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O ALERTA PÓS-ELEIÇÕES: BOLSA PODE CAIR MAIS 30%? | Market Makers #432 — Transcript

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0:07Yes, yes, yes. Another Marketmaker
0:09episode is starting. Welcome to the
0:11podcast of the Brazilian investor family
0:13.
0:14I'm Thiago Salomão, founder and CEO of
0:16this company, and today we're going back
0:17to talking about stocks.
0:19Yes, once the elections are over, we can
0:21go back to talking about the financial
0:22market. And we're not in our studio on
0:25Faria Lima. We came to Rio de Janeiro to
0:27have a conversation with Leonardo Otero
0:30.
0:31He's the manager and founder of Harbor
0:33Capital, an asset management firm that
0:35started as an investment club in 2014,
0:37became a fund the following year, and
0:39from the beginning, has aimed to do
0:41something that's very normal today, but
0:43back then seemed like a crazy idea: to
0:45be an independent asset management firm
0:48focused on investing in international
0:50companies.
0:52Leo also invests in Brazil, but the
0:54strategy is mainly focused abroad.
0:57It wasn't very common back then.
1:00Nowadays it's even more acceptable, more
1:01normal.
1:03But the point is that we're recording
1:05days after the results of the first
1:07round of elections.
1:08We saw the impact this had on the
1:10Ibovespa and the dollar.
1:13So, it even serves as a warning to
1:15investors who didn't have geographical
1:16diversification, highlighting the
1:18importance of having investments in
1:20other markets.
1:22And Leo, we're going to talk about this
1:24idea of investing abroad, but mainly
1:26about the mindset of an investor who
1:28looks at the world, right?
1:32He's here in Rio de Janeiro, impacted by
1:34the events happening, but he and his
1:36entire team are looking at companies
1:37globally.
1:40So, we're going to have a chat to
1:41understand the dynamics of global
1:43business, and how to be a manager who
1:45looks outward and how he feels in a
1:46moment like this, where Brazil has once
1:48again become the ugly duckling of
1:50investments after the second round of
1:52elections.
1:54So, come with me, like the video,
1:55subscribe to the channel because our
1:57channel is growing and wants to grow
1:58even more.
2:00Leo, first of all, thank you for having
2:02us. We're here in your office.
2:05Thank you for having us during this
2:07turbulent week we're seeing in the
2:09market.
2:10>> Very much.
2:11>> I believe you're suffering a little less
2:14than your peers who invest in local
2:16stocks.
2:18We, at least those of us who have our
2:20equity fund on Marketmers, had a very
2:21educational Monday, right?
2:23Because we say that when you lose, it's
2:25good to learn. Anyway, we learned a lot
2:27on Monday.
2:28But before we start the conversation,
2:31Leo, uh, I summarized very quickly your
2:34story of creating a club that became a
2:37fund, and 11 years later, here we are.
2:40And I haven't mentioned the fund's
2:41performance, right? But, wow,
2:42congratulations. 21%per year since the
2:45beginning, right?
2:47Comparing it to the CDI, it was half
2:49that. So, uh, it's been delivering
2:51consistent performance.
2:53But how did that idea emerge back then?
2:56Today it's kind of obvious, everyone
2:59>> knows how to invest abroad, there are
3:01platforms, there are BDRs, there's all
3:02that, but in 2015, like 2014, how did
3:04this idea come about, wow, I'm going to
3:05create an asset management firm, were
3:07you already working with this?
3:08Anyway, how did that happen? No, cool.
3:10Well, first of all, thank you for the
3:11invitation. It's a pleasure to have you
3:13here at our office in Rio.
3:15Uh, I always like to say that Arbor
3:19started as an entrepreneurial project
3:21that eventually became an asset
3:22management firm, right? My co-founder
3:24João Valadares and I always talked a lot
3:26about business; we've known each other
3:27for a long time,
3:28>> and we wanted to build something
3:29together, right?
3:30>> And as time went by, during my college
3:32years, I began to fall in love with
3:33investing, didn't I? When I met Warren
3:35Buffett, I got hooked.
3:38I think for everyone who invests in
3:39stocks, he's the ultimate reference,
3:41right?
3:42Not only for his intelligence and the
3:44results he's achieved, but for the
3:45simplicity with which he manages to
3:46present his ideas, right?
3:48It's very accessible content.
3:50So, we started to really like it. I went
3:52to Omar seven times.
3:53>> Oh, cool.
3:54>> Then I had the idea, hey, why don't we
3:56open it?
3:56>> When was the last time you went? You
3:58went?
3:58>> The last time I went was in '22.
4:00>> Oh, so you still took all the classes
4:01with Charlie Manga?
4:03I started in 2012 and went until 2022. I
4:05didn't go every year, but I did go, and
4:07there was
4:07>> COVID in the middle of it, you know?
4:08>> Exactly. There was COVID, but I went
4:10most of the years, and each time I went
4:12I got more hooked on the subject, you
4:14know? I started Arbor when I was 25, so
4:16I started young. Before that, I worked
4:18in an equity fund that also followed the
4:20old-school investing philosophy here in
4:22Rio.
4:23So we started the club, right, in 2014,
4:25as you mentioned, Salomão. And at the
4:27time we started the club, we only
4:28invested in Brazil.
4:30In that first year, the CVM placed a
4:32restriction on investment clubs,
4:34preventing them from investing their
4:36capital outside of Brazil.
4:38there were no BDRs (Brazilian Depositary
4:39Receipts) at that time. But we always
4:41had the mindset that it didn't make
4:43sense to restrict ourselves only to the
4:46universe of stocks in Brazil. Uh-huh.
4:50>> And we went to Buffett's conferences all
4:53the time.
4:54We didn't have an easy time with the
4:56language. For us, the fact that the
4:58companies weren't Brazilian was never a
5:01barrier, right?
5:03I think our generation coincides with a
5:05great deal of information, right? I
5:07think that perhaps if we went back
5:09decades, it would be much more difficult
5:11to
5:12>> manage a global mandate,
5:15>> compared to what happens today, right?
5:17So, it's true, when we changed the club
5:20to a fund in 2015 and we tried to tell
5:23our story to potential investors, it was
5:25very difficult because we were young,
5:30we didn't have a track record, right? So
5:31, how do you, young and without the
5:33history of a previous firm, raise money
5:35?
5:37So we used to joke that, since we invest
5:38for the long term, we have to wait for
5:40that long-term period to finally arrive
5:41.
5:42Uh-huh
5:43.
5:43>> And at that time, investing in stocks
5:46outside of Brazil wasn't common; BDRs
5:48didn't exist like they do today.
5:52So this idea, which today, as you put it
5:54, is very common.
5:56I would say that all multi-market and
5:59equity funds are increasing their range
6:02of investments abroad.
6:05For us, this has always been very
6:06natural. So, for us
6:09>> at Vel Investing, it sends a message
6:11that you always have to look much more
6:13at the micro before the macro, which we
6:15agree with.
6:18I think what we do here is a
6:19micro-analysis, which we'll go into more
6:22detail about later, but I think a great
6:25invisible lesson in the history of
6:27Warren Buffett, of American capitalism,
6:29is the context.
6:32This works very well when you have a
6:35backdrop, which I think is what's
6:37happening now, stable, pro-private
6:39initiative.
6:42I think we already had this vision in
6:442014, that the United States, especially
6:46, had very different characteristics
6:47from anywhere else in the world.
6:50Uh-huh.
6:51>> I think the election now and the
6:53difference that the market is seeing,
6:54candidate A, candidate B, brings this to
6:56light
6:59very clearly. Let me just bring up a few
7:01points, right? First, about Warren
7:03Buffett.
7:04Uh, he himself makes it very clear,
7:07right, that his success as an investor
7:09is very much linked to the time he was
7:11born, the country he was born in, right
7:14?
7:16He was born in a country that was
7:18emerging from, I mean, entering a major
7:20crisis, and then would emerge and
7:22experience all the prosperity that
7:23American capitalism had.
7:27It also helped that men were born,
7:28because they had more opportunities than
7:30women, or even their sisters, right?
7:32Women, no matter how intelligent they
7:35were, wouldn't have the same
7:36opportunities.
7:38But all this shows how the environment
7:40helped explain his outcome.
7:43But you touched on a point that, well,
7:45we can't help but talk about now, right
7:47?
7:48A week after the election results, this
7:50improbable victory for Lula, because all
7:52the polls showed that Flávio could win,
7:54and we saw the impact on the Brazilian
7:56market.
7:58And you started the 2014-2015 Arbor
8:01campaign, which was
8:04Dilma's second term.
8:08Can we draw a parallel between what
8:10we're seeing today and what you
8:12experienced back then?
8:15Because we had the beginning of one of
8:17the biggest crises in the Brazilian
8:19economy.
8:21Well, and now with Lula's victory and
8:24the first signs, right?
8:27We still need to wait and see, but we
8:28have a contracted fiscal crisis.
8:32We've already had a lot of promises made
8:33and benefits delivered that will further
8:35hinder the outcome.
8:37So, many economists are already
8:39anticipating a crisis. Only if Lula
8:41completely changes the discourse he's
8:42had throughout the entire campaign, and
8:44even the last four years, will this
8:45crisis not materialize.
8:47But, uh, can we draw this parallel, and
8:50how does this connect with the
8:52background when it comes to investing?
8:56>> Not entirely.
8:57I think the parallel is clear.
8:59I think now it might be a little worse,
9:01right? Because the country's gross debt
9:03today is much higher than it was during
9:05Dilma's time.
9:07Uh, we'll probably have four years of
9:10high interest rates and low growth.
9:14Uh, I think many economists expect a
9:16recession. The government,
9:17>> some are expecting it by mid-year.
9:19>> The government promised a lot for this
9:21election. Okay, the fiscal situation was
9:22already bad. He promised a lot to win
9:25the election. Now we are going to see
9:26exactly what he will deliver and what he
9:28will not deliver.
9:29But I think the current picture of
9:31Brazil is a country that grows very
9:33little, interest rates are very high,
9:35the government spends a lot and spends a
9:37lot without seeing a return on that
9:39spending, right?
9:41I think, no, I'm not going to cut
9:43spending on health or education, but
9:45what we, as a society, want is for these
9:47investments to have a better return.
9:50Uh-huh.
9:50>> What happens is that the government
9:52spends a lot and spends without a return
9:53.
9:54So I think yes, there's a very strong
9:56analogy between what we experienced
9:57during Dilma's time and what we're going
9:59to experience now, which is very
10:00difficult for stocks, right?
10:03During our last quarterly call, we
10:05presented a study showing how Brazilian
10:07stocks have performed since we began in
10:092014 until today, and we compared that
10:12data to how the American stock market
10:14has performed over the same period of
10:16time.
10:17This was, while it was an excellent
10:19window for the American stock market, it
10:20was a very difficult window for the
10:22Brazilian stock market, right? The
10:24country grew very little, the profits of
10:26companies in dollars, right? They grew
10:28very little. Do you have an idea? The
10:30profit in the last 12 years of the
10:32small-cap index 11 hasn't grown at all
10:34in dollars, so it's stagnant. The
10:37Ibovespa is growing a little because it
10:38has many banks, many companies that
10:40export.
10:42So, our basic scenario,
10:43>> but this also includes the small-cap
10:45results on the Monday after the election
10:47, right?
10:47>> Yes, there was,
10:49>> I think it fell 30%, it
10:49>> fell 30%, but here I'm commenting on
10:51earnings per share.
10:53I'm commenting on the profit of the
10:55small-cap in nominal terms, it rose 80%
10:57in 12 years, which is 5%per year, which
10:59is very little.
11:00>> Yes. Uh, which I think connects a little
11:03to our previous point, right, about the
11:04boundary situations. It's very difficult
11:06to have a thriving capitalism in a
11:09country where interest rates are very
11:12high, right?
11:13It's very difficult for companies to
11:15invest, for companies to grow.
11:18So, let's see. I think we're a little
11:22worried.
11:23I think we have to follow what the
11:25government will say, while what it said
11:27in the election is frightening.
11:30We know that the government needs to
11:32signal
11:32>> confidence to the market.
11:35The market can't embark on a great
11:37unknown of what will happen.
11:40Our debt is high, right?
11:43So, let's see, let's hope for the best
11:45and prepare for a difficult scenario.
11:48>> Yes, hope for the best and prepare for
11:50the worst, right?
11:52I think that's a good motto for
11:54investors, but historically, how much
11:56have you had throughout history, since
11:59it became a Brazilian equity fund, and
12:01how much do you have now?
12:04Well, I imagine that even though you
12:07have a mandate to invest heavily abroad
12:09, it's undeniable that we had an
12:12investment opportunity in Brazil,
12:14considering that almost everything
12:16pointed to Flávio winning. And the
12:19market hadn't fully priced that in.
12:22>> We can even see from the fund's share
12:24price on Monday that many people
12:26believed in this scenario for Brazil,
12:28right, of the stock market rising with
12:30Flávio's victory,
12:31>> because the share price shows that.
12:34But did you have a large exposure to
12:35Brazilian stocks compared to the
12:37historical average?
12:39>> Yes.
12:40So, even because we set up an asset
12:42management firm focused abroad, we
12:44always have a bias that stocks in Brazil
12:46, given the interest rates, are a very
12:48difficult asset class to hold.
12:51Uh-huh.
12:51>> And I think that's empirically proven
12:54historically. So, we never had much
12:56exposure in Brazil. We always articulate
12:59to investors that our mandate is to have
13:02up to 30%in emerging markets. So, by
13:05mandate, we could have up to 30%in
13:07Brazil.
13:08>> We had roughly 10%in Brazil, and our
13:11average is 15%.
13:13So, in previous conversations, I
13:15mentioned that we didn't want to make a
13:17bet before the second round. We had a
13:20small position.
13:21Like most other market participants, I
13:23was expecting a completely different
13:25result, would you not agree?
13:28All the polls, all the consultancies,
13:30everyone who did the math imagined that
13:32Lula's chances of reversing the
13:33situation were extremely low, and it
13:35happened.
13:37But looking now, I think we entered with
13:40a super moderate sizing, below average.
13:44So, we suffered, right?
13:46But not nearly as much as the other
13:49funds did.
13:52I think it will fall even more, because
13:54when I look, the stock market is up this
13:57year, the real is appreciating this year
13:59, long-term yields are more or less at
14:01the same level they were before the
14:03first round.
14:06So, I think that in the first round,
14:08before the first round, back in
14:09September, you had an expectation within
14:11the expected range that there could be a
14:13scenario with Flávio. Lula was the
14:14favorite, but there was an expectation
14:16for Flávio. So, if we consider that the
14:18market is pricing in the expected value
14:20of outcomes, I believe that we are still
14:23, to some extent, in a state of denial.
14:25It will depend entirely on what happens
14:28. Now we have this issue of Flávio in
14:30the United States, what will come of it
14:31? Will it turn out well or not?
14:35So, when I look at a long-term rate at
14:377.40, when I look at the stock market at
14:40its current level, I look at the
14:42exchange rate at 5.30 with 5.40, to me
14:44it's very far from a stress scenario.
14:47So what we did was, we will always
14:50prioritize investing abroad.
14:52And when I ask, why did you set up Arbor
14:54focusing on investing abroad?
14:58Unfortunately, that's why, because
15:00there's a well-known phrase that says an
15:02emerging market is one where politics
15:04are more important than economics for
15:06the markets.
15:08And we never wanted to be political
15:10scientists.
15:11So here we are now seeing what we were
15:14preparing for, not what happened.
15:17Uh-huh.
15:17>> And even when you talk about political
15:19scientists, they didn't get what was
15:20going to happen right, did they? So even
15:22that's no guarantee of success, right?
15:24That's right, even that's no
15:26>> guarantee of success. What we did was,
15:28we zeroed out the very little we had,
15:30because I actually think it's going to
15:32fall further, it's going to
15:33>> fall further. I think the entire market
15:35was revolving around the thesis of
15:37capital flow
15:38>> and the reduction of the cost of capital
15:39.
15:40The flow, Flávio himself mentioned it in
15:43the debate.
15:45Despite this very poor political
15:47campaign, right, where we saw much more
15:50of a fight, a clash than a real exchange
15:52of ideas, Flávio even said in one of the
15:55debates that, if he won, the future
15:57interest rate curve would close.
16:01This would help to rebalance the
16:03accounts and, even though perhaps a
16:05large part of the population doesn't
16:07have this understanding of what future
16:09interest rates are, the market was
16:11actually showing that, right?
16:14And there was even, I'd say you noticed
16:17a certain complacency in the market when
16:20Lula announced new measures and Flávio
16:23said he would maintain or even increase
16:25the measures,
16:27>> and the market didn't factor that in
16:29because the market really
16:32>> thought that this improvement, right,
16:34this easing of risk with Flávio's
16:35victory,
16:37>> would happen even if we didn't make the
16:39fiscal adjustment of our dreams. But
16:41then it seems like it all came at once.
16:44But just sorry, since I interrupted you
16:46, this fall, do you think it will be
16:48because the fundamentals will worsen,
16:50because money will leave, or because of
16:52something, are you already anticipating
16:54something, I don't know, if there's a
16:56sanction from the United States, if it
16:58will further increase the
17:00>> legal risk in Brazil and investors will
17:03want to leave. What do you attribute the
17:06possibility of the market falling
17:08further to?
17:10I think everything you said, I think the
17:13flow, if we think about it, a large part
17:16of the investors were buying–local
17:18institutional investors, individuals,
17:20and foreign investors–based on the idea
17:23that Brazil was a small market, that
17:25there was little flow, the cost of
17:27capital was very high, and there were
17:30few companies.
17:32It was never debated that we would have
17:35a major structural change in the
17:37Brazilian economy, that it would become
17:40an innovative economy, a great breeding
17:42ground for startups and entrepreneurship
17:45. It was always a single issue: the cost
17:48of capital and a narrow door. I think
17:50that now the exact same arguments apply
17:53to the other side.
17:54So I think this is a problem of
17:56imbalance between who wants to buy and
17:58who wants to sell, which we have to
18:00monitor.
18:03Secondly, as I mentioned, the price here
18:05was the same two months ago, so it
18:07doesn't seem like there's been a major
18:10adjustment.
18:13And on that point you brought up with
18:15Flávio, when you look, for example, at
18:17the picture of Brazil as a country, we
18:19have a primary deficit, let's say, a
18:21nominal deficit of 8%, and a GDP that
18:23isn't growing.
18:25So the real interest rate is extremely
18:27important for the speed at which the
18:29debt will grow.
18:32The yield curve is always like that, but
18:34more than ever it's completely
18:35reflective of economic fundamentals,
18:37right?
18:38Because
18:40>> if the curve starts to rise, future debt
18:42starts to rise.
18:45So this puts the government, let's
18:46assume the best will happen, the
18:48government will have to cut spending to
18:50improve expectations.
18:52If it does that, it takes money out of
18:54the economy, which directly impacts
18:56company profits, right?
18:57>> Uh-huh.
18:57>> Because in the very short term, a
18:59government that spends a lot is positive
19:01for profits, right?
19:02Part of that spending is in the economy
19:04, right? So the opposite is also true,
19:06right?
19:08So I think we have to keep track.
19:12Of course, there will be opportunities,
19:14stocks that have fallen a lot.
19:16I think we'll continue to look at Brazil
19:18opportunistically.
19:19We like to build the portfolio, and it's
19:22always been that way, with 85%of the
19:24capital invested in predictable
19:26companies with enormous competitive
19:28advantages and generational growth rates
19:30for many decades.
19:32And 15%with a slightly more short-term
19:35and opportunistic view. And that 15%was
19:38where Brazil was. We were around 10%, we
19:40decided to zero everything out on the
19:42first day. So today we're at zero. But
19:45we'll keep an eye on it.
19:46>> Uh-huh.
19:47>> If I'm right and the stock market falls
19:49another, I don't know, another 20, 30%,
19:51and the B1 rises another 100 points and
19:54everything changes, we can,
19:55opportunistically, of course, return to
19:57having a smaller tactical position here
20:00in Brazil,
20:01>> right?
20:02>> But when I look at what's happening in
20:04the world, it's so encouraging, isn't it
20:06?
20:06With this great wave of productivity
20:08that artificial intelligence is
20:10currently bringing to companies, I
20:12believe it will be easier to recover
20:14this small loss that I experienced here
20:16in Brazil. Uh-huh.
20:19>> By investing in companies that will be
20:21here 100 years from now, in
20:22intellectually stimulating areas, right
20:24?
20:26>> So let's talk about this 90%that has now
20:28become 100%of your portfolio, which is
20:30the rest of the world.
20:32Uh, how's your mindset? I think, well,
20:36we could talk a lot about this, but I
20:39think it's good to address how your
20:41mindset is looking at the world through
20:44the theses you have.
20:47So, what's part of your portfolio and
20:49fund?
20:51What are your main convictions and how
20:54does that connect with this world you're
20:57talking about of artificial intelligence
20:59, potentially bringing a
21:02>> cool
21:03>> breakthrough in new profits to
21:05capitalism?
21:05>> Great. Great.
21:08Uh, we have a core portfolio that
21:10changes little, right?
21:13So, for example, Microsoft, Amazon,
21:15Facebook, and Google are positions that
21:17have been in the portfolio for over 11
21:19years.
21:22When we started Harbor in 2014, our
21:25first investment theme was that the
21:28internet is a factory of monopolies,
21:32>> and the idea was that on the internet,
21:35mainly due to the network effect, you
21:37had a dynamic where the best companies
21:40captured a much larger percentage of the
21:42market than happened in the physical
21:45world.
21:46An old thesis, but you have to remember
21:48that this was 12 years ago, right? So
21:49that was the truth for e-commerce.
21:51Mercado Libre has a much larger share of
21:53e-commerce than, let’s say, Pão de
21:55Açúcar or Casas Bahia ever had in the
21:56electronics market, don't you think?
21:59If you look at Google, Meta has a much
22:01larger digital advertising market share
22:03than Globo or any company in the United
22:06States had in offline advertising.
22:09So we always saw the world as a
22:11concentration of the internet.
22:14When I look at the portfolio today and I
22:17see artificial intelligence, what we
22:19don't have in the portfolio today is a
22:22company that isn't going to become more
22:25powerful or that isn't using technology
22:28and now AI, either to sell or to improve
22:31processes.
22:33So, we did a large study starting from
22:36the launch of chat PT in 2022 to form a
22:40head of beauty, AI is very
22:42transformational, isn't it very
22:45transformational, and how do we invest
22:48in this thesis following our investment
22:52philosophies?
22:54>> Uh-huh.
22:55>> Because our philosophy has three central
22:58pillars. The first is predictability. We
23:00want to invest in businesses that we can
23:03hold for a long time and can
23:06estimate what the result, the outcome,
23:08the profit of that company will be in
23:11the long term, in the narrowest possible
23:13way.
23:15And we want very high barriers to entry
23:17and, of course, we want to pay a fair
23:20price for it, right?
23:23So, I made this whole preamble to say
23:25that I think artificial intelligence
23:28ends up being the second version of the
23:31internet, the factory of monopolies, in
23:33the sense that it will be very difficult
23:36to take away the large profit pool of
23:39the big technology companies.
23:43Of course, startups, companies as a
23:46whole, will make a lot of money with
23:48artificial intelligence, but most of
23:51this profit, this invested capital, this
23:54return on capital, will be in the big
23:57hyperscalers, right?
24:00So we continue with these companies, for
24:03example, today our largest position is
24:06TSMC and Microsoft, TSMC, semiconductors
24:08, right? So, when we think about the
24:11topic, we always like to divide this
24:13topic into some layers, right?
24:16So, you have the electricity layer,
24:18infrastructure, you have the
24:20semiconductor layer, you have the layer
24:22of companies that buy semiconductors,
24:24build data centers and sell them.
24:28You have the layer of companies that
24:30rent or own data centers and create apps
24:32on top of that, right?
24:35So, we broke the theme down into layers
24:38and tried to optimize the portfolio to
24:40be heavily invested in AI, but heavily
24:43invested in the lower-risk layers.
24:47So, today we have a large investment in
24:49semiconductors, a large investment in
24:51hypersales companies, and also a large
24:53investment in
24:57mission-critical software from the main
25:00verticals.
25:02For example, SAP, the German company
25:04that does ERP, and Microsoft, which
25:06makes Office, the software we use every
25:08day.
25:09So, we optimized the portfolio a lot for
25:12AI, but for AI with high barriers to
25:14entry.
25:15Of course, there will be companies that
25:17will appreciate much more this way, but
25:20they have a huge dispersion of scenarios
25:22.
25:23>> And all these AI Labs, Tropic, OpenAI,
25:2511 Labs, all of them are private
25:27companies.
25:30Even for us, whose primary focus is
25:32investing in the liquid stock market,
25:34there is no way for you to invest in AI
25:36Labs either, is there? I
25:39>> can just
25:42>> ask a very simple question, but I think
25:45it's worth explaining: where is the
25:48guarantee, or I don't know if it's
25:50possible to be 100%certain about this,
25:53this greater barrier for these companies
25:56, right?
25:58What makes you more comfortable having
26:00them, because every choice is a
26:01renunciation, right?
26:03You're choosing to have these companies
26:05instead of having, let's say, the
26:07purebred AI companies, right?
26:09Those that are more directly exposed to
26:11this. And
26:13>> what is also a way to construct the
26:15portfolio, where you have a risk-return
26:16ratio that is more interesting for your
26:18specific needs?
26:19Just to elaborate further on this:
26:22>> Yes, we think a lot about the portfolio
26:24to have a very good balance and to have
26:26a conservative construction, even to see
26:28how little we suffered on Monday because
26:30of that.
26:32And it's true.
26:33If you look, for example, at the stocks
26:36that rose the most in the AI theme, we
26:38didn't have the ones that rose the most
26:40, because those that rose the most were
26:43usually companies that were either not
26:45making a profit or, uh, today are at a
26:47valuation that presupposes huge growth
26:50ahead.
26:51What we did was choose the companies
26:54that had the highest barriers to entry.
26:56And now, addressing your question, we
26:59went after these companies with this
27:01perspective.
27:03So, for example, in semiconductors, in
27:06our opinion, which two companies are
27:08indisputably the leaders in the segment
27:10?
27:12TSMC. And how do we judge TSMC's
27:14barriers to entry?
27:16It's based on market share and capital
27:18barriers, right?
27:21Infrastructure, real assets are perhaps
27:23the simplest way to think about a
27:25barrier to entry, right? If I have a
27:28large shopping mall, like Barra Shopping
27:30, the barrier to entry is that there's
27:32no land next to it. So,
27:34>> TSMC
27:37>> has dozens of factories worldwide, it
27:39has a market share of practically 100%
27:42of all high-end chips, the most advanced
27:45nodes, it produces for the entire
27:48industry.
27:49Remember that Nvidia and AMD are chip
27:52design companies, but they don't produce
27:54.
27:56So, the barriers to entry are market
27:58share, factories, and capital.
28:00It's a company that invests 60 billion a
28:02year in capital expenditure.
28:04So, there is practically no company that
28:07can invest that amount of capital every
28:09single year. Therefore, it was very
28:11clear to us that there was a huge
28:12barrier to entry here.
28:14>> And I think we were right, the stock
28:16went up a lot, and when we look ahead,
28:17we think it will continue to rise
28:19significantly.
28:21If we look at it, one of the critical
28:23paths to producing a chip is the
28:25lithography part.
28:27These are the machines where you print
28:29the wafer, right, on silicon.
28:32And today there is a monopoly here that
28:34is SML, which is a Dutch company, and it
28:36is a firm that is also a part of our
28:37current investment portfolio.
28:41And we also have an investment in NVIDIA
28:43, which again is a company that we know
28:46has 80-90%of the market share worldwide
28:48.
28:49So it's very clear that we didn't try to
28:52score a bicycle kick; we went for the
28:54obvious choices, and the obvious choices
28:57rose a lot because the trend is very,
28:59very strong.
29:01So, regarding semiconductor
29:03infrastructure, hyperscalers, and also
29:05in the area of computing, we could have
29:07taken several different paths, is that
29:09not correct?
29:11The most aggressive approach would have
29:13been, for example, to buy what people
29:14call Neo Clouds, right? These are small
29:17companies that are building data centers
29:19to rent, to sell computing capacity to
29:22Zlabs.
29:24We decided to go through the biggest
29:26companies in the world, Microsoft, AWS,
29:28even Oracle, which we had in the past.
29:32And why, again, is capital a barrier to
29:36entry?
29:37These companies are doing capex of 200
29:40billion per year.
29:42Nobody has that. We're in a world where
29:44Brazil has fiscal problems, but the
29:45United States has fiscal problems,
29:47France has fiscal problems, everyone has
29:49fiscal problems. So, there's a lack of
29:52capital to a certain extent, right? So
29:55these companies are currently on the
29:56frontier of capital allocation and are
29:58allocating a lot of capital. So, I think
30:00that unlike the market, which judges a
30:02lot whether this capital allocation will
30:04have a return or not, we're on the side
30:05that believes it will have a return.
30:08So if you allocate a lot of capital for
30:10a good return, that's good, right? So we
30:13have hyperscalers, and we also think
30:15that the return is enormous, right?
30:18Not to mention, for example, that
30:20Microsoft, the largest software company
30:23in the world, is in almost every home
30:25and has connections with almost all the
30:28major companies in the world. So, when
30:30it launches a product, distribution is
30:32very easy. Therefore, it has a very high
30:35barrier to entry from a distribution
30:37standpoint. When we move to the software
30:39layer, we once again find two companies
30:42that, in my opinion, indisputably
30:44possess the highest barrier to entry
30:46within the software industry. the
30:48largest are SAP, which is a German PR
30:51company, and also the biggest market for
30:53public relations.
30:56RP, that software that, for example, BMW
30:58uses in all its factories, so you'll
31:00never change software, oh no, because a
31:02while ago there was a narrative that
31:04software companies were going to
31:05disappear because they could code with
31:07AI, right?
31:09So, we have SA and we have Microsoft.
31:12So, we decided to take larger positions
31:14, concentrated in these companies that
31:16have a huge barrier to entry.
31:19I understand the three boxes now, but
31:24I think every thesis has to have its
31:26counter-thesis, right? Where am I wrong
31:29?
31:31Where could you be wrong in the software
31:33companies, in the hyperscalers and in
31:36the software developers, right?
31:41Where is the risk in each of them?
31:43>> Good, in the hyperscalers and in the
31:45semiconductor sector, it's in the
31:47adoption of AI, so the big risk for this
31:50thesis is that society, that companies
31:52don't adopt it, right, don't pay for it
31:54, right, I think it's better than
31:57adopting it because they've already
31:59adopted it, right? You look, for example
32:01, at chatpt, the number of users, it
32:03already has 1 billion users, meta, I
32:04think it says it has 700 billion on meta
32:06. Hey, so I think everyone already uses
32:08it in the most developed countries, the
32:10people who work, I think society has
32:12adopted AI.
32:13The big question is the speed of
32:15monetization, of charging for AI.
32:19So, where we could be wrong is that
32:21these companies will find it
32:23increasingly difficult to charge for the
32:26use of AI in their offerings.
32:29Then you can have the argument of open
32:31source models, you can have the argument
32:33, for example, of running models on the
32:35ED, right, which is, for example, on a
32:37laptop.
32:39So, what we are constantly monitoring is
32:42how much OpenAI, Anthropic, Google, all
32:44these large companies are managing to
32:47generate in revenue measured in dollars
32:49per month from AI.
32:53And when you look at the trajectory like
32:55this, Anthropic multiplies its revenue
32:57by 10 in 3 years, right? It's impressive
33:00to think that Anchop is a company that,
33:02if I'm not mistaken, is only about 5
33:04years old.
33:05It should end this year with a revenue
33:08of between 80 and 100 billion dollars.
33:12This company didn't exist 5 years ago.
33:14So, the speed of revenue growth, right?
33:20Because the token spending is much
33:22higher than that, but I'm talking about
33:23actual money, it's enormous.
33:25So, at the end of the day,
33:28>> the macro variable to monitor risk is
33:31the derivative of revenue growth in A,
33:33because it's this revenue that kind of
33:36pays for everything, right?
33:39It pays for the capex of Hypercalers,
33:42which in turn
33:45is Nvidia's revenue, which in turn is
33:48Nvidia's cost, which is TSMC's revenue.
33:53So here's the big point of attention.
33:56Uh-huh
33:57.
33:57>> Everything we see at the margin leads us
34:00to believe that it will continue to grow
34:03very quickly.
34:05I think
34:08you're certainly already using it, right
34:10? And it's for various things.
34:13We here at Arbore use it a lot
34:14internally, and I think all companies
34:16nowadays are using it more and more.
34:19>> So I think it's a resource that will be
34:21much more valuable. It's the first time
34:23in history that you can sell
34:24intelligence, right?
34:24>> Uh-huh.
34:26So there is indeed a positioning as a
34:28company, almost like a citizen, whether
34:31you are enthusiastic about technology or
34:33not. It's
34:34>> not that I've even reached this point
34:37because, since you look much more at
34:40companies abroad than I and other equity
34:43managers do,
34:46you must also have a greater perception
34:48of how artificial intelligence is being
34:49implemented and adopted, and even the
34:51risks it faces abroad, right?
34:53There was a recent discussion, I always
34:56talk about this discussion, a BTG event
34:58where Roberto Salut moderated a
35:00conversation with Mat Veloso, where he
35:03talks a lot about the implications of
35:05artificial intelligence and even its
35:07risks abroad, and how this conversation
35:10is completely distant from reality here
35:12in Brazil.
35:14Here in Brazil, we talk more about, oh,
35:17how many people can I fire by having a
35:19little robot run here.
35:22So, what are you seeing out there that
35:24we here in Brazil, perhaps due to
35:26distance or not following that universe
35:28of companies, following Bloomberg news
35:30much more and so on, but not doing the
35:32same legwork that you guys do, what are
35:34you seeing out there that you can bring
35:37to us?
35:38No, excellent point.
35:39I think we're at the very beginning,
35:42because today when you look at AI
35:44monetization, it's almost entirely
35:46limited to developers.
35:48The bulk of AI monetization in the world
35:50today is in the code side. And everyone
35:53knows that, as you put it.
35:56I think the easiest approach is to try
35:58to automate processes, which is an area
36:01where we
36:03>> look for companies that can
36:04significantly improve margins with AI. I
36:06believe this is a subject that will
36:07generate a great deal of value over time
36:09. You look at the margins of companies
36:10in the SPI (Brazilian Institute of
36:11Productivity and Innovation) and they're
36:12already rising because of this.
36:14It's undeniable that companies will
36:16become much more profitable by replacing
36:18people with AI.
36:20So I'm not at all belittling that, but I
36:22would say that's where we are and it's
36:24going to grow a lot.
36:26AI for individuals is practically not
36:29yet charged, right?
36:31Whether it will be pure advertising,
36:32whether it will be by subscription, how
36:34it will be, is still not defined.
36:36Where we are entering now, which I think
36:38is a subject that is perhaps easier for
36:41the audience to understand because it's
36:43in everyday life, is agentic AI, right?
36:45It's the idea that through, for example
36:48, MES, which is an application that Meta
36:51launched, everyone will have an AI
36:55in their pocket.
36:57So, annoying things that you have to do
37:00, like, I have to cancel a subscription
37:02, I need to reschedule an appointment, I
37:05want to book a trip, well, I can have an
37:08AI agent that will help me do that.
37:11So I think that in the future everyone
37:13will have an artificial intelligence
37:15agent helping them in their daily lives
37:17and the industry will be able to charge
37:18for it over time.
37:21That's why every technological wave
37:23starts with engagement, then comes
37:24monetization.
37:26So a major debate that we are currently
37:28having here, for example, concerns what
37:31will happen to e-commerce in the world
37:33of agency.
37:34Because nowadays, if you go to the
37:36Mercado Livre, Amazon, or even
37:37Booking.com websites, what's the
37:38experience like? You enter a screen
37:40that's a Google experience, right? You
37:43put in more or less what you want, click
37:44there, and that's it. Exactly.
37:47>> And this Google experience opens up a
37:49huge opportunity for the company that
37:51has this Google experience to charge,
37:53because Mercado Livre, in addition to
37:54charging its take rate, charges a lot
37:56for prioritizing you in the person's
37:58eyes.
38:01The moment I buy a TV through my agent,
38:03machine-to-machine, you take the biggest
38:06profit pool on the internet today, which
38:09is the advertising part of that
38:11e-commerce site.
38:13That's a question, right? It's not a
38:14conclusion we've reached,
38:16>> but you have a trillion dollars of value
38:18here that can be shifted somewhere.
38:21>> Just to understand, I followed along,
38:23but I got lost there. So, I'm on Mercado
38:26Livre (Brazilian eBay), I type in, I
38:28don't know, creatine.
38:30Then it gives me the first option, which
38:31usually even shows the sponsored listing
38:33; they make money from that.
38:34>> Exactly.
38:35>> How could this possibly go from Mercado
38:38Livre to a robot interacting with a
38:40robot?
38:41>> Yes, you would tell your agent, "I want
38:43creatine from the Growth brand," and
38:45your agent would make the decision for
38:47you,
38:48>> okay? They would go directly. So it no
38:50longer makes sense for the person to pay
38:52Mercado Livre to appear there.
38:55So, in this scenario, Mercado Livre
38:57would lose its main source of
38:58profitability, which is putting that
39:00product in your face.
39:03That's interesting.
39:05Because I'm even going to relisten to
39:07that episode going back to São Paulo,
39:09because a while ago Mateus and I did an
39:11episode talking about the history of
39:13Mercado Livre and the managers who
39:15participated.
39:17They were talking about a market that
39:19Mercado Livre was going to attack much
39:21more, which was precisely the market
39:23where Google is dominant, and Mercado
39:25Livre wants to occupy that space. So
39:26this thesis might even, okay, it's still
39:29very much a hypothesis,
39:30>> a hypothesis. Yes,
39:32>> but the path is in that direction. I
39:33think you can think the same thing about
39:35Hotel.com, you can ask the same question
39:37about Booking.com. Yes, there's an
39:39investment of ours that I think I'd say
39:40is the only investment in the portfolio
39:42today that we're reconsidering
39:43>> whether it will actually suffer from...
39:45>> Hey, it's Booking.com, right? Because
39:47there's Xpedia, but the Xpedia of
39:49Hotels.com, right? That's
39:51>> Booking.com. Booking.com,
39:52>> which is practically a monopoly in
39:54Europe. It's very strong in Europe,
39:55especially in Asia, less so in the
39:57United States, but here in Brazil it's
39:59also very strong, but not as much. But
40:00in Europe, which is the largest
40:02destination market in the world, it's
40:03practically a monopoly.
40:06And the experience of thinking about a
40:08travel itinerary with artificial
40:09intelligence is already common, but
40:11nowadays you'll ask me for help with a
40:13trip to Madrid and suggest an itinerary
40:16, and I'll go to siteedub.com and book
40:18there, or I'll go to RBNB and book there
40:20.
40:21Of course, I'm jumping ahead to the
40:23future, but the market anticipates the
40:25future too much. When the market senses
40:27that the future is here, companies start
40:29multiplier-level marketing, right? And
40:32today the market is sniffing out a
40:33disruption in the e-commerce market.
40:35Again, it's a hypothesis that we're
40:36monitoring all the time, but where would
40:38this money for AI come from? One
40:40hypothesis could be here as well.
40:43So, this is more of a short-to
40:46medium-term hypothesis.
40:48And in the very long term, I believe
40:50that we are going to see companies being
40:54built upon entirely new business models
40:56that do not even exist yet, right?
40:59A major source of enthusiasm for the
41:01founders of OpenAI, the founder of
41:04DeepMind, and the team at Anthropic is
41:06the prospect of finding solutions for
41:09diseases that currently have no cure,
41:12such as various forms of cancer.
41:16So, when AI stops being sold by token—
41:19meaning how many tokens I used
41:21multiplied by the cost per token, as a
41:24token is practically a sequence of
41:26letters or numbers—when the model shifts
41:29from this to
41:31>> monetizing by results, you may
41:33experience a complete change in revenue
41:36, and that is how a company might charge
41:39for it.
41:40To make this argument tangible, for
41:42example, today you have companies with
41:44many customers who complain a lot. Think
41:46of a company like Vivo, a telephone
41:47company with millions of customers;
41:49probably a huge cost line for them is
41:51their call center.
41:53Nowadays, of course, they use a lot of
41:55technology, but this technology is
41:56usually charged per customer, right? So
41:58, I have, say, 20,000 people in my call
42:01center, I pay x times 20,000.
42:03That's my cost with this technology.
42:07But today, a company like Sierra, like
42:09Nice, an Israeli company, what's their
42:10business model today?
42:13Instead of selling you a seat in your
42:15call center, I'm going to be that person
42:17.
42:18So I leave a profit pool, a software
42:20company, and go to a profit pool of a
42:22person.
42:24So there are, I think, infinite
42:26opportunities, but all of them are
42:28actually possible to pinpoint that's
42:31what it is.
42:32>> It's more of a world direction,
42:34>> right?
42:35But even in the case of Vivo, right, any
42:38operator, I believe that many Brazilians
42:40aren't sure if they're using the best
42:43plan for their needs, but because of the
42:45difficulty of calling someone, being in
42:48a store and everything else: "Ah, let me
42:50use this plan, I'll see about that later
42:53," right?
42:54So, and that's where I think a lot about
42:56drawing parallels with the financial
42:59sector, right?
43:00Look, how much we used to spend or leave
43:03on the table because we had all our
43:05investments in the big banks.
43:08>> And then the opening of the platforms
43:10showed us that we could make the same
43:12investment, even better, paying less.
43:15So imagine if artificial intelligence
43:17helps you choose the best plan according
43:19to what you actually use, which is much
43:22cheaper, sometimes you have another
43:24provider, and you don't have to go
43:26through all that hassle.
43:28There's also a cost aspect that can help
43:30the providers, right, in customer
43:33service, but there's also a revenue
43:35aspect that can be impacted by
43:37not-so-good plans, which exist due to
43:39the slowness or difficulty of
43:41implementation.
43:43But let me ask you a question.
43:44We can come back to this later, but you
43:46said, right, at the beginning: "Hey,
43:48we're here with Charlie Manger's books,
43:49you're a Warren Buffett enthusiast."
43:53How does the philosophy of Voluntary
43:55Investing, right, of our young people
43:57from Omaha,
44:01connect with this,
44:05this agility, this, well, this somewhat
44:07futuristic talk,
44:09>> which should enter your minds when
44:11studying EAs and reading about these
44:13founders and everything else, how one
44:15thing connects with the other or not,
44:17they are two different things.
44:20>> I would say Solomon, which is the same
44:21thing.
44:22Because what did I learn?
44:24If I were to summarize Buffett's lessons
44:26, for me it's common sense.
44:30That idea that if you have, if you're a
44:32genius, if your IQ is so far above
44:34average, sometimes it's better to donate
44:36some of that IQ and have common sense.
44:39And common sense is very important.
44:40Common sense prevents you from making
44:42mistakes at events, like an election. So
44:44common sense is a filter for brilliance
44:46.
44:47It makes you do the basics well.
44:51So when I talk about money, like when
44:53we're investing in AI, all of this is
44:54common sense, knowing that the future is
44:56impossible to be certain about, so I'm
44:57going to play the sure shot, I'm going
44:59to score an ugly goal, but I'm going to
45:00score.
45:02>> So I take a lot from Buffett.
45:05>> The second point Buffett talks about a
45:07lot, you know you're a great,
45:09knowledgeable reader, your fund also
45:12follows Warren Buffett's philosophy, and
45:14it's doing very well in business.
45:18I think the idea of a good business
45:22will never change.
45:24A good business, for me, is one where
45:26you invest a certain amount of capital
45:28and more capital comes out of that
45:30capital. You have to have a good return
45:32on capital.
45:33What has changed a lot, right?
45:36If you look at the time when we lived in
45:39a rural society to today, it's very
45:41clear how things are accelerating, right
45:44?
45:45I think after the industrial revolution
45:47, the world started to accelerate the
45:49pace of progress a lot, right?
45:52So, if you look after the baby boomers,
45:54after World War II, you had perhaps
45:56until the 80s a world where not much
45:58changed.
45:59You had a big demographic boom, an
46:02income boom, but you didn't have any
46:04major technological disruption.
46:08What came with the launch of more
46:10powerful semiconductors, computers, cell
46:12phones, the internet, the cloud, AI now
46:15is that the pace of technological
46:17evolution has exponentially increased.
46:20And why does this connect so much with
46:22Buffett? Because Buffett talks about
46:23Moles all the time.
46:26The pillar, I would say, of Buffett's
46:28approach is high quality and barriers to
46:30entry, right? He brings up the idea of
46:32the castle, right? You have to have a
46:33lake with crocodiles surrounding the
46:35castle.
46:36And Buffett's brilliance is that he
46:38takes very difficult concepts and makes
46:40them accessible.
46:42Uh-huh.
46:43>> But sometimes the conclusion is that you
46:45should only look at businesses that are
46:47too simple.
46:48And that's where I think we differ, that
46:50I think the message behind it is: you
46:52have to look at the barriers to entry,
46:53but you have to know that the world has
46:55changed.
46:58Nowadays the world is going totally
47:00towards technology, and the good part of
47:02that is that you have businesses like
47:04Antrop that go from zero to 100 billion
47:07dollars in revenue in 5 years, which
47:09would have been impossible 10 years ago
47:11.
47:13So whoever managed to ride the wave of
47:15Antrop's investment, right, it's worth 2
47:17trillion dollars, right? So 2 trillion
47:19dollars of wealth were created in 5
47:21years.
47:22OpenI too.
47:24So there's a very positive side to this
47:26, but there's a very negative side: most
47:29companies are completely threatened,
47:31their business models are completely
47:33threatened.
47:36So I think that as a value investor you
47:38have to be very careful not to fall into
47:41the risk of "I'm going to buy at a cheap
47:43multiple" and that's being conservative
47:46, but sometimes you're buying a business
47:48that's going to end.
47:52So that's the big challenge nowadays,
47:54right?
47:55Because in the example we were giving of
47:57cell phone companies, of agents helping
47:59to compare prices, for example, physical
48:01retail became much less profitable when
48:04the internet came along, because the
48:06internet brought transparency, right?
48:09So this very transparent world, where AI
48:12will help you make all the decisions
48:14that exist, will impact the margins of
48:16all companies, right?
48:18Uh-huh.
48:19>> For example: TV subscriptions, Netflix,
48:22and Paramount.
48:24All of this is a big problem nowadays,
48:26the cancellation rate is increasing,
48:28because when you open an app like this,
48:30the first use case it encourages you to
48:32use is to connect it to your email and
48:34see the subscriptions you have that you
48:36don't use.
48:39So, that's how we connect. We really
48:41want to keep up with what's happening. I
48:43think that to create barriers to entry
48:45in the long term, you have to be a bit
48:46futuristic. But if you look at our
48:49portfolio today, there are very few
48:51futuristic things. So we have to be in
48:53the future to think about the present,
48:55because the future will eventually
48:56arrive and the market anticipates the
48:58future, right?
49:00But our portfolio today has nothing
49:01speculative; they are all businesses
49:03that have been profitable for a long
49:05time with low multiples. So Buffett is
49:07the father of philosophy, right?
49:13When you talked about physical retail
49:16starting to lose margins with the advent
49:19of the internet, man, on a trip I took,
49:22I think about 8 years ago in the United
49:24States, I was at an American's house and
49:28we went to buy one of those portable
49:35speakers, and we went to a store that
49:37specializes in electronics, and I saw
49:39the speaker and said: "Wow, this is it,
49:41I'm going to buy it, let me get it." He
49:43said: "No, no, no. What are you going to
49:44do?""Well, I'm going to buy it?" He said
49:46: "No, but did you check Amazon's price
49:47?"
49:48I said: "What do you mean?""No, because
49:50sometimes it's cheaper on Amazon." He
49:52opened the app and said, "Look,
49:54>> it's cheaper on Amazon."
49:57I said: "Damn, but then I'll have to say
49:59: 'No, do this, give me the money, I'll
50:01buy it here and he'll deliver it to my
50:03house tomorrow.'"
50:05Then he said: "No, but we're not going
50:06back tomorrow, we were traveling, right
50:07?"
50:08"He said, 'No, but they leave it at the
50:09door and then pick it up.'
50:12So, this is such a simple case from 7 or
50:148 years ago, but it shows a lot about
50:16how this trend is practically structural
50:18, right?
50:19How it impacts habits, and that's very
50:22much it, right?
50:25Consumption habits change according to
50:28the transformation of society, the
50:30usability of...the adherence it has in
50:32society, which can take weeks, months,
50:34or years, right?
50:37And the faster this happens, the more it
50:39seems like the direction is set, right?
50:42It's totally set. You think
50:45>> that retail consumption is going to the
50:47internet, and within the internet,
50:48decisions are going to machines; you're
50:50going to a much more competitive world,
50:52right?
50:53For example, I was looking at a trip on
50:55Booking.com; you can book and then
50:57cancel for free. Then I went to change
50:59the date, and the price had gone down. I
51:02think it's very common with airlines;
51:04the price fluctuates a lot, right?
51:06You kind of don't understand the pricing
51:07very well, right? At the moment, a
51:09machine is making the best decision for
51:11you,
51:12>> almost like a..." tr.
51:13>> In the past, the machine used you as a
51:15source of profit.
51:16Now, your machine will use them as the
51:19best possible business. Uh-huh.
51:20>> So, when we think like that, we have to
51:23be very careful about the long-term
51:24profitability of companies.
51:26>> So, today we don't have any company that
51:31sells a product, a service, any company
51:34that will suffer from this hypothesis.
51:36Now, you can take some time to think
51:38about it, because I don't know if you
51:39have the answer on the tip of your
51:40tongue.
51:42But is there something from the past,
51:45something more, uh, old school, that is
51:48still a good investment or could even
51:51become a good investment because of
51:54these societal changes?
51:56I don't know, something that connects
51:59people more, anyway. Uh, there is
52:01something that, in fact, has actually
52:04increased the barrier to entry or has
52:06simply become something with a high
52:08barrier to entry due to these societal
52:11changes.
52:12>> Without a doubt. So, even bringing it a
52:14little, using examples from our
52:16portfolio, we have, for example, an
52:18investment in the aerospace sector,
52:20right? Uh, turbines and components that
52:23go inside the airplane,
52:24>> right? This is a sector with decades and
52:27For decades, it's a sector that won't
52:29change. I think the airplane turbine,
52:31without a doubt, with each generation it
52:33becomes better, more efficient.
52:35The engineering process becomes more
52:37technological, but for all intents and
52:39purposes, it hasn't changed much, right
52:40?
52:42So in our minds, it's like this: either
52:44I'll be invested in businesses where the
52:46change is positive, or I'll be invested
52:49in businesses where there won't be any
52:51change.
52:53So infrastructure is a business that...
52:55what's
52:56>> the name of that airplane turbine
52:57company? There's Safran, a French
52:59company that uses engines for all
53:01smaller regional flights.
53:04And there's GE Aerospace, which GE went
53:06bankrupt and spun off; one of the
53:08companies that spun off is called
53:10Aerospace, which makes engines for large
53:12and small airplanes.
53:14And what's the appeal of this business
53:16model, right?
53:17It's that Buffett, bringing Buffett's
53:19analogy again, who talked a lot about
53:21Gillette, an investment he really liked
53:23, said that Gillette didn't make money
53:24when it sold you the razor for the first
53:26time.
53:28It made...Money was made when you
53:30replaced the blade, which he named Razer
53:33, Razor Blade, business model. Airplane
53:36engines are the same; an airplane engine
53:37stays in the plane for about 40 years.
53:39When he sells the airplane engine, he
53:41doesn't make a profit.
53:42In most cases, he loses money. But where
53:45does he make the money? Because you have
53:47an engine running in an airplane for 40
53:50years, and due to regulations, he has to
53:52buy the part from you. So the guy loses
53:55money selling the engine, but makes
53:57money for 39 years selling the part to
54:00airlines.
54:01So it's a business that won't change
54:03with the...it's a business that has a
54:05gigantic barrier to entry, and it's a
54:07business that I can look 20, 30 years
54:09ahead and have a very high degree of
54:11confidence in what will happen.
54:13>> Great.
54:14I think that, for example, shopping
54:16malls, okay, e-commerce will grow, but I
54:18think that shopping malls in good
54:20locations tend to appreciate in value.
54:22I think that infrastructure captives, I
54:24think that businesses, since the world
54:26today is so virtual, I think that
54:27physical businesses, right?
54:30You For example, look at how much sports
54:32franchises are appreciating, like
54:34stadiums, for instance, Maracanã.
54:37Maracanã should be an asset that will
54:39grow significantly in value over time,
54:41right? Because at the same time that
54:42people are so very virtual, they also
54:44really want to be physically present,
54:45don't they?
54:46So, that's a
54:47>> good comparison.
54:50And you even mentioned shopping malls, I
54:52wanted to ask: how much does
54:57this comparison of sectors that exist
54:59here and abroad, but with a completely
55:01different perception and vision, fit
55:04into your discussions here within the
55:06group, or even in exchanges of ideas
55:08with other managers, given that you are
55:10here in Brazil? You mentioned shopping
55:12malls, for example, a shopping mall in
55:14Brazil is different from a shopping mall
55:16in the United States, right? The model,
55:18the location.
55:21We recently met with the CEO of Smartfit
55:24, Diogo Corona, and he explained that
55:26Smartfit was actually inspired by a
55:29low-ticket gym in the United States,
55:31right?
55:32I think it was
55:34>> Planet. Fitness, right? Planet Fitness,
55:36which even the guy said, "No, the
55:39exterior is really ugly," so people
55:41wouldn't stay too long, so they'd come
55:44to train later, because they had way
55:46more registered students than capacity
55:48to accommodate them, right? So,
55:53two sectors that are completely similar
55:55, yet they possess dynamics that are
55:56entirely different.
55:58>> Uh, how does that work in day-to-day
56:00operations? How much of your experience
56:01here in Brazil also helps to draw this
56:03parallel? Anyway,
56:04>> I think this question is extremely
56:06important, and I think this is the great
56:08strength of having a more diversified
56:10mandate from a regional point of view,
56:12because here we are divided sectorally,
56:14and whoever looks at financials and
56:16payments in Brazil will look at the
56:18United States, China, everywhere.
56:20>> Meaning, you have to look from JPMorgan
56:22to Itaú.
56:22>> Yes.
56:24And I think comparing business models in
56:26different regions is precisely one of
56:28the great superpowers of an investor,
56:30because you can have a much more
56:32complete view of whether the business is
56:34good or not.
56:35That's bad.
56:37>> Uh, so you used the example of shopping
56:39malls, and I completely agree with that
56:42.
56:43The Guatemalan shopping mall or Barra
56:45Shopping are very, very good assets,
56:47whereas many strip malls in the American
56:49countryside will probably end up there.
56:52There are many more shopping malls, so
56:53you have to make the comparison. For
56:55example, in Brazil you have Pix.
56:57>> Pix is the most widely adopted instant
56:59payment method in the world. So
57:01investing in an acquiring company in
57:02Brazil is much worse than investing in
57:04an acquiring company in the United
57:05States. So you need to take that into
57:08account
57:11all day long, and knowledge of one place
57:13helps a lot in another.
57:16I think there is always one question
57:17that we receive, Solomon, which is the
57:20following one: are you guys specialists
57:22or are you generalists? Well, a
57:24specialist is someone who understands a
57:26small group of companies very, very,
57:29very well.
57:31And a generalist, hypothetically, is
57:32someone who understands the world or who
57:34invests in several companies around the
57:36world and has a line of reasoning that
57:38thinks: "I'm going to have an army of
57:40specialists and I'm going to be a..." Is
57:42it a generalist at the top, where I'll
57:44allocate capital among my specialists,
57:46or will I have several specialists at
57:47one desk, each making the best
57:49allocation within their core area?
57:51This is a big discussion, I think, about
57:53the organizational structure of
57:55investment firms, right?
57:57And we think that, of course, ideally
57:59you're somewhere in the middle; you need
58:01a lot of tacit knowledge.
58:03But I think that, again, thinking about
58:05the future, where you have much more
58:08fluid and easier access to information,
58:10and you have a genius in your pocket,
58:12right?
58:13You'll have a PhD in every subject in
58:15your pocket.
58:16I think there's an argument to be made
58:18here, that the seesaw shifts a bit from
58:20the great specialist to a bit more
58:22towards the generalist.
58:23And for me, what is a generalist in
58:26investments?
58:28It's someone who has good judgment and a
58:30good risk-return analysis across
58:32different asset classes and in different
58:35regions.
58:38So,
58:41in the future, I think philosophies with
58:44a broader mandate, right?
58:47I think that's already happening in
58:49Brazil, will...These changes are
58:50inevitable, right? We see many managers
58:53wanting to make broader investments,
58:54which has become a lot more accessible
58:56in the current day and age.
58:58>> And going back to the beginning of the
58:59conversation, do you think what we saw
59:01in the second round of elections, Lula's
59:03victory, should accelerate this process
59:04?
59:05I'm even thinking about the longevity of
59:09the business, not just the investment
59:12itself, but the equity fund management
59:16business, because we know it's a highly
59:20scalable market. You can have a small
59:23team, and double the number of people
59:25won't necessarily give you double the
59:27results. Sometimes even a larger team
59:29can be detrimental.
59:31So you can have very good results with a
59:33lean team, and in a year or two you're
59:35already making an absurd amount of money
59:37from the performance, but the opposite
59:40is also true, right?
59:42Because if you don't have very good
59:43performance, it becomes difficult to
59:45maintain the team.
59:47And what we saw after the second round
59:51was a disastrous result in investment
59:54funds,
59:58also due to the Ibovespa having a lot of
1:00:00exposure to...Petrobras and Vale were
1:00:02two companies that didn't fall as much
1:00:04as most of the stocks in the funds;
1:00:06these funds naturally end up falling
1:00:09more than the Bovespa index. So, there's
1:00:11a risk, you said, that the stock market
1:00:13is still up this year.
1:00:15Yes, but maybe not all funds are
1:00:17outperforming the Igovespa or even in
1:00:18positive territory.
1:00:21And then you perpetuate this for another
1:00:244 years of a structurally negative
1:00:26market.
1:00:28Anyway, could it be that, more than an
1:00:32alternative, it could even be the
1:00:34solution or salvation for these asset
1:00:36managers to start looking abroad?
1:00:38I think it's the only solution, because
1:00:42, again
1:00:46, I come from a point of view that has a
1:00:48bias, having built a business that
1:00:50focuses abroad. So, I think that after
1:00:53what has just happened, I am almost
1:00:55certain about this, because it is going
1:00:58to be a very difficult situation indeed
1:01:01.
1:01:02I think that a country with interest
1:01:05rates at the level it has, even more so
1:01:08with these tax-exempt bonds, requires a
1:01:11very high return.
1:01:13From an equity fund to a viable
1:01:15financial product, right?
1:01:17And the shares performed poorly for a
1:01:18long time, right? And now they've
1:01:20suffered again.
1:01:22And again, it's the unpredictability;
1:01:24it's the enemy of the investor, and
1:01:26Brazil is the land of the unpredictable
1:01:28.
1:01:29So the game these people are playing is
1:01:31very difficult. It's very difficult.
1:01:34I greatly admire my peers who only
1:01:36invest in Brazil and how good they are,
1:01:38how they manage to generate good returns
1:01:40, playing a very difficult game.
1:01:43My game is much easier, right?
1:01:47For instance, since the time we started
1:01:49Arbor, our fund has managed to
1:01:51outperform 96%of all the stocks that are
1:01:54currently listed.
1:01:56So, only three stocks in Brazil have
1:01:58performed better than our fund has since
1:02:00we first started operating.
1:02:02And it's not because we were brilliant,
1:02:04it's because when you look at any
1:02:06statistics on ease of making money and
1:02:08compare Brazil and the United States,
1:02:10it's much easier there.
1:02:12On average, stocks rise more, many more
1:02:14stocks rise more than fixed income.
1:02:17So, in that game of one-on-one choosing
1:02:19Randomly, a monkey choosing stocks,
1:02:21there you'll have a much better return
1:02:22than here.
1:02:25So, there's that thing that's much
1:02:27easier there, what I call the base rate
1:02:28, right?
1:02:29Nothing changing, the inertia there is
1:02:30much better than here. And here nothing
1:02:32will change in 4 years.
1:02:34And besides that, there's the issue of
1:02:36the interest rate differential and its
1:02:38impact, for example, comparing my fund
1:02:40with the Ibovespa, just so as not to
1:02:42personalize the comparison.
1:02:44Today, when we have our vehicle for
1:02:46Brazilian investors open on the
1:02:48platforms, it is effectively netted.
1:02:51We have a dollar-denominated vehicle
1:02:52that went up on Monday because it's
1:02:54dollarized, right?
1:02:56>> Sorry. It's just that this term "netted
1:02:58" doesn't make any sense to me.
1:03:00To be netted because the dollar is
1:03:02converted into reais. It's very strange
1:03:04, isn't it? The netted fund should be
1:03:06dollarized, right? But anyway.
1:03:08>> Yes, we have a fund that eliminates
1:03:10exposure to the dollar. I think that's
1:03:13true.
1:03:14>> But in this fund, uh, in addition to the
1:03:17performance of the stocks, you earn a
1:03:19large part of the CDI.
1:03:21So, for For example, if I buy a basket
1:03:23of stocks that rises 10%in dollars and I
1:03:25buy a basket of stocks that rises 10%in
1:03:27dollars and the Ibovespa rises 10%, my
1:03:29fund didn't equal the Ibovespa, I still
1:03:31gain an interest rate differential.
1:03:33So, in this scenario I will rise 18%.
1:03:36So,
1:03:38>> wait, wait, just so people understand
1:03:39exactly, explain this interest rate
1:03:41differential math better, which I think
1:03:42is a very important point.
1:03:44>> Of course.
1:03:45Uh, interest rates...comparing stock
1:03:48market multiples and investment
1:03:50opportunities without considering the
1:03:52currency you're comparing is a very
1:03:55common mistake.
1:03:57I joke that since we started Arbor,
1:03:59every day people tell me that the
1:04:00Brazilian stock market is cheap and the
1:04:02American stock market is expensive. And
1:04:04I think it's continued like that now.
1:04:07And the big point that people don't make
1:04:09is that you're talking about completely
1:04:12different interest rate regimes. For
1:04:14example, just to make the calculations
1:04:16easier, let's say the SELIC rate is 15%
1:04:17. Uh-huh.
1:04:18>> Okay.
1:04:19>> So the SELIC rate is...15%here.
1:04:22To simplify the calculation, let's use
1:04:24the US interest rate here, okay?
1:04:273%there, okay?
1:04:29So, when I buy a dollar, when I buy the
1:04:32asset in dollars and make a R $ for 12
1:04:35months from now, a year, the dollar in
1:04:3712 months is the dollar today adjusted
1:04:40by the interest rate differential of the
1:04:43Brazilian Selic rate in dollars. Uh-huh
1:04:46.
1:04:46>> So, the Brazilian interest rate in
1:04:48dollars is the US interest rate plus the
1:04:50Brazilian risk premium. So, just to make
1:04:53the calculation much easier, let's say
1:04:55the US interest rate is 3%and there's a
1:04:57200 basis CDS risk premium.
1:04:59So, Brazil borrows money at 5%in dollars
1:05:02and 15%in reais.
1:05:06Then you can capture that 10%through
1:05:08this operation, which I call a hedge or
1:05:13>> currency lock.
1:05:15>> You are financing at 5%and investing in
1:05:17an asset, as the money is not just
1:05:19sitting there; it is locked into
1:05:21something that yields 15%, so the
1:05:23interest rate differential also goes
1:05:25directly into your pocket.
1:05:27Exactly. So So, if I'm under 10%, in the
1:05:31scenario I gave, my fund just needs to
1:05:34stay the same.
1:05:37So, what's the ideal scenario?
1:05:39The ideal scenario for my fund, for
1:05:41funds that follow this strategy, is that
1:05:44things are going very well abroad and
1:05:46that Brazil maintains a very high
1:05:49interest rate regime, but it can't go
1:05:51haywire, right? It can't, since the
1:05:54adjustment is in the exchange rate.
1:05:58Where this math breaks down is if the
1:06:00capital depreciates more than 10%
1:06:01>> at the time of the adjustment.
1:06:03>> So the ideal scenario is a country where
1:06:06interest rates are very high because the
1:06:08government spends a lot and pretty much
1:06:11no major changes, neither one way nor
1:06:13the other, happen because Congress holds
1:06:16back the executive branch, and Congress
1:06:18is from a political camp opposed to the
1:06:21executive branch.
1:06:23So, if the base scenario is this and the
1:06:26pre-32 yield curve is 15%,
1:06:31let's suppose it's 15%, you'll have a
1:06:33financial product where you'll have the
1:06:36performance of a stock portfolio plus 10
1:06:39%per year.
1:06:42So, I think all managers know this and
1:06:45...For reasons sometimes outside the
1:06:48scope of their mandate and historical
1:06:51context, they can't make that change in
1:06:54philosophy.
1:06:56But the way I think, it's so superior in
1:06:58the current scenario, right, the
1:07:00pre-election scenario, I think there was
1:07:02great enthusiasm for falling interest
1:07:04rates, and if interest rates fall
1:07:06tomorrow, you have a duration effect in
1:07:08the short term, which is very large.
1:07:10>> Yes. And then you combine that with low
1:07:12market liquidity. And then the flow
1:07:14comes, the
1:07:15>> narrow door will open very wide and
1:07:17everything would go up.
1:07:19So, it was an opportune thesis, more
1:07:21opportunistic than structural, which
1:07:23could become structural depending on
1:07:25what the new government did,
1:07:26>> without a doubt,
1:07:27>> but that didn't materialize.
1:07:30So now I think the way out for the
1:07:32industry is to move towards a philosophy
1:07:37of stocks, because stocks outperform
1:07:40fixed income in the long term, uh, in
1:07:43the United States.
1:07:45And this argument is unequivocal in
1:07:47countries with low interest rate regimes
1:07:50.
1:07:50When interest rates are crazy, like in
1:07:52Brazil, you have the statistics we know
1:07:54, which makes everything much more...
1:07:56It's difficult, but the SNP will win.
1:07:59Because, for the SNP to beat the CDI,
1:08:01which is another way to approach this
1:08:03issue, because there's this idea that
1:08:05the CDI is like a penny that never
1:08:07sleeps and it's impossible to beat the
1:08:09CDI.
1:08:11We started the conversation saying that
1:08:12our fund, from the beginning, yielded
1:08:14CDI plus 10%per year. So we yielded 21%
1:08:16, the CDI was more or less 10-11%.
1:08:20So, gross of fees, we yielded CDI plus
1:08:2316%. So, that's a gigantic spread over
1:08:25the CDI. And why?
1:08:27Because interest rates, the CDI endorses
1:08:29that 5%we talked about. So, if the S&P
1:08:32500 yields more than 5%per year, you've
1:08:35beaten the CDI.
1:08:37So it's totally feasible to beat the CDI
1:08:40by investing in stocks.
1:08:43Regarding great wealth, I joke that if
1:08:44you look at the Forbes list, there
1:08:46aren't any rentiers at the top, right?
1:08:48It's
1:08:49>> always an entrepreneur, right?
1:08:51>> So I think the industry will have to
1:08:53adapt.
1:08:54To accommodate and adapt.
1:08:57>> Yes, but that Quinean marathon runner
1:09:00analogy is difficult. It's because he's
1:09:02getting faster and faster, right?
1:09:06Because if the scenario, if the price
1:09:07continues to be what's happening now, I
1:09:09mean, if the economy continues to be
1:09:10what's happening now, we should see
1:09:12interest rates rising again in Brazil.
1:09:14Anyway, it's complex. Oh, Leo, you
1:09:18touched on something that was in my
1:09:21question, that slightly more basic
1:09:23question.
1:09:24A lot of people must be telling you: "
1:09:26Hey Leo, your work is great,
1:09:27congratulations, but I'm not going to
1:09:28invest in the American stock market now
1:09:30, it's already gone up too much, this
1:09:31bubble is going to burst."
1:09:33What do you answer when someone says
1:09:34there might be a bubble in the United
1:09:36States? That it could burst?
1:09:38>> Well, I think, I, I disagree 100%.
1:09:43I, I, I think that, on the contrary, I
1:09:46think that today, if you look at a very
1:09:48simple analysis, if you look at the
1:09:50multiple of the American stock market in
1:09:52the last 12 months, It dropped about 15
1:09:54%in multiples.
1:09:56That's because profits are growing so
1:09:58much that the S&P is rising while the
1:10:00multiple is falling.
1:10:01>> Uh-huh. So, when you look at the S&P at
1:10:0420 times earnings or the S&P 50, if I'm
1:10:05not mistaken, at 14 or 15, right?
1:10:12I don't see a bubble at all.
1:10:14And I say this: in the 12 years we've
1:10:17had the portfolio today, I'd say it's
1:10:20among the 10%
1:10:24of the time where I think our portfolio
1:10:26is cheapest. I think the stock market
1:10:30abroad is cheaper than it has been in a
1:10:34long time.
1:10:36And why doesn't this show up in the
1:10:38multiple? I said the multiple fell a
1:10:39little, but not much. It doesn't show up
1:10:41much in the multiple of the index as a
1:10:43whole because the composition of the
1:10:45index has changed a lot. So when you
1:10:47change a composition, you change the
1:10:49result of that composition. But if you
1:10:51look at company by company, for example
1:10:52, we have Visa, a stock that we've held
1:10:54since the beginning of our portfolio.
1:10:56One from the back, almost 12 years.
1:10:59Today it's at 25 times earnings.
1:11:03It was 37 times earnings in 2021. So,
1:11:05okay, 2021 might be excessive, but if
1:11:07you look at the market then, which I
1:11:09would say was the bubble, the most
1:11:11expensive market moment since we started
1:11:14was 2020-21, I think worldwide, in
1:11:16Brazil too.
1:11:18If you compare the market at that time
1:11:20with the market today in terms of
1:11:22multiples, we must be about 30%lower.
1:11:24Uh-huh.
1:11:25>> And the argument for why this is
1:11:27happening is because the real US
1:11:29interest rate is at 2.5-3%.
1:11:32Interest rates worldwide have risen,
1:11:33right? Which is another problem for
1:11:35Brazilian interest rates.
1:11:36So, interest rates worldwide have risen
1:11:39, which has reduced multiples. So, if
1:11:41fixed income is paying more in the long
1:11:43term, stocks also embed a higher return
1:11:46in the long term.
1:11:47So, we remain very optimistic, I don't
1:11:50see anything losing the bubble in any
1:11:52way.
1:11:55And about Visa, or not so much about
1:11:57Visa and more about holding the
1:12:00investment for 12 years.
1:12:03How is that done? Because 12 years in
1:12:06Brazil, well, that's not even possible
1:12:08...It's more than long term, right?
1:12:10Several World Cups.
1:12:11>> Yes, and unfortunately without a title,
1:12:14right?
1:12:15But what is it, or how is it, to hold
1:12:19such a winning position?
1:12:21I picked the case of Visa because it's
1:12:23been in the fund since the beginning.
1:12:25So, it must be curious to have a company
1:12:26that's been there since day one, you've
1:12:27been following it, seeing the changes,
1:12:29but it's still there.
1:12:30But you mentioned several companies
1:12:32during the conversation, well, the
1:12:34Nvidia case is perhaps the most famous,
1:12:36but several companies that have
1:12:37multiplied their market value by three,
1:12:39four, five, ten times and remain in the
1:12:41fund.
1:12:42How is this balance achieved in practice
1:12:45, on a daily basis,
1:12:48>> to convince yourself that it hasn't
1:12:49risen too much and deserves to remain in
1:12:51the fund? That's it
1:12:53.
1:12:53>> Well, Google was in quota one of the
1:12:56fund, Booking was in quota one of the
1:12:59fund, Amazon Meta, uh, Microsoft for 11
1:13:01years.
1:13:03So, we have a group of about seven
1:13:05companies that we've held for 11 years.
1:13:08To give you an idea, when we bought
1:13:10Microsoft, it had about 20 billion in
1:13:11operating profit.
1:13:13>> It should have 150 billion this year,
1:13:15>> wow.
1:13:16>> So, it multiplied by almost 10. That's
1:13:18the big difference. Profits there are
1:13:20growing a lot, that's why the shares are
1:13:22going up.
1:13:23So, objectively, it's about tracking the
1:13:26valuation and comparing the progress of
1:13:30intrinsic value with price.
1:13:33We use intrinsic value progress a lot,
1:13:35right? What's the fair value of a stock
1:13:37appreciating over time? We believe it's
1:13:39the growth in profit and how much it
1:13:41pays in dividends.
1:13:43So, at the end of the day, if the
1:13:44business doesn't change much in its
1:13:46characteristics, we'll be looking at the
1:13:47company's free flow yield or
1:13:48price-to-earnings ratio and comparing it
1:13:50to growth.
1:13:51From afar, nothing too complex, but what
1:13:55we always try to do is mentally position
1:13:58ourselves and organize the company
1:14:01around themes that are very long-term.
1:14:06We joke: we don't allocate time to
1:14:07perishable things, because I want to
1:14:09allocate time to themes that, when I
1:14:11have a grandchild, they'll be talking
1:14:13about.
1:14:15So, I want to build the company around
1:14:17themes that will always be there,
1:14:19because I can carry this company for a
1:14:21long time.
1:14:22If I try to create an investment
1:14:24philosophy based on opportunistic things
1:14:27, I'll be changing the subject all the
1:14:29time.
1:14:31So, I'll never put myself in a situation
1:14:33where I hold a stock for a long time
1:14:34because I entered a company with an
1:14:36opportunistic bias, with a bias towards
1:14:38falling interest rates, with a bias
1:14:40towards, I don't know, a change, a
1:14:41catalyst, a sale.
1:14:43So, I think what makes this viable is a
1:14:46long-term philosophy that
1:14:50prospected companies like this. So we
1:14:52have, for example, PetroRil, we don't
1:14:55have it anymore, we held it, and it
1:14:57showed a 30-fold increase, I think.
1:15:00C Limited multiplied by 30. Microsoft,
1:15:02since we bought it, has multiplied 10
1:15:03times, Google has multiplied more than
1:15:0510 times. So we have a dozen companies
1:15:07that have multiplied by 10. The fund's
1:15:10share price is at 19, right? The share
1:15:12price since day one.
1:15:14So, again, it's about positioning
1:15:16ourselves in a pro-business region and
1:15:19with this tailwind, which is capturing
1:15:22some of the Brazilian fixed income
1:15:25through the head, right, the
1:15:29>> guy, I think the conversation was more
1:15:32about investments abroad, but this is a
1:15:35very important point, this mechanism of
1:15:38how to capture fixed income in this
1:15:40strategy.
1:15:42But just to be clear, the exchange rate
1:15:44is fundamental, right?
1:15:47So, perhaps a de-anchoring of the
1:15:49exchange rate could end up hindering the
1:15:52result.
1:15:55>> Leo, man, we've already covered a lot,
1:15:57I'm going to do a quick Q&A and a part
1:16:00where you ask more direct questions.
1:16:03I'll include a few questions in the Q&A
1:16:05. The first is: what do you learn the
1:16:07seventh time you go to Omarha that you
1:16:09didn't learn the first time?
1:16:12Good question. I think it's like going
1:16:14to church, you already know what's going
1:16:15to happen, right? But you go and leave
1:16:17happier, right?
1:16:18I think you learn details.
1:16:20It's more, I think the atmosphere is
1:16:22really cool, you get to know it, it's
1:16:24something that won't
1:16:26>> exist anymore, right? Unfortunately, I
1:16:27think there will never be something like
1:16:29that Warren Buffett culture again,
1:16:31because besides being an excellent
1:16:33investor, he was an excellent human
1:16:35being, right?
1:16:36So I think it still is, right? It's just
1:16:38that he won't be present at...Yeah,
1:16:40>> but I asked the same thing to Frederico
1:16:43Vontobel from VC Investimentos, who,
1:16:45when we went to Omarha, we went with him
1:16:47and he went, I think, for the eighth or
1:16:49ninth time.
1:16:51Then I asked the same thing, what do you
1:16:52learn the eighth time? Didn't you learn
1:16:54it the first or seventh time?
1:16:56Then he said, "We learn to remember what
1:16:59we can't forget."
1:17:00>> Great. So that's a
1:17:02>> lot like going to church, right?
1:17:03You know everything that's going to be
1:17:05said, but it's about remembering what
1:17:07you shouldn't forget. Very good.
1:17:09Uh, Leo, a book to recommend to our
1:17:12audience. Two, actually, one more
1:17:14market-oriented and one more open-ended
1:17:16. Something you've read recently or that
1:17:18has really impacted you? I'm
1:17:19>> going to draw inspiration from the
1:17:21conversation we had before coming into
1:17:24this room and reread Buffett's letters.
1:17:26>> Oh, great.
1:17:28Because I always do that.
1:17:31I like to pick a period in history, what
1:17:33he said during the 1987 Crash or the
1:17:35crisis,
1:17:36>> and I go into specific topics,
1:17:39>> and every time I do that, I'm shocked
1:17:41that it's the best financial content,
1:17:44period. There's nothing that even comes
1:17:46close.
1:17:47So I say that 95%of what I learned was
1:17:49from Buffett's letters. Of course, there
1:17:52are many books, but nothing comes close
1:17:53.
1:17:54>> And I only did this exercise when I went
1:17:55to OMA. I did it through...I didn't read
1:17:58the letter in its entirety.
1:18:00Uh, there's a book, it's even translated
1:18:03, uh, if I'm not mistaken, the name is
1:18:05Berkshire Hathaway University, and it
1:18:08analyzes each letter.
1:18:11And it's really cool, since I wouldn't
1:18:12have time to read them all before the
1:18:14event, I would go to the significant
1:18:16events. Wow, what did he say
1:18:18pre-subprime, during subprime, after
1:18:22subprime, and so on. It's really cool.
1:18:24This exercise is wonderful, but you read
1:18:27it in its entirety, right? I can even
1:18:30see it there, there's Bare Hathaway
1:18:31Letters to Shareholders.
1:18:32>> That is what it goes to...
1:18:33>> No, I read them all.
1:18:35I've read them all several times, not
1:18:37all of them multiple times, but I've
1:18:38read them all at least once, and
1:18:39starting with the partnership, right,
1:18:40before Berkshire, you get his story.
1:18:43I think everyone who does what I do, the
1:18:45tollbooth ex, has to know the history,
1:18:48right? Is
1:18:49>> there a year that comes to mind, man? A
1:18:52letter from 198.
1:18:54>> No, see nothing,
1:18:55>> man. Then, if someone comes along and
1:18:57says, "Hey, Solomon, I read one here,
1:18:59I'll
1:18:59>> tell you
1:18:59>> that this one is worth it, because it's
1:19:02really a great book."
1:19:03>> The older ones are better. For me, it's
1:19:05very clear that in recent decades
1:19:09his interests have changed. In the
1:19:11beginning, he talked much more about
1:19:12business, about investment, but he
1:19:14started talking much more about things
1:19:16related to people, philosophy,
1:19:17>> to you as a human being. He changed,
1:19:20>> right? So I think that in the beginning
1:19:22, business is better. Yes, that's even
1:19:24evident in his biography, right? The
1:19:26first half of "Snowball" is a business
1:19:28book, the second half is a book about
1:19:31life. Exactly. And another book that
1:19:33isn't about the financial market. So I
1:19:35have a hobby, right, which is
1:19:37motorsports, right?
1:19:38>> So,
1:19:38>> I was even going to say, there's that
1:19:39picture back there, I don't know if it's
1:19:41showing up on camera, but
1:19:42>> yes.
1:19:43So, there's a book about the greatest
1:19:45Formula 1 car designer in history, which
1:19:47he still is today, he...He's the
1:19:48designer for Red Bull, just like he's
1:19:50the designer for Aston Martin, but the
1:19:52biggest winner is an engineer, an
1:19:53aerodynamics engineer, who calls it "
1:19:55How to Build a Car."
1:19:57He tells the story of all the cars he
1:19:59designed for Formula Indy and Formula 1
1:20:01,
1:20:01>> and tells the story of the car. What
1:20:03Formula 1 is all about is fascinating.
1:20:05People think Formula 1 is just a
1:20:07competition of who drives best, but the
1:20:10extra driving aspect is really cool,
1:20:12that engineering challenge is
1:20:14fascinating, the rules change, they have
1:20:16to interpret the rules in a certain way
1:20:19, and he won that game.
1:20:21He's by far the best, and for those who
1:20:22like the subject, it's awesome. "
1:20:24>> How to Build a Car"
1:20:25>> is
1:20:26>> cool.
1:20:27A song, what song touches your heart?
1:20:31>> A song, I'm quite eclectic, I listen to
1:20:35everything. I'd say I don't have a
1:20:38favorite
1:20:40song.
1:20:41>> What does eclectic mean? It ranges
1:20:44>> from rock, to hip hop, to Brazilian
1:20:46music, to bossa nova. New, rap, Michael
1:20:49Jackson.
1:20:50So, I think my generation listened to a
1:20:52lot of electronic music, DJs, so
1:20:54everything like that.
1:20:56But I don't have that band, it's my band
1:20:58that I listen to the most.
1:21:00So, I'm using the spontaneous
1:21:01recommendation function of the AI again
1:21:03, the AI DJ on Spotify, which keeps
1:21:05recommending things to you.
1:21:08And I like this idea of discovering new
1:21:09music, you know?
1:21:12>> Now I am curious about which song fits
1:21:14into this eclectic level, but if there
1:21:16is a track you would like to discuss
1:21:18after the ping-pong concludes, you can
1:21:20nominate
1:21:23>> a guest you would enjoy seeing here on
1:21:25Marketm, sitting in your place and
1:21:26having a conversation with me.
1:21:30Guest, I'm a big fan of entrepreneurs,
1:21:35right?
1:21:38So I would look for a Brazilian
1:21:41entrepreneur who is building
1:21:47a business. I'm going by profile because
1:21:49I don't want to, I don't want to mention
1:21:51a friend of mine who's a manager,
1:21:52because I have so many friends and
1:21:55I don't want to prioritize any one.
1:21:58But I would go for an entrepreneurial
1:22:01profile that is building a new, cool
1:22:03company.
1:22:05Brazil, in the tech sector; I would go
1:22:07for a profile like that. Uh-huh.
1:22:09>> Because that's what I like, it's so
1:22:11difficult to be an entrepreneur in the
1:22:12country, I consider myself an
1:22:13entrepreneur long before I was an
1:22:15investor, right? You're also an
1:22:16entrepreneur, right?
1:22:18And it's difficult to be an entrepreneur
1:22:19, right? Yeah, yeah. You think you're
1:22:22going to succeed, very wrong, so to take
1:22:25a story...
1:22:25>> But I am, I am very grateful for all the
1:22:30constraints I lost by being an
1:22:32entrepreneur, because after you, it's a
1:22:35new learning experience, it's a new way
1:22:38of looking at life, at people, because
1:22:41when you leave a traditional job to be
1:22:44an entrepreneur, you really see what
1:22:47risk is and it makes you much more
1:22:51accountable, right? Because you
1:22:54>> feel much more responsible for what will
1:22:56happen, what is happening.
1:22:58Even though external factors largely
1:23:00determine what happens, your success or
1:23:02your path, you still feel that you are
1:23:03the one who is responsible.
1:23:06There are people working for you, with
1:23:08you.
1:23:09So that ends up being something I always
1:23:11joke about, that market makers may not
1:23:13It worked out, but it already worked out
1:23:15, because of the transformation it
1:23:16brings when you undertake something.
1:23:19It's...It's really cool.
1:23:20>> Really cool.
1:23:22>> Uh, you're invited.
1:23:24A curiosity about you. Ah, you already
1:23:26talked about motorsports.
1:23:28Another curiosity about you that few
1:23:30people know or are aware of? I
1:23:33>> think I'm quite traditional. I don't
1:23:36think I have anything very interesting
1:23:38like that, like, being a Botafogo fan, I
1:23:41thought about being a driver, right?
1:23:43So I raced karts for decades, I raced
1:23:45Formula Renault, Formula 3. So for a
1:23:47long time in my life I thought I would
1:23:49be a driver.
1:23:51So I
1:23:51>> still drive
1:23:53>> today, not today. Nowadays very little.
1:23:55In Rio there are no racetracks, no kart
1:23:56tracks, it's much more difficult. I have
1:23:58a simulator at home, I used to compete
1:23:59in simulators.
1:24:00>> So I think motorsports is a passion of
1:24:02...I think passions are generated in
1:24:04childhood, right? Uh-huh.
1:24:06>> It's very difficult not to be that.
1:24:08I think it's the only thing that's more
1:24:11different.
1:24:13>> And well, to close the question, the one
1:24:15that touches the heart, uh, what was the
1:24:17biggest...What kindness has someone
1:24:19shown you in your life?
1:24:22>> And in your life, it could be
1:24:24professional, personal, the beginning of
1:24:26your life, whatever.
1:24:28>> It's hard to avoid clichés when talking
1:24:30about family, isn't it?
1:24:32I think it's always the patience your
1:24:35parents had with you.
1:24:37Now I have a child, right?
1:24:39When you have a child, you start to see
1:24:42life and how you were in a different way
1:24:46, right?
1:24:47So
1:24:48>> I think it will definitely be something
1:24:50,
1:24:50>> several examples, but that my father and
1:24:52mother did for me.
1:24:53>> You have a son?
1:24:55>> A son.
1:24:56>> How old is
1:24:56>> he? He's a year and a half.
1:24:58>> A year and a half. Oh, okay.
1:25:00I'm at the beginning of this journey.
1:25:02>> Great. Very good. Well, congratulations
1:25:06on your story.
1:25:08Not only the father, the businessman,
1:25:10the entrepreneur, but also the investor
1:25:12. It's great to see the Harbor case, may
1:25:14it serve as inspiration. I think many
1:25:17people who want to start investing
1:25:19abroad sometimes wonder which path to
1:25:21take, whether to outsource, or to do it
1:25:22themselves.
1:25:24I think you've already shed some light,
1:25:26even for those who...A greater
1:25:27understanding of what's happening in the
1:25:29market, of the importance of looking
1:25:30outwards, right?
1:25:32Here in Brazil, we already have so many
1:25:33reasons to diversify our portfolios. So
1:25:35, I hope this conversation has helped.
1:25:38Did you like it?
1:25:38>> Very good,
1:25:39>> man. That's great. So, when I get back
1:25:41to Rio, I'll want to knock on your door
1:25:43again.
1:25:43>> The doors are open.
1:25:44>> Thanks a lot, Leo! Yeah. And you who
1:25:47watched until the end, leave a like,
1:25:49subscribe to the channel because
1:25:51Marketmers has a new episode every
1:25:53Tuesday, Thursday, and Sunday at 6 PM.
1:25:55By the way, this episode is airing on a
1:25:57Sunday, and starting next Sunday, my new
1:25:59project, Salomão Entrevista, will air.
1:26:03The first episode of my new project,
1:26:05exactly November 8th, will be released,
1:26:07and you can also check it out here on
1:26:08the Marketmers YouTube channel.
1:26:11Until next time, and bye. Oops.

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