Brazil Value Talks: Ric Reich
Multiplied Invested Capital by 3x in 4 Years
Today I have the pleasure of interviewing Brazilian investor Ric Reich.
From December 2019 to May 2024 his historic performance will be the envy of anyone.
His portfolio returned more than 178.53% in the period, versus 9.86% for Ibovespa.
He multiplied the invested capital by 3x!
This guy knows how to generate real value.
Shall we meet him?
BS: Ric, could you tell us a little about yourself?
RR: In the last year of economics college, while my father was fighting cancer, I discovered the financial market and it was love at first sight.
The market is the most meritocratic environment I have ever experienced: either you are good and make money, or you are bad and lose. You can't blame anyone but yourself. Furthermore, exploring a new universe helped me a lot to think about positive things in a difficult time.
After graduation, I worked as an AAI at XP, but I only lasted 3 months. It is an ultra-commercial activity, and the most important attribute is being a good salesperson. After the disappointment, I sent my resume to all the assets in Brazil, but no one responded.
Today, my goal is to teach Brazilians how money works. The level of financial education in the country is sad, that's why I decided to create content. I recently canceled my CNPI so I could trade on the stock exchange without bureaucracy.
BS: What is your strategy for making money on the stock market?
RR: Today, the strategy is as simple as possible: buy good companies when the return is attractive. To do this, I do fundamental analysis and valuation, I have never worried about graphs and I avoid any decision based on macroeconomics.
I spend a lot of time understanding and reflecting on companies' business models. The most important part is finding the factors that can kill a company; In the end, this is the law of the capitalist system.
After a while, we learn that analyzing companies and finding the target price is basic. The difficult part is maintaining conviction when the market melts and maintaining discipline when the market becomes euphoric.
BS: What is your process for finding a new buy opportunity? What filters do you use?
RR: I think there are few companies on the Brazilian stock exchange, and even fewer possible investments.
I exclude idiots, companies with a lot of leverage, bad companies, corrupt controllers, companies that do not generate cash, companies with low profitability and companies that do not grow.
Therefore, today there are approximately 40 “buyable” stocks. Those that are not part of the portfolio are added to the watchlist. After that, it's all about price and opportunity cost.
BS: How do you value a share: DCF, Multiples, implied IRR, a mix of the previous ones, …?
RR: Once I understood that multiples are a "proxy" of the internal rate of return, everything became easier. The best valuation is the one we do in our heads, when there is a lot of margin of safety and we don't need to do the math.
My process consists of comparing today's multiple with my expectation of the company's growth in the coming years, as long as it is a quality asset. Lastly, I perform a DCF to accurately understand target price expectations, but the difference between the valuation via baker's bill and the DCF is residual, around 15%.
BS: How do you like to build your stock portfolio, considering the number of companies, sectors and concentration?
RR: My stock allocation depends on the cycle, but most of the time I am 100% long stocks. In 2020, before Covid, for example, I had 30% in cash because the market seemed very optimistic.
I usually have 10 stocks, but when the stock market melts, I love to concentrate the portfolio. At the height of Covid, my portfolio was made up of 30% PETR4, 30% BPAC11, 20% UNIP6 and 20% CVCB3 - I never made so much money in my life. But that was an exception, most of the time my biggest position is 10% of the portfolio. When I don't have that much conviction, I take a 5% position. I avoid more than 30% in a single sector.
BS: How often do you like to rebalance your portfolio?
RR: There is not necessarily a date, the movement is always reactive to the market. When it goes up too much, I reduce it; When it drops a lot, I increase it. The simplest and most efficient way to manage your portfolio is to respect the allocation of each asset.
If I want to have 10% in the asset ABCD3 and after an upward movement the allocation reached 15%, it is good to reduce it to manage risk.
BS: How long on average do you hold a position in your portfolio?
RR: There are stocks that stay for 1 month, for example, HYPE3, and some positions I have held for 5 years, like PETR4.
I have never calculated the average time for each asset in the portfolio, but it varies a lot. If the outlook is good, I continue carrying the action.
BS: Do you believe that graphical analysis, together with fundamental analysis, can help with the buying and selling points of stocks?
RR: I've never spent a second of my time looking at graphs, I think it confuses more than it helps. I've tried reading a book on technical analysis, but I honestly can't take it seriously.
However, knowing probability, statistics and understanding the quantitative dimension of the stock market is a prerequisite for anyone who wants to make a living from the market.
BS: What are your favorite sectors on the Stock Exchange? And the ones you avoid? Why?
RR: In my view, Brazil is a commodity, financial sector and infrastructure. I like sectors where companies grow with good profitability over several years.
I avoid retail, aviation, construction and education. It's obvious that you can make money in these sectors, but I like to sleep peacefully.RR: I spent a lot of time trading options and concluded that it is a waste of time, at least in my strategy.
At the sales end, you get it right 100 times, but when you make a mistake, you give everything back. On the buying side, you have to put up with seeing your money turn to dust for a long time.
The market has a fetish for complex strategies, but I think the simpler the better.
BS: Do you use derivatives? What is your strategy?
RR: I spent a lot of time trading options and concluded that it is a waste of time, at least in my strategy.
At the sales end, you get it right 100 times, but when you make a mistake, you give everything back. On the buying side, you have to put up with seeing your money turn to dust for a long time.
The market has a fetish for complex strategies, but I think the simpler the better.
BS: What is the cheapest company on the stock market today?