Market Structure of Brazilian Public Equities

Navigating Market Extremes with a Dynamic Investment Approach

Two investors based in Rio de Janeiro were big fans of a guy named Warren Buffett in the 80’s. They deeply studied his strategy and decided it would be a nice idea to try it out in the Brazilian market. Pioneers, each opened their businesses. They managed to achieve great performance and success, attracting new entrants. Fast forward, the local market might have more value investors per investable listed company than any other place globally. It’s a very competitive market. Generally, they seek the trifecta of proven business models with good governance and justifiable valuations. There are few names like this at any given time, so portfolios tend to overlap meaningfully, making sizing and timing key performance differentiators. Investment teams have become like investigative journalists, constantly tracking the development of the same stories, which sometimes leads to losing perspective on what makes a good investment.

Another phenomenon was the rapid growth of financial distribution platforms such as XP and BTG Pactual, which have channeled significant capital into different strategies. Similar to how content creators became dominated by their distribution channels (like YouTube, Netflix, and Spotify), fund managers were also affected. The distribution platforms began to dictate what they wanted, often favoring predictability and low volatility — or, as they call it, “risk.” Hedge funds attracted more capital (and talent) to pursue short-term opportunities, focusing more on arbitrage than investment. This has led to prices moving in response to news and quarterly results. For long-term investors, this creates an opportunity set if they understand the dynamics at play.

Company owners and executives need thoughtful, strategic questions, but often can’t find the right interlocutors. They manage for the long-term, as most business initiatives take a couple of years to be implemented, tested, and adjusted—quite different from quarterly results, which started being shaped two or three years ago by the management team, while a junior analyst constructed its precise earnings estimates put together fifteen days before the release.

Moreover, as time passes, more investors look for shortcuts to achieve “efficacy,” i.e., making money faster, often employing higher turnover (and leverage). After all, who wants to get rich slowly? This means relying on pseudo “expert networks”, napkin math, and valuation multiples. But businesses need cash flow, and guess what, investors do too. Cash reinvestment at attractive rates is the ultimate source of value creation, and very few analyze this carefully —especially when portfolio turnover is high. Hedge funds are playing the market’s meta-game, and the companies they invest in can’t keep up with the capital velocity demanded by those hedge funds.

The market isn’t broken. The correct analysis is being used given the dominant investment strategy. It’s just that the underlying assets — businesses — are being evaluated based on three months of performance into “perpetuity,” regardless of whether executives have a four-year vesting period or owners are foregoing dividends to reinvest in the business for the long term. And that’s precisely where the opportunity lies.

I don’t subscribe to dogmatic business investing, such as the traditional “buy & hold” strategy. Instead, I advocate for dynamic business investing, where your investment stance evolves as the situation changes. Investors must recognize that market prices will fluctuate significantly—reaching both extreme highs and lows—throughout the journey. It is essential to capitalize on these opportunities, adjusting positions based on a structural assessment of the business’s performance. When there is extreme price dislocation in the market’s meta-game, it’s crucial to respond accordingly.

Deploying capital requires time — often more than a year — so short-term results may disappoint those focused on immediate returns. Now, imagine navigating this with rising interest rates that nearly match your cost of equity. In that snapshot, there’s little equity value remaining. However, if the investment proves to be sound when stabilized, long-term investors stand to benefit from both the mature yield and an equity re-rating within the enterprise’s overall value. That's towards what I am pursuing.