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Today we're going to talk about investment strategies, and this guy here is considered one of the best in history. Today is the day for you to learn the complete step-by-step process of the "King Branch" method to structure a winning portfolio in the long term. Headphones aren't very well known to the Brazilian public as they are to Americans and Europeans, but something that greatly facilitated people's understanding was the Billions series that airs online.
Many people in the financial market love it. Of course, leaving aside all the dramatization and all the Hollywood-esque aspects that a series needs to attract an audience, it opened the eyes of people who didn't quite understand what the head does, besides all the intrigues in the series. What he does is, like trolling, risk, and investments to have a return, okay, but always prioritizing volatility.
In Brazil, headphones also exist and are called multi-market funds, but Brazilian legislation is a little different from the legislation of other countries where headphones have the freedom to basically buy anything you can imagine. Brazilian multi-market funds do exist, it's true, but not necessarily.
Yes, it's a freedom without a doubt. If you watch interviews with major international portfolio managers, they always talk about risk, risk, risk, because that's what's on their minds when they structure portfolios. Profitability is important, of course it's important, but more important than that is preserving the assets that are inside those portfolios, which as a rule belong to very rich people.
Because to get into the famous Red Fox, you have to have a lot of money. In my humble opinion, he's one of the best managers I've ever seen in my entire life. There are other very good ones, but honestly, when we talk about Red Fox, the legendary one comes to mind, and all the strategies he uses to control and manage risk without neglecting the profitability of the assets.
Just to give you an idea, let's talk about that 2008 crisis—God doesn't remember, it's been a while since the American market crashed—and how much did the legendary portfolio fall that same year? 44 percent. Undoubtedly, he's a guy who has a lot of respect in the financial market. At the time I'm recording this video, he's more than...
Or at least with a $160 million portfolio under management, that's a lot of responsibility on his shoulders. His entire strategy is based on a premise that can be summarized in two little words: risk-return. You can have a 300% annual return, of course you can, then you can have a return of 1,000, 5,000, 10,000 percent in a year, yes you can.
But the correct statement isn't whether you can, but rather how much risk you assumed to achieve that return, if you even managed to achieve it. And that's what most investors never stop to think about: how not to see these extremely high returns, these pornographic realities. The legendary investor's obsession is not losing money.
His main objective is to preserve the wealth of his rich clients, and he's a very studious guy. I also consider him one of the most intelligent cases I've ever seen. I've even seen several interviews with him, read his books, and everything else. He really is an outlier, and he created it, that is, not based on guesswork, but he did backtesting on bacteria, if you don't know.
What's most challenging is taking a strategy you consider a winner and seeing how it performed over many, many years. He did this with many, many, many, many strategies until he arrived at one that was the best, the most successful in all the analyses he conducted on his headphones up to 1925. You were already before that great crisis of '29.
And the first lesson from so much study, so much that he discovered, is that stocks have three times the volatility of government bonds. Robson, that was already somewhat predicted, and you'll understand why I'm saying this later on, as it will fit into the line of reasoning. And the legendary [King Darius] said that when he analyzed many, many, many portfolios of individual investors, he realized that these portfolios perform very well when times are good, but very poorly when times are bad.
And how does the average investor, the individual investor, fix this? King Darius has the answer because King Darius always likes to take analogies from nature and bring them to the world of investments. So he sees that asset prices are... Influenced by four things— inflation, economic growth, and economic decline—you've noticed that these are four things that influence asset prices, and he also divides them into four seasons: according to nature, we have summer, autumn, winter, and spring; investments also have four seasons.
It's at this point that King Darius takes this information I just explained to you and cross-references it, arriving at something that's on your screen. It's possible—this is the legendary figure himself. If you've never had the opportunity to see this guy on the screen, let's start with the left quadrant up there.
When we have economic growth, which assets favor the investor? Stocks, debentures, commodities, and gold. When we have a decline in economic activity, the assets that benefit the investor's portfolio are treasury bonds and also those bonds linked to inflation. When we have an inflationary environment, the assets that benefit are commodities, gold, and also inflation-linked fixed income.
And when we have a period of deflation, the assets that end up benefiting the investor are treasury bonds and stocks. So, what does that mean? I need to put 25 percent of my portfolio in each of these. These quadrants aren't the reason I explained earlier that the volatility of stocks is three times greater than that of government bonds.
Because in these investment classes you saw on the screen, the risk of each one is different. You'll see, for example, the historical volatility of gold is different from the historical volatility of stocks, which is different from the volatility of inflation-linked bonds. Well, without him being the killer here, you have to weigh these assets and fit them into their little squares according to historical volatility, which is what our dear Ray Dalio arrived at through all the studies carried out up to 1925.
So we have the portfolio in the way it is on your screen: thirty percent of the assets are in stocks, and here, be careful, he generally likes to invest through stock portfolios, okay? He has quite a few stock market leaders. Now pay attention to fixed income: fifteen percent are treasury bonds maturing between 7 and 10 years, and forty percent are treasury bonds maturing in the long term, after 20 years.
All you take stocks, the intermediate-term bonds, and the long-term bonds already... He gives 85 percent of the portfolio and divides the other 15 percent between gold and commodities, exactly as you see on the screen. So now that you understand the rationale behind why each thing goes in its designated place, the complete structure of the investment portfolio looks like this.
And what do the colors mean? Green signifies the lowest volatility of all assets. Then you go from green, through yellow, towards a lighter red, which gets progressively darker. So this color progression you see on the screen represents the lowest to the highest level of volatility. So, for example, if I look at the screen in the right corner, emerging market stocks have a certain level of volatility, so buy outside the spectrum.
Now, if you take, for example, cash, it was green because I arrived at the market. It doesn't have to be volatile, but what does his portfolio look like today? I recently posted on my Instagram the updated portfolio of the king. The most important position he has is the spike, which is a key component of the stock market.
This is the American Ibovespa index. Inside, you can find Apple and Coca-Cola. McDonald's Facebook weapons, one, the second most important is Ticket Gold, also a major investor in gold. The third most important is Vanguard Emerging Markets, which, as its name suggests, invests in emerging market stocks.
Then we have IV, which is exactly like Spy, meaning it's a team from [unclear - possibly a company name]. We have PLP, which stands for Treasury bonds, or the long-term US Treasury bond I explained to you a little while ago. Then we have Hélio, which is a company that invests in investment grade, the most important one.
It's a company that buys stocks in the Bovespa index, and it invests in Brazil through Minecraft. Next is Raul, which is also a kind of gold fund. It's also a major emerging market fund, just like we just saw. Our beloved VW Vanguard, or WYG, is also a major debenture fund, but instead of companies with good credit capacity, it invests in speculative companies with low credit ratings.
Payment capacity is also a type of investment that only buys stocks in emerging countries like China, Russia, South Africa, and India. For example, it buys stocks in the Ibovespa index of South Korea, the Yen buys stocks in the Bovespa index of India, and the Vera only buys stocks in countries involved in the market, such as Japan, Germany, Switzerland, and the Netherlands, excluding the United States and Canada.
This valuable content you just saw has much more on my Instagram and Telegram, and the links to both are below in the description. Click there because you're leaving a lot of valuable content on the table if you haven't been following. We've reached the end of our chat today. A big hug, and we'll see you at our next meeting.
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