Brazil Value Talks: Kevin Gervasoni
Multiplied Invested Capital by 23x in 6 Years
Today I have the pleasure of interviewing Brazilian investor Kevin Gervasoni.
From September 2018 to May 2024 his historic performance will be the envy of anyone.
His portfolio returned more than 2259.31% in the period, versus 62.22% for Ibovespa.
He multiplied the invested capital by 23x!
This guy knows how to generate real value.
Shall we meet him?
BS: Kevin, could you tell us a little about yourself?
KG: This is always the hardest part, but I'll try to skip straight to how I ended up in business. I tried to found a startup with some friends when I was younger, I won't go into the details of that because it would be long, but one of the angel investors at the time suggested I start studying the stock market and financial markets more. Basically, he wanted me to understand a little more about how an investor thinks, what he looks at, because this would help me in the future to raise capital for my projects.
Following his advice, that's what I did, but I soon fell in love with this business. I'm very curious and quite self-taught, so I studied and read everything I could about the market. Luckily, I started very well on the stock market, I caught the end of a bull market in Brazil and that feeling of being able to make money in the market made me want to continue studying and learning more. That was the beginning of 2017 and around 2018 was when I started dedicating myself 100% to trading.
I had good feedback at the beginning, and I think I went through that feeling we always have when we start learning something new. At first you think you are smarter than others and that you already understand how it works and the more you learn, the more you realize that you don't know anything. My first big market thesis that ended up being successful was that the fintech market would grow a lot and that these would be the companies in the "next bubble”. At the time we didn't have much choice; the only listed company that carried this thesis was Banco Inter, which I have followed since the IPO.
Furthermore, I also had a thesis that the big banks would lose a lot of market share to these fintechs, and that they would lose a relevant part of their revenue at the time, which was revenue from banking services, since the fintechs were all providing these services for free. . My first big position was to sell Itaú, to buy Banco Inter, a long and short.
I got the trade right, even though I got a large part of the thesis wrong, which is funny in the market. In fact, fintechs exploded and “bubbled” Banco Inter's stocks, which rose more than 10x, while Itaú practically remained on the sidelines during the period. This trade lasted somewhere around 18 to 24 months and I did other trades in time in parallel, but that was the main position.
I ended up managing to sell Banco Inter very well, practically at the maximum value of the paper. Today, Banco Inter fell a lot from the highs I sold and Itaú ended up being perhaps one of the big winners among the big banks. It's incredible how much they've grown and delivered since then and I was very wrong about the thesis that they would lose revenue from financial services, but that's what the market is: even though I'm wrong, sometimes you make money and the opposite is also true: Many times if you are right you will lose.
BS: What is your strategy for making money on the stock market?
KG: It's funny that I never really had a strategy. I have changed my operating style several times and I believe that nowadays I am actually forming my style.
At the beginning, I traded a lot long and short, I learned how to choose good correlated assets to set up these trades and I managed to significantly improve my profitability at the time.
The years 2018 and 2019 were years of many IPOs and I also had a flipping strategy, in which I selected which companies I would buy in the prospectus and sell on the first day of trading. This strategy was also very profitable during the period.
Afterwards, I traded a lot with options and day trading in futures, stocks... in short, I've tested practically everything, technical analysis, fundamental analysis, flow, statistics.
Nowadays, I would say that I found my style, I end up analyzing the macro a lot more and doing a top down. I prefer to concentrate my positions on something that I have more conviction, but I have never gone all in. I focus a lot on theses that I believe.
Since 2020, post-pandemic, I stopped only trading stocks in Brazil and started looking at other markets: interest rates, international markets, commodities, currencies. This made me start to study the macro a lot more when selecting my theses and it really opened my mind, as I'm not always so optimistic about Brazil, so I don't always need to be long in local stocks.
If I were to define my trading style today, I would say that I am very contrarian. I tend to be looking to buy things that the market is typically hating at the moment and sell what the market is most excited about, which makes timing a very important factor in my decision making these days.
BS: How to choose good correlated assets to set up a long and short?
KG: Well, I would say there are a few ways that I use. One of them is a more quantitative analysis looking at correlated assets that deviate from one to two times their historical averages. In long and shorts of this nature, I look for 1 to 3% return and it normally lasts a few weeks, 1 to 3 weeks. I always go for well-correlated assets, like PETR3 and PETR4, or GGBR4 and GOAU4. It usually works out very well. The problem is that when it goes wrong: you usually return 2 to 3 profitable operations. As it has a high success rate, it is usually positive, but it is always a bit complex to do, so I end up being very selective in this type of operation.
Another way is more structural long and shorts, based on some fundamentalist/macro thesis, as was the case of Itaú versus Banco Inter. It was a thesis that one would do much better than the other in a given period, and in this type of trade, you need to have some thesis that defends the position.
And finally, there is a type of short that I find interesting, which is when you sell an asset with a bad expected IRR and use it as funding for positions that you believe can go further. For example, from 2021 to 2023, I uploaded a short to Ambev with this idea. I used the money as funding for other positions that I considered better.
BS: What is your process for finding a new purchasing opportunity? What filters do you use?
KG: Well, first I spend the day following the market, very strong fluctuations in an asset, both up and down, relevant facts, balance sheets, flow when someone takes a lot of stocks, or liquidates a position. These day-to-day market movements draw my attention to study a thesis and see if I can find any opportunities.
Furthermore, I spend the day reading reports, balance sheets, news, posts on social networks, podcasts. I also follow international content and end up reading everything and every now and then I find something that gives me a stronger conviction to take big positions.
BS: How do you value a share: DCF, Multiples, implied IRR, a mix of the previous ones, …?
KG: In the beginning, I did DCF along with technical analysis, but it started to become unfeasible with the amount of things I wanted to follow. Nowadays, I study what I'm trying to establish a position to understand "what makes price", I use a lot of multiples, comparisons, historical averages.
The most important thing for me today is to have as much information as possible about where I am positioned, or wanting to set up a position, know the numbers and always look ahead.
I see many long-term investors with philosophies that it is impossible to predict the future, or that it is impossible to predict the short term, but that the long term is more feasible to get right.
I think the opposite, I think it's impossible not to be in the market and constantly trying to predict what will happen. In the end, that's what makes the difference: you get right where the market is going and not look at where it is today.
I also think it is much more feasible to set shorter deadlines than longer ones. It is impossible to say with precision what the world or the results of a particular action will be like in 10 years, but it is much more viable to imagine what the results will be like in the next 12 months, or imagine what could happen in macro terms in a shorter period. .
I'm always trying to look 6 to 12 months ahead. Much beyond that is almost impossible to predict.
BS: What historical averages do you usually analyze?
KG: Looking from the fundamentalist side, I really like to look at an average of the company's historical margin, or multiples that it traded, especially at times when there is some type of event that breaks these numbers. They usually return to the averages when there is no deterioration in fundamentals.
Another more technical one is a 30-period average on a weekly chart. I have found that this average works very well for strongly trending assets. When they break this average with volumes 5 to 10 times stronger, it is usually an interesting entry point and the trend usually lasts for a long time, if the fundamentals remain strong. If you look at CEAB3, for example, which was one of the assets I traded well last year, it broke this average last year and has not lost yet, which means that the upward trend in a longer term continues. Typically, assets that appreciate sometimes remain above this average on the weekly chart and test 3 to 4 times before finally losing trend.
BS: How do you like to build your stock portfolio, considering the number of companies, sectors and concentration?
KG: I have no problem concentrating, as long as I have strong convictions, not only in stocks, but in what I imagine to be the most “obvious”, be it interest rates, currencies, anything that I think makes the most sense.
I really like understanding market cycles. I never buy something because it's cheap, or sell it because it's expensive. I've fallen into this trap a few times and I think it's a very common mistake for those just starting out.
The market is made of cycles and it is much better for you to understand where we are in the cycle to understand how your portfolio should be positioned. At times, it will make more sense to have stocks in a certain sector than another, even if they are not the cheapest, or to hold no stocks at all and look for opportunities to trade in other assets.
It is always possible, looking back, to identify what cycle the market was in, or try to understand what cycle we are in now. The difficult part and part of the work I try to do is identify which part of the cycle we are going to. That's the challenge.
BS: How often do you like to rebalance your portfolio?
KG: That's another thing I would say I'm very different from most. I like to position myself all at once, with some rare exceptions. When I am convinced of a trade, I set up a position at once and when I understand that I made a mistake, or the market came in my direction and the movement is about to change, I exit the position at once. I'm not much of a rebalancer.
I usually enter and exit a trade at once. Sometimes, even though I think there may be more movement for or against, I leave or enter a little earlier. I once heard from a friend with vast experience in the market a phrase that I carry: “the last 10% of growth we leave for the greedy and the decline for the fearful.”
I don't need to get the perfect price timing right, but I do have to get my thesis timing right. If I'm right, even with some decline in the short term, I will hit big moves and staying longer than I should in a position can also take away all the profit I made.
BS: How long on average do you hold a position in your portfolio?
KG: This varies a lot, from a day trade to positions lasting weeks, months... Hardly anything stays in my portfolio for more than 12 or 18 months. This is usually the maximum time, especially because cycles change in shorter periods.
Even a long bull market cycle is made up of smaller cycles of ups and downs and sectoral rotations, so I tend to change the portfolio with a high frequency, but almost always carrying some more structural positions in the portfolio and others that can “protect me” if I be very wrong.
BS: Do you believe that graphical analysis, together with fundamental analysis, can help with the buying and selling points of stocks?
KG: Without a doubt, I don’t believe in a single type of analysis or price target. I often even have a reference price in my head, but timing is my main driver. If I believe that a certain share could go for say 10 reais, the period in my evaluation is more important than the price. If in the end it ended up going up to 8, or 15 reais, that's where I leave, or below zero.
The fundamentals help me identify opportunities and technical analysis brings a lot of price reference, where there is usually a lot of interest from buyers or sellers.
But neither one nor the other usually works in isolation. The biggest mistake a fundamental analyst makes is thinking that a stock and a company are the same thing. The biggest mistake a technical analyst makes is thinking they are different.
BS: What are your favorite sectors on the Stock Exchange? And the ones you avoid? Why?
KG: I have no prejudice with sectors or assets, but I like large asymmetries and potential for appreciation. Therefore, I can hardly find anything very interesting in what everyone is looking at and usually when I see everyone liking an asset a lot, or hating it a lot, that's when my contrarian side comes in and I see if it's the right time to go against the consensus. .
Being a contrarian is very different from simply going against something everyone is excited about or in favor of something everyone hates. There are usually reasons for the market to be very optimistic or pessimistic about something. The idea is to understand whether the price already incorporates this consensus. Sometimes, you come to have a thesis that goes against what the market expects, so it becomes perfect, because not only is the consensus all for the same side, but you also imagine that something different will happen (for better or worse). ). Normally in these cases you have a lot to gain when you get it right.
We hear the phrase: “everyone bought tops, or everyone sold bottoms” and I usually say that this is the most common thing to happen, since tops are formed precisely when everyone is buying and bottoms when everyone who had to sell have already sold. Therefore, it is very common for the majority to buy tops or sell bottoms, which is why you need to be contrarian, sell when everyone is buying a thesis that seems to have already been priced in, or buy something when everyone has become very pessimistic and given up.
BS: Do you use derivatives? What is your strategy?
KG: I use it more frequently in some periods than in others. There isn't much of a rule, but at times I have shorter-term theses that I believe make sense to use derivatives. This way, the gains will be greater and as a way of allocating capital in something that I believe can have a big movement without needing to relocate other positions in my portfolio that I have greater convictions.
I am moved by asymmetries. The market is sometimes almost like a game of odds. If there is a chance of winning 10x on a derivative, no matter how small the chances are, if I believe it is possible for that to happen, I buy it. The chance of winning a lot when you get it right, with controllable losses when you get it wrong, is very favorable.
In general, I like buying options more than selling options and I basically operate in two ways. For positions that I believe can perform well in the short term, I prefer to buy calls, or dry puts depending on which side I see the movement, ATM (At The Money) and with a shorter maturity.
And my favorite: when I want to take positions that I believe could have large movements over a longer period, I prefer to set up locks, bullish or bearish, these more out of the money, or OTM (Out The Money). This type of position via options, when successful, can give 10 to 20 times a return. Of course, they are more difficult to get right, but it's a huge asymmetry, and when you get it right, it hits your wallet hard.
BS: You had a well above average return in 2023. What was the rationale and positions you took?
KG: In 2023, the volatility of my portfolio increased significantly. I even posted here on Twitter / X at the time, commenting that it was the moment in which I was most leveraged buying stocks in Brazil.
The strange thing was that I got the macro scenario I had in mind quite wrong, but the asymmetry was so big that I still had the best return in a year to date.
At the end of 2022 and beginning of 2023, the market was completely skeptical about Brazil, mainly due to the political noise that President Lula caused upon entering his mandate. A PEC with spending above the ceiling, promises to end the spending freeze, changes in the direction of state-owned companies, government-financed investments, deprivatizations, all the expected playbook from a PT government that strangely was sounding like a surprise for the market.
I started to hear things like, “Brazil is going to become Venezuela”, “The deficit is going to explode”, “The exchange rate is going to devalue like it happened in Argentina” ... all kinds of pessimistic phrases that in practice seemed to make little sense.
At that moment, I was seeing positive winds. Haddad, from the beginning, was showing himself to be more rational and concerned about the tax authorities and immediately promised a framework in which the market was completely skeptical at first. Our Central Bank would begin a cycle of interest cuts, which has historically been a positive factor for risky assets. And I saw China's reopening as something very bullish, since they spent 3 years in lockdown and everywhere else in the world, at the time of reopening, the economies exploded with a big V-shaped recovery, so I suspected the same would happen with China and that this would be positive for commodities and therefore for Brazil. Not to mention, of course, that valuations were ridiculously cheap. As I said, it's not enough to be cheap, but in this case with my more buying bias, that contributed a lot to my optimism in concentrating my positions.
At the time, Ibovespa was close to 100 thousand points and I already imagined that it could reach 150 thousand points by the end of the year. The environment seemed perfect. In the end, the framework ended up not being as good as promised, the Central Bank ended up taking longer to cut interest rates and in the end China ended up imploding in a real estate bubble. I got a lot of the scenario wrong, but I still managed to choose good assets for the year and the Ibovespa still ended the year at 135 thousand points, a very significant increase.
At that moment in the cycle, I wanted to focus a lot on the domestic market and companies with more financial leverage that could benefit from the drop in interest rates. Civil construction and retail were the main positions of the year. I had GUAR3, PLPL3, MDNE3, MOVI3 and the main one was CEAB3. I ran the portfolio with 2x leverage during the year. I concentrated my portfolio a lot on CEAB3, buying a little above 2 reais per share and I already had more or less 10 reais in mind for the stock. It had excellent fundamentals and was already showing an improvement in results ahead of the rest of the sector.
It ended up that the portfolio did very well, with a lot of volatility. Those months between September and October were very complicated, but at the end of the year it more than made up for it after the Fed pivoted in December.
The “great profitability” of 2023 came from a large asymmetry in a very pessimistic market, together with an asset that improved throughout the year, which was CEAB3. And of course, with a lot of risk. This is very important to be clear. To have great returns, you need to take great risks and high volatility usually accompanies this type of return.
BS: What is the cheapest company on the stock market today?