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PJ Pahygiannis
PJ Pahygiannis
Articles (149) 

13 Questions With Argentine Value Investor Santiago Lucca

'Being human beings controlled by our feelings, it is not difficult to fall prey to them and make a bad buy or sell on the stock market'

1. How and why did you get started investing? What is your background?

Everything begins in a very particular way. While I do not remember exactly how old I was when I had my first attraction to business, I can say it was at a very early age. I had the opportunity, with the help of my family, to make my first venture. Time passed and I became more and more interested in business. It was obvious that is, of course, where I wanted to go. Unfortunately, I did not have the opportunity Warren Buffett (Trades, Portfolio) had to buy my first three shares of Cities Service Preferred at age 11.

In my case, I met the market in 2010 due to great curiosity. After my first visit to the market, I decided to invest a percentage of my small savings and buy my first shares. At the time, to be frank, I did not have much knowledge about the companies I invested in. My portfolio declined at an accelerated pace. This caused me to panic and I sold all my positions, assuming this lost. And so was my first experience and my first great lesson on the stock market. That is when I decided to stay away for an indefinite time to start investigating companies and, more than anything, the big investors.

By this time, I was studying some subjects about business administration and economics. But I felt that it did not quite fit the knowledge I was looking for in the stock market world, so I immediately began to acquire my first books. That  is when I met a fascinating person and everything was starting to take off. I got "The Warren Buffett Way" by Robert G. Hagstrom and by the time I finished reading it, everything was starting to change. Above all, the way I looked at the market. So I decided to go back to put into practice what I just learned from the book.

By the end of 2011, I had bought my first shares. I could not resist checking to see the price of this quotation every day. Two years later, I was still reading books, interviews, Berkshire Hathaway annual letters and biographies. And every day I was more passionate about the investment world. Right there, I decided to sell my shares of both banks, Grupo Financiero Galicia (NASDAQ:GGAL) and Banco Francés (BUE:FRAN), to then build a portfolio of companies that I liked the most and had read more on. In 2013, with six of my favorite companies in the portfolio, I managed to have an extraordinary year. By 2015, I was loving the job of reading and managing money so I decided to start looking for people within my circle of family and friends to manage their money in the stock market. I founded my first and current manager, Bergson Capital Management, and began to invest in various companies. In the course of the first two years, the rate of capital inflow to manage grew a fabulous 1790%. And as for the profitability, it was a cumulative of 325% in Argentine pesos. Currently, it is only investing in Argentine companies but has not ruled out buying in other countries in 2017.

2. Describe your investing strategy and portfolio organization. What valuation methods do you use? Where do you get your investing ideas from?

It is important to highlight an important pillar within the organization. Bergson carries out an investment process that is not very complex. First, no leverage or financial derivatives are used. If you ask me why we do not operate it, the answer is clear and true to the value investing philosophy. We are clearly oriented in the long term and avoid anything that has to do with speculation. I do not think it makes much sense to buy long-term financial options since we could have a huge capital loss. Then, as main planning, I am interested in the continuous search for good companies to buy. If I had to define the daily work, not to sound repetitive, but reading, reading, reading, reading does help you know a little more every day about the companies that we have already invested in, and those that could make the shopping list. In any case, value investing is based on reading since you never know when something you are reading can be useful. We like to have a clear and well-defined investment philosophy. It escapes technical analysis and is a matter of analyzing and understanding each business well.

Let's look at a brief checklist that identifies Bergson when it comes to looking for companies: 1. They have a remarkable ability to generate cash flows. 2. Do not have too much future expectation, without having in the present, of a good income of cash flow. This is common sense. 3. Have a simple, easy to understand business with little competition and is well funded. 4. That the business be managed by reliable people, with good business management skills, a good capacity to manage capital and, above all, that are oriented to the shareholder. 5. As the most important point, you are looking for the best price. Since the price paid will determine the profitability obtained, after rigorous analysis, we buy shares if offered at a discount of 50% or 40% depending on the sector. Or rather, we only buy with safety margins higher than 40%. The margin of safety in our investments is very important since it takes a focused portfolio strategy. They buy the best investment ideas, putting capital in few companies and thus benefit from the high growth potential of each one.

Currently, the largest investments of Bergson Capital Management are Autopistas del Sol S.A (BUE:AUSO), San Miguel SA (BUE:SAMI), Grimoldi S.A (BUE:GRIM) and Petrolera Pampa (BUE:PETR). In valuations, valuation is made by multiples and discounts of cash flows. In any case, the PERs, if used correctly, can always give us an intrinsic conservative value.

3. What books or other investors changed the way you think, inspired you or mentored you? What is the most important lesson learned from them? What investors do you follow today?

I could mention the books and investors that have influenced me most. I think many would put Warren Buffett (Trades, Portfolio) first, but in my case, I want to give the first place to the great investor Philip A. Fisher. His philosophy and, more than anything, his book "Common Stocks and Uncommon Profits," has made me understand the importance of good companies when buying their shares, as well as why long-term investment. Both Bejamin Graham, Warren Buffett (Trades, Portfolio) and Philip Fisher have given me enormous inspiration to continue reading and acquiring knowledge. At present, I follow one of the best, Seth Klarman (Trades, Portfolio). Something I learned during this time is the importance of liquidity. Perhaps for many it is capital without movement, or that as such produces nothing, but for Bergson, it is what allows us the possibility of continuing to operate when opportunities arise.

4. How long will you hold a stock and why? How long does it take to know if you are right or wrong on a stock?

We actually buy shares as if buying the entire business. We only do it when it offers us an adequate margin of safety. I believe that having this methodology and philosophy is important. For every transaction carried out, Bergson places a specialized manager in the acquisition of businesses and not as market analysts. Whenever the business keeps making money, I do not see any sense in getting rid of the stock. This tranquility is provided by the continuous monitoring of each company in the portfolio and investing within our circle of competence.

5. How has your investing approach changed over the years?

Throughout the years, a great deal of learning has been acquired. First, something that is worked on day by day is the patience required in our investments. Being human beings controlled by our feelings, it is not difficult to fall prey to them and make a bad buy or sell on the stock market. For that reason, during this time I found it very useful to stop looking at the fluctuations of the portfolio in general and only to look less and less at daily quotes. Last, but not least, investing in banks is no longer attractive because of its high volatility.

6. Name some of the things that you do or believe that other investors do not.

Given the immensity of funds and managers that exist, it would be very difficult to say with certainty that Bergson does something that others do not. But taking advantage of everything as a learning opportunity and learning from different experiences offers us the possibility of becoming a little more intelligent each day by learning from the mistakes of others.

7. What are some of your favorite companies, brands or even CEOs? What do you think are some of the most well-run companies? How do you judge the quality of the management?

I could name many favorite CEOs. Warren Buffett (Trades, Portfolio) seems to be an extraordinary manager of business with a lot of experience. Another person is Francisco García Paramés. I am reading a book called "Investing in the Long Term" and I liked it a lot. Previously, I read numerous interviews, both of him and the team of analysts at AzValor, and I can say that they have done a fantastic job all these years, given the great attachment of value in each of their investments. Companies very well managed here in Argentina are Autopistas del Sol SA, San Miguel SA, Pampa Energia SA and Grimoldi SA.

Some of the well-managed companies that are not Argentine are:

1) Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B)
2) Phillips 66 (NYSE:PSX)
3) Charter Communications Inc. (CHTR)
4) Visa Inc. (V)
5) Bank of New York Mellon Corp. (BK)
6) Twenty-First Century Fox Inc. (FOX)
7) PayPal Holdings Inc. (NASDAQ:PYPL)
8) Liberty Global Group (LBTYA)

8. Before making an investment, what kind of research do you do and where do you go for the information? Do you talk to management?

Before making any kind of investment, I start with the last five annual balances to see what state the company is in, how much debt it has, how it works and determine its true value. It is necessary to see what sector operates this business and to think about its strengths and weaknesses, competition, competitive advantages and how the price has evolved in the last five years. After that, I analyze how long it can continue doing business without any problems. I leave a clear example, one of our biggest positions is San Miguel SA. The business is very easy to understand since it is dedicated to the commercialization of citrus. It has a very large competitive advantage and its business cannot be negatively affected by advances in technology. This company has an excellent future.

9. What kind of bargains are you finding in this market? Do you have any favorite sector or avoid certain areas, and why?

In this global market, I have found many attractive investments. Companies that are working very well and will continue to do so for a long time. Sectors that have a very solid growth potential and are managed by excellent managers. I could mention some of these companies that give us attractive results. One of them is AutoZone Inc. (NYSE:AZO). The only sector I avoid is technology since I do not know much about that area.

10. How do you go about valuing a stock and how do you decide how you are going to value a specific stock? When is not cheap?

After rigorous analysis and determining if the company meets our checklist, we will only invest if we have a margin of safety of at least 40%. We calculate this margin as follows: Price to intrinsic value  less thatn 60% on DCF and NAV. There are times that, as Warren Buffett (Trades, Portfolio) says, when you find a company that has the price for the floor, the mathematical calculation is the least important.

11. How do you feel about the market today? Do you see it as overvalued? What concerns you the most?

We see how markets are at their all-time highs, we all know that. But it has been going on for many years. Thousands of analysts announced a recession, even a stock market crash within a short time following the triumph of Donald Trump. That did not happen but the best can be seen with more volatility given the uncertainty generated by this new government. The important thing is, first and foremost, to always be prepared with a percentage of liquidity to take advantage of prices for the floors. Being rational, absolutely no one knows that it will happen, even tomorrow. And as Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) say, no one knows when the rain will come, but when it comes we are going to sell the umbrellas. In this scenario, the margin of safety in our investments is of paramount importance.

12. What are some books that you are reading now? What is the most important lesson learned from your favorite one?

I am currently reading "The Little Big Book of Value Investing" by Carlos Bellas.

13. Any advice to a new value investor? What should they know and what habits should they develop before they start?

I would advise daily reading and to start investing in some long-term investment funds with a good track record. This is precisely how to avoiding capital losses.

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