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PJ Pahygiannis
PJ Pahygiannis
Articles (149) 

23 Questions With Brazilian Value Investor Gustavo Saiani

'Most important is management integrity and ability. Those traits can sometimes be verified in many different ways, the most obvious of which seems to be their reluctance to take on debt'

December 05, 2016 | About:

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

I actually started out as a guitarist. From the age of 15 I took it really seriously. When time came to go to a university, I tried mechanical engineering and was very unhappy for two and a half years. Meanwhile, I started teaching music and performing. I also started a tiny business making and printing things like business cards using my father’s computer and printer. This was around 1995. One of my band mates studied graphic design, which up to that point I had not considered. Belatedly, I made the connection and decided to switch to graphic design. I was much happier but ironically stopped doing graphic design work and coasted along in school, devoting all my energy to music.

I graduated as a designer and had a scholarship offer for music at the New School University in New York City. I ended up living there for five years, got another degree and recorded and performed in many countries. Unbeknownst to me, I was getting an informal Ph.D. on the dynamics of a severely contracting industry, as album sales fell about 90% while I established myself as a musician.

After a bit of an identity crisis, I moved back to Brazil and became a graphic designer at the age of 27. That was the first time I had worked in an office and the building’s elevators had screens with news, advertisements and stock quotes. Every day I saw the Dow and the Nasdaq and thought how crazy it was that those numbers floated around with no apparent rhyme or reason.

Then came 2007 and the numbers on the elevator screen started getting low quite fast. I have always been an avid reader, newspapers included, so of course I knew some crisis was brewing. The worse the crisis got, the more curious I became. I could see the psychological aspect of it all playing out and affecting reality.

As banks started going bust, I started seeing the name of this fellow everywhere. There was one guy to whom everyone seemed to be going in an attempt to be saved. Warren Buffett (Trades, Portfolio), of course. From that moment on, I read everything I could about him and my knowledge about investing grows around his influence.

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

So far I have focused on my home market, Brazil. I look for companies with low debt, a low Shiller PE ratio, a long history and a good brand. I go straight to companies' financial statements and try to take a look at as many as I can.

3. What drew you to that specific strategy? If you only had three valuation metrics what would they be?

It all comes from Benjamin Graham, even though I do read as much as I can about many other people. There are two guys out there, and I feel their reputation has been growing, who put out some really simple and great videos on YouTube: Preston Pysh and Stig Brodersen. Their videos synthesize Graham's ideas quite nicely.

To me, if a company has low debt over equity, a low Shiller PE ratio and has been profitable over the years, those are signs to keep it under consideration.

4. 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?

The first book on investing I read was Benoit Mandelbrot’s "The Misbehavior of Markets: A Fractal View of Financial Turbulence." I got one thing out of it: markets are not continuous. The implications of that are enormous, of course. Later I read "The Intelligent Investor" and "Security Analysis," and expanded to Charlie Munger (Trades, Portfolio), Phil Fisher, George Soros (Trades, Portfolio), Howard Marks (Trades, Portfolio), Seth Klarman (Trades, Portfolio) and many others. I read a lot about other subjects too, especially psychology.

5. 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?

I go for at least three years. I have no ability to predict movements in the short term. If at any time new information comes and I realize I was wrong, I do something about it.

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

So far I have had little time to change my approach in a significant fashion.

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

I believe in multi-year time frames, which most people do not seem to.

8. 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?

Apple (NASDAQ:AAPL) under Steve Jobs in the 2000s was inspiring. Elon Musk is inspiring, so is Jeff Bezos. Berkshire Hathaway's (NYSE:BRK.A)(NYSE:BRK.B) decentralized operations model and centralized capital allocation is quite a lesson. But when a company continues to thrive after leadership changes, to me that is the ultimate display of greatness.

9. Do you use any stock screeners? What are some efficient methods to find undervalued businesses apart from screeners?

No, I do not really use stock screeners. I really look at as many companies as I can through their own financial statements. There is a lot you can learn there.

10. Name some of the traits that a company must have for you to invest in, such as dividends. What does a high-quality company look like to you and what does a bad investment look like? Talk about what the ideal company to invest in would look like, even if it does not exist.

It helps if the company is in a favorable sector, a sector you can be sure will be around 10 years from now. Most important is management integrity and ability. Those traits can sometimes be verified in many different ways, the most obvious of which seems to be their reluctance to take on debt.

11. What kind of checklist or homework do you utilize when investing? Do you have a specific approach, structure, process that you use? Or do you have any hard cut rules?

The first thing I look at is really debt. If the company has high debt, I stop. Then on to return on equity, price relative to earnings and on to a few more fine-grained things.

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

If a company looks like a really good investment, I do read up on its management, listen to quarterly calls and even watch managers’ interviews on YouTube. I do not talk to management directly.

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

If a company is worth more than 15 times its average net income over the past ten years, inflation adjusted, then it is definitely not cheap enough for me.

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

Brazil is undergoing a significant economic and political crisis. So we have seen companies fail and also companies’ valuations go down by 90% or more, but survive. I believe there are still attractively valued companies in Brazil as of December 2016.

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

The market I understand a bit about, Brazil, does have undervalued companies at the moment, in my opinion. My concerns are not necessarily market-related but are more to do with political integrity and stability. Those, to me, are more important than market considerations.

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

Right now I am reading "Market Wizards" by Jack Schwager, volume 15 of Sigmund Freud's "Complete Works," the "Presidential Diaries" by our former president, Fernando Henrique Cardoso, and a couple of computer programming books.

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

If you ever went to a casino, lost money and kept coming back afterwards, avoid becoming an investor. If you are one of the very few people who are immune to gambling, go ahead and read a lot, listen to a lot of people and make sure you are getting knowledge from the best people possible because in this field they actually share precious knowledge.

18. What are your some of your favorite value investing resources or tools? Are there any investors that you piggyback or coattail?

I am a book guy, those are my tools. I do not really piggyback on anyone but I do copy their principles.

19. Describe some of the biggest mistakes you have made value investing. What are your three worst investments that burned you? What did you learn and how do you avoid those mistakes today?

Investing in companies with high debt in the hopes that it will be OK is a basic mistake I have made. Seeing a clearly favorable company but failing to act on it, the so-called errors of omission, would make for more than three of my worst errors.

20. How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections and fluctuations?

I do not use leverage to minimize danger and worries. I got my first investing lessons reading about Mr. Market, so that became ingrained in me and I witnessed things for years before getting my feet wet. I also have many other interests: I paint, I take care of my daughter, I do yoga and I program computers.

21. How does one avoid blowups in value investing?

You try to avoid blowups by being careful and studying a lot. If there is no good margin of safety, go do something else.

22. If you are willing to share, what companies do you currently own and why? How have the last five to ten years been for you investing wise compared to the indexes?

I own positions in four Brazilian companies, I am long all of them. I have been investing for less than 10 years, so using five years I did better than the indexes, but my portfolio is small.

23. Here's a fun one - What stock would Warren Buffett (Trades, Portfolio) or Benjamin Graham buy today if he were you?

Those guys represent what most of us aspire to become. They have so much to teach me that I will skip on giving them advice for now and study them instead.

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