Brazil Value Talks: Vance Silveira
Great learnings from multiplying the invested capital by 4.5x in 3 years and returning almost all the accumulated return
Today I have the pleasure of interviewing Brazilian investor Vance Silveira.
From January 2018 to October 2024 his historic performance will be the envy of anyone.
Vance's portfolio generated an incredible return of 349% in the first 3 years and, after that, suffered a drawdown until reaching the performance of the Ibovespa in the period.
A roller coaster that brought many lessons!
Shall we meet him?
BS: Vance, could you tell us a little about yourself?
VS: I'm Vance Silveira, I'm 28 years old, I have a degree in economics from UFMG and I'm currently a partner in two companies that I bought part of from a friend.
I'm passionate about investments, I love reading and I worked for 3 years as an equity analyst at a management company here in Belo Horizonte.
BS: You multiplied your capital by 4.5x in just 3 years and then returned almost everything. Can you tell us in detail how this happened?
VS: I can say that I started out with a bit of luck. At the time, still at the beginning of my journey as an investor, I paid for a stock course in which the speaker at one point said that her second largest position was a company that she already liked at 10 and was at 4. I thought: "wonderful" and I went all-in on it, lol, and that was my breakthrough. It was the famous Simpar. Then, I bought Petrorio, Profarma, and basically any small cap would have given me a lot of joy in 2019. That was what contributed to the big rise.
I was spoiled and kept focused on small companies, especially because I thought that, with the recovery of the stock market after Covid, I would do better with high betas, a characteristic more present in this class than in blue chips.
This is where the first lesson begins:
In the medium/long term, less volatility gives more return and the beta loses its effectiveness.
So, we got to 2021. There wasn't much to do. Honestly, it was a lot of pressure because your money at the 2% Selic rate would lose out to inflation and buying an NTN-B would contract a rate well below the historical one.
Second mistake here:
Allocating too much to variable income, when it was clear that things were a bit strange with that wave of fake tech IPOs, all because I wouldn't accept losing out to inflation and holding part of it at the Selic rate.
So I made my first, most serious mistake.
I, who criticized the wave of IPOs, heard a speech that was at least charming at the unifique - FIQE3 roadshow and allocated a large portion of my portfolio to it.
The company would trade at about 35x profit at the IPO. The reasoning at the time was as follows: the company had an organic ROIC in the range of 30% and, inorganic, 20%. It had a lot of market to grow with the fiber optic boom and, growing at the past pace, it would be about 10x profit in 4 years and would certainly still be traded at 20x due to quality and growth. So, I would multiply my capital by 2x in that period.
Here are 3 classic mistakes I made for investors to be aware of:
I underestimated the challenges of growth. It lost margin by expanding to RS. I was unlucky. It stopped growing organically and had a lot of construction work to lay wires on the street, which resulted in lower housing penetration. In my Excel valuation spreadsheet, the projection accepted everything lol
I counted on the market for my financial plan to come true by deducing that it would price the shares at a multiple X. However, this is more uncertain than the company's own results. Today I tend to count on the company offering me and that's why the issue of dividends started to weigh more heavily.
Buy IPOs. You can't buy IPOs. It's better to wait. I'm playing against myself, if the owner thinks it's well priced, the asymmetry tends to be worse for the investor who buys in.
So, I lost a lot of money and decided to return to the Simpar thesis with more aggressiveness. I thought: this one has a history of execution, it has good returns, but that's when I made another mistake.
I'm a fan of returning to averages and this applies to commodities, interest rates, etc. I believe it works, but there's a catch.
Simpar would be a good cash flow generator with the Selic rate, which I believe is normalized at around 8% to 9% (something like inflation + 3.5%). That's what I had in mind. However, interest rates rose to 13.75% and, as soon as they fell, another rise began, something unthinkable, with NTN-B hitting almost 7%, neutral interest rates rising.
And what happened to Simpar? In addition to some circumstantial issues regarding the depreciation of Movida and semi-new Vamos vehicles, I lost the "investment load".
What's the point of the normalized flow being good if it takes years to get there, while I could be remunerated even at the double-digit Selic rate? The company itself was left generating practically nothing for the shareholder. All the flow was sucked through a straw to remunerate third-party capital.
So it's necessary to think about this, not only in the normalized scenario, but also the importance of giving preference to stability.
I think that one stock combines this very well is BBAS3 and it even converges with what Peter Lynch and other investors have already said: boring companies tend to remunerate you well.
I'm still with Simpar too, but in the past, size was a mistake.
BS: What is your strategy today to make money on the stock market? How can you take the hits you did, but not fall so much later?
VS: VS: Today I really believe that, to make money, it goes very much against what I've heard from Buffett and ignored or only understood better now:
Only own shares if you're willing to hold them for 10 years.
What I take from this is not a question of being a long-term investor, but rather that you only depend on the company, so today, when I evaluate a company, the exit multiple doesn't matter. It's always the same profit/price, it has to be at least 1% to 2% higher than what a basket of high-grade debentures offers me today.
What I mean is that I'm tired of playing with the future and factoring it in, so I ignore it in both the multiple and the perpetuity, where I don't imply any real growth. It may be different from the standard model, but it's what I feel comfortable with.
And today I prefer dividends more. They don't have to be paid today, but in a few years I want them back because I don't like depending on others to make money. I want part of the cash flow that the company generates.
Now for Buffett's other rule:
Don't lose money.
This seems obvious, but I understand that the point is that, even if you are a long-term investor, you should not put yourself in situations where you could lose. If in the short term the metrics that move a stock are above the historical average, it is better to wait. For example, if a leveraged company has an average interest rate of 5% over the last 10 years and NTN-B is paying 4% today, it is better to wait, even if it is a quality company, etc. And that is where I think the buy & hold philosophy is bad, because it would encourage people to buy a good company regardless of the price.
Finally, my philosophy also comes from avoiding some tail risk. So, large exposures to commodities or highly leveraged companies require more care, because you can quickly get stuck in a very difficult scenario and happen like Simpar, losing "carry". It doesn't matter if the stock falls, but if it stops generating cash flow for the shareholder because of macro factors, that is a problem. You will be stuck.
Therefore, I think I should only invest in companies with this characteristic with a portfolio limit and especially when things are already more than one deviation from the average to the worst side.
To take these hits without falling too much later, you also need to know how to let go. Don't think you can win in every scenario. There will be cases where it is better to wait at that ridiculous CDI of 2% and lose money to inflation than to keep thinking you will extract alpha from the market. It is about playing in favor of the cycle and thinking about guaranteeing a large flow for the shareholder in the stock. If there is no large flow, it is better to surf some debentures with a duration less than or equal to the CDI.
So much so that those who made money from 2021 onwards invested in stocks with a large flow such as Petro, BB, etc.
Small caps, when they are at rock bottom, also provide a large flow for the future, but after they appreciate, sell, my friend. If you need to count on a lot of growth, get out. Don't do what I did.
BS: IV: In a market as cyclical as the Brazilian one, in your opinion, are there any stocks that we can consider keeping in our portfolio for 10 years?
VS: VS: Yes, definitely. I think there are some that you will need to observe a little, but if you want to forget about it and do other things, you will do well with a BBAS3. It always trades at a lower multiple. Or with some electric company, like ALUP11 or EGIE3.
There is not much error. There is so much contraction and expansion of multiples there and you take the load. Others may be worth holding for 10 years, but since they are more cyclical, some small caps, leveraged or commodities, it is likely that at some point in this 10-year window you should have sold because it became irrational, for example: SIMH3, VALE3, Construction companies, …
At some point, you have little to gain in flow and you start to put forward scenarios that are not average, but rather the narrative of the moment.
BS: What is your process for finding a new buy opportunity? What filters do you use?
VS: Today I have the luxury of searching through the information network that I have at my disposal, whether it's Twitter, investor groups, interviews, podcasts, etc.
When someone talks about a thesis and a rationale catches my attention, I look at the numbers from the last 10 years, try to clean up the profit by interest and average margins a little and see if it seems attractive, that it could give me a fat cash flow.
If I like it, I start that work of going to the IR website and researching it more in depth.
So I like to see a lot of normalized price/earnings and the historical ROIC too.
But as I said, you need to clean up the profit, even if it's quick.
To avoid making mistakes, I prefer to eliminate turnaround theses and those that require high growth from my studies.
BS: How do you value a share: DCF, Multiples, implied IRR, a mix of the previous ones, …?
VS: I usually do DCF with a 5-year projection ahead. This is the range in which I can see growth with greater confidence and then, I sell the last year using an exit multiple, which is the minimum cash flow I require and bring it to present value.
There is no secret to doing the valuation. It is to see the growth and adjust the results to a normalized scenario, whether in margins, sales, interest costs, etc.
I usually require high grade debentures +2% as a discount rate and exit multiple.
Today, this is something like IPCA + 9%. Therefore, I sell at 11x profit (1/9%) on exit. I feel safer this way.
BS: How do you like to build your stock portfolio, considering the number of companies, sectors and concentration?
VS: I would allocate something like 50% to those stocks that I think are in a negative scenario and, when the metrics that move them converge to the average, I capture a large flow to the shareholder later on.
In the other part of the portfolio, stocks with less volatility in multiples, as I mentioned before.
Honestly, I think that 4 to 10 stocks is enough. I'm a bit radical, but I think that more than that makes the benefit of diversification start to eat into the benefit of knowing where you're putting your money, especially for those who don't live for that. The manager of the Guepardo fund, whom I admire, and his entire team, limit it to 14 stocks. Even with the experience I've had in work and investing, I wouldn't be able to visualize much more than 10 theses today.
BS: How often do you like to rebalance your portfolio?
VS: With rare exceptions, I tend not to like to mess around. I have bad memories of that, too, because what is falling is usually not an opportunity. It's you who is not seeing something in the thesis... lol
BS: How long on average do you hold a position in your portfolio?
VS: On average they stayed for about 2 years, I hope they stay longer lol
BS: Do you believe that graphical analysis, together with fundamental analysis, can help with the buying and selling points of stocks?
VS: I believe that graphical analysis helps, I use RSI a lot.
BS: What are your favorite sectors on the Stock Exchange? And the ones you avoid? Why?
VS: My favorite sectors are utilities and financial. The UTIL and IFNC indexes humiliate the IBOV. They have created so many shitty ETFs and to this day there has not been one to represent them lol… I avoid aviation (bad returns worldwide) and otherwise I avoid turnaround cases and cases that demand continuous and high growth. Words like secular thesis are already a bad start.
BS: Do you use derivatives? What is your strategy?
VS: I don't use derivatives, but I admire those who know how to use them well. That's outside my circle of expertise today.
BS: What is the cheapest company on the stock market today?