why?
J: The algorithms choose this for me, I'm agnostic.
I can even enter airlines when there is asymmetry. Speaking of which, I'm optimistic about CVCB3 and AZUL4 in the short term.
BS: Do you use derivatives? What is your strategy?
J: Yes. In directional periods, dry calls. In sideways periods, Vega sell structures.
BS: What is the cheapest company on the stock market today?