Brazil Value Talks: Mestre Don
Performed 7x Ibovespa in 2 Years
Today I have the pleasure of interviewing Brazilian investor Mestre Don.
From February 2022 to October 2024 his historic performance will be the envy of anyone.
His portfolio returned more than 64.58% in the period, versus 8.73% for Ibovespa.
This guy knows how to generate real value.
Shall we meet him?
BS: Mestre, could you tell us a little about yourself?
MD: I'm an ordinary man trying to beat the market, passionate about everything about investing, and have been an independent investor for almost 15 years.
BS: What is your strategy for making money on the stock market?
MD: When I started, I was 100% stock-based, focusing on small caps, which was great from 2016 to 2019. But time has taught me to operate on several fronts. Small caps for carrying, some swing trades and also with derivatives strategies. Derivatives are what allowed me to profit from sideways and bearish markets, as well as bullish ones. Investing is a marathon and to survive and prosper in this game we need to use several tactics, especially to minimize drawdown, which is the portfolio's losses from the top. Risk control is everything. If you take a 30% loss in your portfolio, a 30% gain won't make up for it; you'll need a 43% gain to do that. If it's a smaller loss, 10%, you only need an 11% gain to overcome it. So you have to keep your losses small. The first question is how much can I lose if I'm wrong? What's my stop? Only then do I think about the gains. There's no such thing as a safe stock. Every stock you own could open on a huge drop tomorrow if there is the right reason.
BS: What is your process for finding a new buy opportunity? What filters do you use?
MD: First, I look closely at the evolution of the results. If operating profit and revenue have been increasing year after year, I look for a ‘ladder’ style chart for these parameters. Then I see if there are good margins and indicators, if there is a low P/EBIT, P/L and preferably if it pays dividends. Dividends are important because they ease the task of carrying out a thesis that can take years to come to fruition. But they are not essential. Many good things do not pay dividends on the stock exchange.
There is also the liquidity filter. Good stocks with low liquidity are a kind of market reserve on the stock exchange, since medium or large funds do not even look at them. It is very difficult for a large investor to want to buy a stock that trades for less than R$500 thousand per day, because they would have to drive the price up when buying. For those who have the patience to build up a position little by little and hold on, knowing the risks, good stocks with low liquidity are a good option.
And finally, the market filter. In a market with high interest rates and difficulty in getting into an upward trend, it will be difficult for your stock to perform well. It is like trying to sail without wind. In a bull market, everything goes up, so you have to be in tune with the market in general. In sideways or bearish markets, you can only build positions in the best assets, and gradually. What is cheap can remain cheap, and a CDI of 11%+ is not something to throw away!
BS: How do you value a share: DCF, Multiples, implied IRR, a mix of the previous ones, …?
MD: I look more at multiples and growth, in addition to margins. Theses about exiting bankruptcy and agreements with creditors or the government to reduce debt also have their value and often go unnoticed by most investors. A large debt becoming small results in a very large gain in the price. This happened with CTKA4, way back when. GPCP3 (now DEXP3) was another example.
BS: How do you like to build your stock portfolio, considering the number of companies, sectors and concentration?
MD: I prefer not to have more than one from each sector. And limit it to about 6 stocks for the long term, not counting the ones I use for swing trading. More than that becomes difficult to keep track of.
BS: How often do you like to rebalance your portfolio?
MD: When a thesis matures, it becomes expensive, or when a stop loss is triggered. Or when there is a structural change in the market, as was the case in 2016 with Dilma's impeachment. As a rule, high and rising interest rates, more fixed income, otherwise, more variable income.
BS: How long on average do you hold a position in your portfolio?
MD: It varies a lot. I can hold long-term positions for many years.
Completely different from swing trading. If it hits the target, or goes up a lot in a short period of time, I'm out. In a scheme of: hi, bye, give me my profit, I'm out.
BS: Do you believe that graphical analysis, together with fundamental analysis, can help with the buying and selling points of stocks?
MD: Absolutely. I like the term ‘techno-fundamentalist’, which is in Nicolas Darvas’ book, “How I Made $2,000,000 in the Stock Market,” which everyone should read. We are dealing with human nature, which ends up expressing itself on the chart. Greed, fear, indecision, and even the Insider, all of this is present on the chart and in the market’s price records. The charts of indexes, oil, and ten-year interest rates are indicators of which way the wind is blowing.
For me, the most important chart pattern is the cup and handle. This pattern, on a longer chart timeframe, can mean a sustained and continued rise in price, and it is no wonder that renowned authors in the US such as Mark Minervini, William O’Neil, and Stan Weinstein talk a lot about this and other chart patterns, as well as moving averages, which I also think are important to look at. They are interesting authors to learn about charts and risk control.
BS: What are your favorite sectors on the Stock Exchange? And the ones you avoid? Why?
MD: I really like banking and sanitation, but it varies a lot. The ones I avoid for the long term are retail and airlines for the same reasons as Barsi. For trade, anything goes. Construction is usually good if you catch a bullish start to the cycle. I gained a lot with TRIS3, for example. But you have to know when to leave.
BS: Do you use derivatives? What is your strategy?
MD: Yes, derivatives were a turning point in my career as an investor. I trade selling options on BOVA11 and PETR4, mainly through structured transactions, which earn money over time and allow me to build hedges for my portfolio at no cost, by buying longer put options. This is what I currently study the most, and it yields good returns in a stagnant market, as we have seen with the IBOV recently. It has its risks, you have to trade small and hold back so as not to take too much heat, especially in sold calls. It is a very different world from stocks, but very rewarding too.
BS: What is the cheapest company on the stock market today?