Dispatch №13

“My greatest legacy will be to get people to invest in wealth generation. If you are going to buy stocks in the market now, the first thing is to define a focus, a guideline, and be aware that they will only make money in the medium and long term. The other thing is to create criteria. My most important criterion is that of priority. If someone comes to me saying that he wants to sell me a Mercedes, I will say no, because it is not my priority. My priority is to grow my monthly income portfolio. I go on exorcising everything that is not my priority. I don’t do anything on impulse.

Brazilian Warren Buffett

If you don’t see a future in stock investing because you think it is too late or you have too little money to invest, you need to know this story. And if this is your case, don’t feel bad. It is the case for most Brazilians and billions of other people. Stories like the one you are about to read can change your perception once and for all.

Luiz Barsi (São Paulo, March 10, 1939) is an economist, lawyer and the largest individual investor in Brazil. People call him “Brazilian Warren Buffett”. He is one of the most influential figures in the Brazilian stock market and has accumulated about $735.7 million in assets.

The son of an immigrant, Barsi lost his father of Italian origin when he was only one year old. His mother was one of the “middle” daughters of a family of more than ten siblings who came from Spain as children, after losing everything in a big flood in the city where they lived. She worked as a washerwoman and she and her son Luiz lived in a tenement in Brás districts in the downtown of São Paulo. Life was hard: the boy took his first bath in hot water only when he was over five years old.

To help his mother, he started working at the age of seven, shining shoes, which he did until he was a pre-teen. Barsi also worked as a candy salesman in a movie theater, and later as an apprentice tailor alongside his mother, who had opened a small store. The apprentice took the knowledge with him: to this day, he sews the falling buttons and torn clothes of his family.

The family lacked everything in Barsi’s childhood, except education. Since he could not complete his education, his mother made sure that the boy did not miss any school – and always on a full stomach, to concentrate only on what the teacher was saying. Barsi also inherited from his mother a tireless work ethic – working up to three jobs at a time – and a “hard-line” style of financial management.

His education opened the door to the stock market and at the age of 14 he began working in a brokerage house, where he learned everything that made him what he is today: a millionaire, financially free, successful. In a brokerage firm he would be encouraged to pursue technical training in accounting. There, his interest in studying company balance sheets was born, something he does meticulously until today. After his technical degree, Barsi would graduate in Actuarial Science and complete two other higher education courses: Law, at the Law School in Varginha (MG) and Economics at the School of Economics, Finance and Administration in São Paulo, two courses considered essential for the analysis of balance sheets, companies, and the economic and political scenario that he still does today.

At 16, Barsi had already been working for a long time. He helped support the household and had a pretty hard life for a teenager. However, persistence did not let him get discouraged, and the future millionaire already had his dreams very concrete.

After graduating, Barsi went on to teach classes on balance sheet structure and analysis. But his education would also open the way for a job as an auditor and make him doubt the sustainability of Social Security in Brazil.

Before he turned 30, Barsi began to do what few young people do even today: worry about their retirement. Barsi didn’t want to get rich, but “never to be poor again, not in that miserable condition.

In analyzing the national social security system, Barsi drew two main conclusions: 1) the system was heading for collapse; 2) he depended only on his work to guarantee his retirement.

Barsi also realized that two groups of people didn’t need to worry about retirement: public employees, who would receive a full salary even after they stopped working, and businessmen, who could continue to receive the profits from the companies they created.

Since he had no interest in working for the government, he chose to become a businessman. But, in his own words, instead of owning a small business, he preferred to be a partner in several large businesses. This reasoning would lead him to buy his first shares.

As an auditor, he had a lot of contact with company balance sheets. In 1970 he began to study stocks and prepared the study “Stocks Guarantee the Future”, with a careful evaluation of all sectors and their level of “perenniality”. Thus, he came to the conclusion that there were some sectors of the economy with greater chances of enduring, such as food, sanitation, energy, mining, and finance.

After listing the areas considered most promising, Barsi then went on to list all the publicly traded companies that made up each of these sectors and started “mining” companies, separating those with the greatest chances of long-term success.

After sorting the companies by outcome, he arrived at what would be the best company to invest in: Anderson Clayton, a foreign-owned company, with a price of 50 cents per share and paying a dividend of 12 cents.

But here Barsi found a flaw in his project: although the company was healthy, was in the food sector – considered perennial – and paid good dividends, its long-term success was uncertain for a twofold reason: the two ladies over 80 who owned the company were increasingly finding it difficult to deny buyout offers from other companies. And the one who alerted them to the problem was the company’s own vice president.

The warning was enough to make Barsi change his strategy of investing in Anderson Clayton – and also to show how important it was to know deeply the company in which he intended to invest.

Barsi had to settle for the company that was second on his list: Companhia Energética de São Paulo (CESP). His argument for choosing the company was simple: no matter what you do with a property, you will have to pay the electricity bill. His first goal was to own 100,000 shares in Companhia Energética de São Paulo (CESP) with the intention of receiving dividends. The company was chosen because it paid a minimum priority and mandatory dividend of 10% on the par value, which today would be worth R$1.00, distributed every six months. At the time, his goal was to accumulate the equivalent of US$ 5 thousand, according to his own calculations, less than a popular car. It was a modest and attainable goal, which was later broken down into smaller goals. The idea was to buy 1,000 shares a month. Barsi then started saving everything he could from his auditor’s salary to buy stock in the company. When he reached 100,000, shortly after he started, he celebrated his first achievement as an investor who was only looking for a complementary pension with stocks.

From that moment on, the goals started to grow – and were continuously achieved. Barsi started to apply the reinvestment technique: he used the money he received from dividends to buy more shares of the company and increase his position in the company.

The rest is history.

In the early 1970s, Barsi also owned a brokerage house, Cruzeiro do Sul. He spent 18 years working as an economics editor at the Diário Popular newspaper – a period that helped him get to know even more deeply the companies in which he would like to invest.

Another way to get to know the companies better and ask questions was by calling the Investor Relations center. “I would make my recommendations, basing on what I interpreted from company meetings, which I would go and visit. I visited all the publicly traded companies at the time. And I was creating a much more reliable perception of what the company was,” he said in an interview.

After leaving the Diário Popular, Barsi pursued his journalistic career in parallel with his investments, and was Capital Markets editor of Marketing Magazine between 1989 and 1992.

He developed his own method known as the “precautionary stock portfolio,” concentrating capital and investing in securities of companies that guarantee good dividends. It took only him only 10 years before he had enough money for his retirement. Within 10 years, the strategy had guaranteed enough income that Barsi no longer needed to work. But he kept investing.

Barsi summarizes all his experience in one piece of advice: “Anyone can get rich with stocks. All you have to do is to buy cheap stocks, negotiated below the asset value, choose good payers of dividends, and wait”. The problem with the method is in its application, especially the last part, waiting. The strategy he created is simple, but time-consuming: buy 1,000 shares of the same company every month for 30 years. After the eighth month, according to Barsi, the dividends received are enough to reinvest and it is no longer necessary to take money out of your pocket.

The strategy, according to Barsi, can be followed by anyone, but it requires a lot of discipline and patience. Because, more than investing in stocks, Barsi invests in business projects with prospects for success.Buying stocks, for him, is just a way to participate in these projects. His intention is not to resell the papers in the future, but to receive part of the profits, as a small shareholder. “Anyone who invests in companies with fundamentals, without being in a hurry to sell, will make money. But if you do it with a good strategy for the proceeds, you become a millionaire”. But for that, you have to manage your anxiety.

For example, in 2019 alone, he received R$4 million in profits from Eletrobras, equivalent to a monthly “salary” of R$300,000. And this came from just one of the many companies that make up his portfolio. Yes, throughout his career as an investor, Barsi made some mistakes, such as investments in Banco do Progresso and Banco Nacional. “They were three losses that I had to sustain, but they didn’t shake me up because I continued with the other shares. I never lost anything because I started from scratch and what was taken from me was part of what I gained from the market,” he says. But he also accumulated other excellent hits. One of his best moves was with Banco Santander’s shares. Barsi started buying the shares when they were worth R$0.50. Many years later, in January 2020, the shares he had bought, of the preferred type (SANB4), were trading at R$25.35. Today, about 15 companies are part of Santander.

The megainvestor’s portfolio is focused almost 85% on dividends. Today, about 15 companies are part of his portfolio. All of them are from sectors considered perennial, such as banking, electricity transmission and distribution, and pulp and paper. In the long term, such companies generate cash flow and a positive profit. Some of them have been in his portfolio for more than 30 years.

In some circumstances, Barsi invests in other companies “outside” his pension portfolio – he has a separate amount just for these investments of opportunity – but he uses this method only to leverage himself and then sell the shares to inject more money into his 12 core portfolio companies.

To get into his portfolio, the company needs to “score” well in his analysis, which takes into account whether the products and/or services are consumed for long periods of time; whether the company’s corporate rules are well defined; the quality of management; the financial health and profits; and the regularity of dividend distribution.

For those new to the market who ask for tips, Barsi repeats three basic rules: 1) don’t put in the stock market money that may be needed, as an emergency reserve (although Barsi himself doesn’t follow this advice, since he has 100% of his investments in the stock market); 2) invest only in well-founded companies and not in “tips” from friends or colleagues; and 3) never sell shares out of necessity.

A constant critic of fixed income – which Barsi usually calls “fixed loss” – the investor guarantees that all his money is invested in stocks or, as he prefers to say, in projects of electric power, cellulose, financial sector, chlorine and soda. He also does not invest in the futures market, saying he does not buy “wind”. “I don’t know anyone who got rich speculating on the stock market, buying options, or with leverage strategies.”, says Barsi.

Always focusing on profitable companies that pay good dividends, his strategy has remained the same for decades.

And he says he doesn’t invest in stocks because they are just stocks. He invests in business projects with prospects of being successful, and the shares are the means of participating in these projects. In this way, he guarantees more security and effectiveness in his investments. “Today, I can state without mistake that shares guarantee the future”. He says he doesn’t give a damn about his wealth, which, according to him, only feeds his ego, and what he really cares about is the dividends paid by the companies in which he invests.

The recipe for success seems simple, but it is exactly what transformed the shoeshine boy into one of the biggest investors in Brazil.

And he is not even today considering changing stock positions he has carried for years. The largest individual investor in Brazil has positions in the following securities: Banco do Brasil (BBAS3); IRB Brazil (IRBR3); Klabin (KLBN11); Suzano (SUZB3); Unipar (UNIP6); Taurus Armas (TASA4); Isa Cteep (TRPL4); Taesa (TAEE11); Paranapanema (PMAM3); Santander Brasil (B3:SANB11) and Cemig (CMIG4).

One of his relatively new positions, reinsurer IRB Brasil RE, “just needs a boost” after shares fell 90% following the discovery of an accounting fraud in early 2020. “It’s like a locomotive – it’s on the rail but not running. It needs fuel, and that fuel is capitalization,” he said. In July 2022 his youngest daughter, Louise Barsi, was elected to join the reinsurancer’s audit committee.

Bruno Monsanto, a partner at RJ Investimentos, says that Barsi has two merely speculative positions: the mentioned IRB Brasil and Paranapanema. The first company has fallen more than 90% in the last three years and is now worth less than R$1, “and as it is not a company with a perennial income stream the investor believes that the company will have a strong recovery in the future”, says Monsanto. Paranapanema, on the other hand, has fallen by about 80% in the last five years – in 2019 it was worth more than R$40, and today it costs around R$5. “Even with the judicial recovery, the shareholder also believes that the company will recover”, also says the partner of RJ Investimentos.

One of Barsi’s biggest concerns is that the new Brazilian government, which takes office this January, will tax dividends paid by companies on the stock exchange. Still, he remains optimistic that the tax will not exceed 15%, even though a 30% to 40% rate could erode shareholder profits.

As far as cryptocurrencies are concerned, 2023 should be another year where Barsi continues with his sharp strategy, i.e. out of the market. Asked if he plans to invest in the sector, Luiz Barsi stated that “exorcise the cryptocurrencies“. It is worth remembering that exorcism is a practice in which some religious perform a ritual to expel evil spirits. This is not the first time Barsi has taken a stand against cryptocurrencies. Recently, he stated that “cryptocurrencies are fantasies of people who are easy to deceive”, which does not fit his profile.

The so-called intellectual assets are those created by companies for their business, which may or may not give them a competitive advantage in the market. And according to Luiz Barsi, cryptocurrencies also fit the definition, indicating that because they have no physique, they have no credibility. Finally, in addition to exorcising cryptocurrencies, Luiz Barsi stated that he will never buy a digital currency, stamping his foot that he will remain steadfast against financial technology in 2023.

When asked if money is the main item for success in investments, the great investor goes further: “Money is important, but it doesn’t take you far. Discipline does! It is an extremely important factor for the following reason: every individual who intends to invest must follow a basic rule, which is never spend more than he earns. Simple and obvious”.

And today by the way he lives not that much differently today than he did in his early adulthood. Barsi still takes the subway, works several hours a day, wears simple clothes, and lives a life without ostentation. Anyone who sees the gentleman with the white hair combed back, wearing a short-sleeved shirt and his glasses, and using his special free Single Ticket for seniors in the São Paulo subway, might not know that he is one of the country’s biggest investors. A father of five children, Barsi still works at a brokerage firm’s office twice a week – where he goes often accompanied by his youngest daughter Louise, who follows in her father’s footsteps and has created a program to train investors.

Louise, who is not 30 yo yet, has an enviable résumé: she is a certified investment analyst for the brokerage Elite Investimentos, holds a seat on the fiscal councils of AES Tietê, Klabin and Santander, is a substitute member of the board of Unipar Carbocloro and a member of the board of Eternit. From an early age, Louise was groomed to take over her father’s business. As a teenager she did not receive pocket money, but dividends (about R$300 per month) from a portfolio her father had put together especially for her. On her birthday she would ask for shares as a present and follow in her patriarch’s footsteps, reinvesting almost everything. She, along with two partners, created the company Actions Guarantee the Future, the same name as the project developed by Barsi in the 1970s, which gave origin to his way of investing. Louise hopes to help people build a portfolio of stocks for retirement and carry on her father’s legacy.

“If anyone researches anything about my father in the 1970s they won’t find anything. People only came to believe him when he became a winner, decades later. My idea is to try to convince people, as soon as possible, of the importance of investing. For me, it is an honor to be able to continue his legacy,” said the daughter of the “king of the stock market”.

But not even Louise takes all her father’s advice to the letter. She says that even she, who already considers herself a “young retiree,” cannot give up fixed income – called by both of them a fixed loss.

“He actually has 100% of his capital in variable income because he has such a large position that his cash is the proceeds. Obviously, those who are not there yet, which is the case of 99% of investors, like me, have to have a portion in fixed income. The purpose is as a reserve. For the average investor, these resources can’t go to variable income at all”.

Despite his calm, Barsi doesn’t spare any criticism. He pokes fun at economists, politicians, banks, funds, and the stock market itself.

In his opinion banks manage resources for their own benefit, and not for the market. He affirms, for example, that funds are not the best instrument to get into the capital market because they always reap benefits for themselves through management fees, instead of focusing on the interests of their clients. And that brokers and managers recommend investing in them because, unlike with stocks, it is possible to buy and sell funds without being taxed. “Real estate funds are a confidence game. So are funds in general. Private pension is another one. Run away from funds. You make the fund owners rich. They charge you management fees, success fees, performance fees, and I don’t know anyone who has made money with funds besides bankers”.

“Brazilians have an aversion to paying taxes. I love paying tax because it’s a sign that I won, you know?”, he says. Nevertheless, he is against a tax on dividends: “Not that one!”

And his advice to all the investors who are just starting to invest?

And in the market you will only win if you don’t consider yourself a minority shareholder. Consider yourself a small owner, because the minority shareholder can sell the shares, the small owner won’t sell, because the bigger owner won’t sell either. In 1970-71 I thought I should be the owner of Banco do Brasil. Today I am not the owner, but I am the biggest individual shareholder. It was the criteria. This is the lesson I would like to leave”.

Books that piqued our interest over the past week

Invention and Innovation: A Brief History of Hype and Failure

by Vaclav Smil

The world is never finished catching up with Vaclav Smil. In his latest and perhaps most readable book, Invention and Innovation, the prolific author—a favorite of Bill Gates—pens an insightful and fact-filled jaunt through the history of human invention. Impatient with the hype that so often accompanies innovation, Smil offers in this book a clear-eyed corrective to the overpromises that accompany everything from new cures for diseases to AI. He reminds us that even after we go quite far along the invention-development-application trajectory, we may never get anything real to deploy. Or worse, even after we have succeeded by introducing an invention, its future may be marked by underperformance, disappointment, demise, or outright harm. Drawing on his vast breadth of scientific and historical knowledge, Smil explains the difference between invention and innovation.

Amazon

Palo Alto: A History of California, Capitalism, and the World

by Malcolm Harris

In PALO ALTO, the first comprehensive, global history of Silicon Valley, Malcolm Harris examines how and why Northern California evolved in the particular, consequential way it did, tracing the ideologies, technologies, and policies that have been engineered there over the course of 150 years of Anglo settler colonialism, from IQ tests to the “tragedy of the commons,” racial genetics, and “broken windows” theory. The Internet and computers, too. It’s a story about how a small American suburb became a powerful engine for economic growth and war, and how it came to lead the world into a surprisingly disastrous 21st century. PALO ALTO is an urgent and visionary history of the way we live now, one that ends with a clear-eyed, radical proposition for how we might begin to change course.

Amazon

For Blood and Money: Billionaires, Biotech, and the Quest for a Blockbuster Drug

by Nathan Vardi

In the multibillion-dollar business of biotech, where pharmaceutical companies, the government, hedge funds, and venture capitalists have spent billions on funding, experimentation, and treatments, a single molecule can stop cancer in its tracks―and make the people who find that rare molecule astonishingly rich. For Blood and Money follows a small team at a biotech start-up in California, who have found one of these rare molecules. Their compound, known as a BTK inhibitor, seems to work on a vicious type of leukemia. When patients start rising from their hospice beds, the team knows they’re onto something big. What follows is a story of genius, pathos, and drama, in which vivid characters navigate a world of corporate intrigue and ambiguous morality. Vardi’s narrative immerses readers in the recent explosion of biotech start-ups. He describes the scientists, doctors, and investors who are risking everything to develop new, life-saving treatments, and introduces suffering patients for whom the stakes are life-or-death. A gripping nonfiction read, For Blood and Money illustrates why it’s so hard to bring new drugs to market, explains why they are so expensive, and examines how profit-driven venture capitalists are shaping the future of medicine.

Amazon

Unscripted: The Epic Battle for a Media Empire and the Redstone Family Legacy

by James B. Stewart and Rachel Abrams

The shocking inside story of the struggle for power and control at Paramount Global, the multibillion-dollar entertainment empire controlled by the Redstone family, and the dysfunction, misconduct, and deceit that threatened the future of the company, from the Pulitzer Prize–winning journalists who first broke the news. Unscripted is an explosive and unvarnished look at the usually secret inner workings of two public companies, their boards of directors, and a wealthy, dysfunctional family in the throes of seismic changes, from the Pulitzer Prize-winning journalists James B. Stewart and Rachel Abrams. Through the microcosm of Paramount, whose once victorious business model of cable fees and ticket sales is crumbling under the assault of technological advances, and whose workplace is undergoing radical change in the wake of #MeToo, Black Lives Matter, and a distaste for the old guard, Stewart and Abrams lay bare the battle for power at any price—and the carnage that ensued.

Amazon