Brazil Value Talks: Luigi Micales, CGA
Performed 1.6x Ibovespa in 3 Years
Today I have the pleasure of interviewing Brazilian investor Luigi Micales.
From November 2021 to November 2024 his historic performance will be the envy of anyone.
His portfolio returned more than 40% in the period, versus 25% for Ibovespa.
This guy knows how to generate real value.
Shall we meet him?
BS: Luigi, could you tell us a little about yourself?
LM: I started my career as a technical analyst and even achieved some success, but I realized that it would be more profitable to adopt a fundamentalist approach, combined with technical timing analysis for the medium and long term. I stopped day trading and started focusing on quality operations and assets that the market often ignores. 20 years ago, I joined a family office and since then we have evolved into a client-focused Multi Family Office, offering differentiated products and operating completely independently.
BS: What is your strategy for making money on the stock market?
LM: I've always wondered how to buy something good, with little risk and at a great price. It seems impossible, right? But sometimes this happens in the financial market. I try to acquire assets that the market is currently undervaluing (like Banco Itaú in recent years) or that are about to enter the next phase of the economic cycle. I adopt a phrase from Benjamin Graham as a mantra: I don't sell to pessimists and I don't buy from optimists. I try to simplify the process, avoiding the daily news that hinders more than it helps in making money. At the same time, I maintain strict risk control, not in terms of volatility, but rather by focusing on assets with good cash flow, quality in the products/services they offer, a good moat and a price that allows me to obtain an attractive minimum internal rate of return (IRR).
BS: What is your process for finding a new buy opportunity? What filters do you use?
LM: In macro analysis, I start by looking at inflation, because it influences interest rates, and interest rates control practically everything. My team is very good at predicting inflation, which helps us a lot in our analysis. Although we are sometimes wrong, we are never wrong by much, which allows us to have good predictability. Next, we analyze the economic cycle to identify which sectors and assets can benefit. Finally, we examine stocks, looking for those that, within these prerequisites, have good numbers, competitive advantages and more cash flow or less debt, which provides good growth.
BS: How do you value a share: DCF, Multiples, implied IRR, a mix of the previous ones, …?
LM: I use a mix. First, I analyze the multiples in relation to the company's growth, then in relation to the company itself, and finally, I compare them with its peers. However, what really makes the difference is an analysis that I do in reverse: I extract, within the DCF, the growth that the market expects from the company. If this number seems difficult to achieve, I don't buy.
BS: How do you like to build your stock portfolio, considering the number of companies, sectors and concentration?
LM: I really admire Peter Lynch's strategy. I buy a lot of small stakes in companies with great potential, but I focus on holding a few larger positions, around 3 to 5, with a percentage of about 7 to 12% of my portfolio, and many positions with smaller percentages, around 2 to 3%.
BS: How often do you like to rebalance your portfolio?
LM: I only rebalance when I find better opportunities or when I notice a clear deterioration in my fundamental theses. Most of the time, I make slow adjustments, as the fundamentals evolve in favor or against my theses.
BS: How long on average do you hold a position in your portfolio?
LM: It depends a lot on the company, but our tendency is to hold positions for years.
BS: Do you believe that graphical analysis, together with fundamental analysis, can help with the buying and selling points of stocks?
LM: Yes, I started my career as a graphic designer and was successful, but over time I realized that it was much more profitable to carry out fundamental analysis and use the graphics to position myself in the long term, making adjustments in the medium term.
BS: What are your favorite sectors on the Stock Exchange? And the ones you avoid? Why?
LM: I don’t have a favorite industry; I prefer resilient or high-growth industries, such as financials. However, I like to buy cyclical industries when they are struggling, as they usually offer great profitability if bought at the right time. I avoid industries such as aviation, where it is very difficult to make money, margins are low, and companies have little control over the key profit drivers.
BS: Do you use derivatives? What is your strategy?
LM: Yes, at Black Swan we use assets, but only to buy options with significant upside or downside that are not priced by the market. In other words, we use derivatives asymmetrically, with a very low percentage of the portfolio, looking for opportunities that, if they do not materialize, will not make a difference in the profitability of our portfolio; however, if they do materialize, they will bring high returns to investors.
BS: What is the cheapest company on the stock market today?