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Okay, so here's another video today, and if you paid close attention, I didn't say analysis. Today we're going to be talking about this book here, the most important one for investors, R Max, and it's not an analysis of a real estate fund. Someone even commented, "Oh, let's do a video about competition models between real estate funds." I always try to bring different types of videos.
I've already talked about ETFs, I've talked about market cycles too, a while ago, and I end up talking more about real estate funds because I have more knowledge to share with you here. But I always try to cover stocks, cycles, ETFs, so if you like this type of content, leave a comment. Seriously, I read them, I really watch them.
If you find it interesting, you can leave the book you want to see here, or the stock, or the infrastructure fund, or the real estate fund you want to see here. I always bring content to vary things and talk about other subjects. But speaking of books, I haven't read many books about this specific book, even with more than 5 years of investing and consistently above-market returns.
Books weren't something that changed my trajectory as an investor. I've read four investment books, five investment books, and one or two of them were in Hollywood, one of them was this one here. So, they weren't something that changed my experience much, and I truly believe that unless it's a really technical book, investment books won't change your trajectory as an investor.
What changes your trajectory as an investor is market timing and knowing how to analyze cycles. That, for me, is what changes your game when investing. They even asked R. Marx, "R. Marx, you don't know him? He's the founder of a multi-millionaire asset management firm. Howard Marx is also a multi-millionaire investor of his own wealth." And then they asked him, "Look, R.
Marx, if investing is so simple and so clear, just follow what you do, just follow your rules, why don't most people succeed investing?" And then he said, "Look, in basketball, we can teach a person everything: to run, we can teach them to dribble, we can teach them to pass, we can teach them to dunk, to shoot, we can teach them everything about it." In basketball, preparing her body physically is something we can't teach someone to just be tall.
Height is very important in basketball, and in the financial market, they say temperature, you know how to control your emotions, that's very important. It would be height, as Henrique Breda, who wrote the preface, says. But for me, it's market timing, market timing, and height. So if you don't have height in basketball, it's impossible, right?
So for me, what really changes your game in investing, in the financial market, is market timing. And of course, market timing is something you really need; you can't change that. You just have to sit and wait, analyze, and improve every day. But what I'm trying to do here, bringing as much experience as I have from Harry Marx and in all the videos about real estate investment trusts (REITs), is precisely to give you a little bit of that to help you get ahead and achieve things faster and go further faster.
But now, talking about the book, we start the preface with Henrique Breda quoting Charlie Manger, including Charlie Manger. who is no longer with us, died last year if I'm not mistaken. He starts by saying that all the intelligent people you truly admire read a lot, all the people you truly admire read a lot, and so we're bringing this book here precisely because it's a book by a multi-billionaire author.
And so we're bringing it here precisely as a reading, right? You probably know someone who is either heavily in debt, or who has money and needs to invest but doesn't even think about it, or someone who really wants to invest. And to help that person, we're going to do the following: I have two books by Harry Marx.
I have this one here that I have in my hand and this other one here. So there are two books, including this one, which is signed by the guys from the market: Thiago Nigro, Breno Perrucho, Bruno Perini, Lucão, Pablo Bilar. So let's do the following: if this video reaches 50 likes within the first month, I'm going to do the following: I'm going to raffle off this book here, I'll sign it and send it to you.
So if you find this type of content interesting, leave a like, because I'm going to raffle off this book here. Leave a like! Subscribe to the channel too, because I'm going to do a giveaway for you guys, and also to help your friend there, and this video here can help you win this giveaway. Let's do the following: send this video to that person, that person you know who needs some content to help them get started.
So send this video, and then we can benefit everyone, okay? But now talking about the book itself, ah, taking away this quote from Charlie Munger, we start the preface by Henrique Breda with him bringing this quote from Howard Marx himself, and then, in addition, the first chapter of the book, we talk about second-level thinking.
Second-level thinking is, for me, the most stratospheric thing that Marx ever elaborated on. What I think of as second- level thinking, for example, is a real estate fund or a stock, and this real estate fund is very cheap, Petrobras, for example, during the election period between Lula and Bolsonaro.
So there's the stock that's very cheap, everyone's saying it's too cheap, run away from them, it's bad, I've invested and screwed myself, everyone's saying that. That's first-level thinking. So... Lula is going to get involved and Petrobras is going to be screwed, I don't know what, that's second-level thinking, first-level thinking, and second-level thinking, what is it, man?
Everyone, everyone is saying that this investment is bad and it's very cheap, the stock fell 80%, 70%. If I buy it, isn't the chance of me making money, since it's so cheap, higher than the chance of losing money? And that's second-level thinking, going beyond that. So everyone's saying, "Wow, this real estate fund is great, I don't know what." Is n't it already so overpriced that its risk-return ratio ends up being bad, which makes it a bad investment as a consequence?
So second-level thinking is this, it's a brilliant thing that Harold Marx brings up, and whoever wins the book giveaway here, I want to see them talking about this because it really changed my game, thinking beyond what people are thinking, doing beyond what they are thinking to have a return above them, right?
And in addition, in the book, in the first chapter, we have what brings second-level thinking and second-level thinking. Second- level analysis is something complex and profound, and you have to consider: What is the range of possible outcomes? What is the chance of you being right? What will happen if you're wrong?
So you have to formulate many questions in your head, which isn't simple: "Is it expensive? Is it cheap? Is it bad? Is it good?" It doesn't go beyond that. But, man, are people not finding it so bad that it might actually be good, or are people finding it so good? Like Vegan, for example, which might be bad, right?
Vegan, for example, a company that, if you look at any valuation, it's difficult to find a serious valuation, it's difficult to have an upside because it's already so priced in, so good, so perfect, that sometimes it ends up being great as an investment for the owner, but bad as an investment. So, it's about thinking about the second level.
And then, in the second chapter, we bring up Max, who comments on market inefficiency, right? Inefficient markets, he even made a lot of money, he got really rich with the toxic credit market, so you know when I... I say that analyzing a CRI (Credit Investment Fund) is difficult because a CRI can have many things to analyze, and it's time-consuming and complex.
So Howard Marx took the worst crises, the very worst, the worst. "Wow, this credit here is the worst possible," he made money off of it because, firstly, he analyzed the collateral, and secondly, because the credit of that company was already so poorly priced, he often ended up making money by improving the company's situation and selling that company credit.
So, he made a lot of money with this, precisely with a second-level thinking: "Wow, the price is at 10,000, but the company, the collateral it's giving me, I can sell, I can buy the company with this credit here, and then I can sell its assets." The same logic as Warren Buffer, right? I can sell its assets and put the money from the assets, which is greater than the price, at which I can buy it.
So, he managed to make a lot of money with this, bringing this second- level thinking. He talks precisely about the importance of operating in inefficient markets, such as the stock market. The American market is rarely inefficient; it has its ups and downs, of course, but it's rarely inefficient. Now, Brazilian real estate investment trusts (REITs) – are they inefficient?
It's mostly individual investors, not institutional investors. It's a market that few people know about, a market that doesn't have many people with the capacity to invest a lot of money. Is it more or less efficient than the American market? Which is more inefficient: the REIT market, predominantly made up of individuals, or the stock market, which has a lot of banks, institutional investors, and investment funds with billions of reais from foreign investors?
So which do you think is more inefficient: the crypto market, for example, or the real estate market in São Paulo? It's always about analyzing which market is inefficient. Why would you want to analyze an inefficient market? Because in an efficient market, it's very difficult to find a worthwhile risk-return ratio.
In an inefficient market, it's easier because it's not priced correctly. So, if you do a more in- depth analysis, you can find that. That's why I like Brazilian REITs, aside from several others. The characteristics of an inefficient market are very interesting, and Howard Marx emphasizes this. He got rich doing it and continues to get richer and richer doing it.
He says it's very important to focus on inefficient markets. Furthermore, here's a brilliant point Howard Marx makes, which you're probably starting to invest in or want to start investing in: when you buy a stock or a real estate fund and it goes up, you become more confident, you think, "Wow, I made the right decision," which makes you buy more.
But understand, every time it goes up, you're buying at a higher price. If you're going to buy, you'll buy at a higher price, and besides, the risk- reward ratio will be lower because now there's less return, because part of it has already risen to an equal risk level. In other words, the risk-reward ratio becomes worse for you than when you bought it back then.
But when the stock or real estate fund goes up, people feel they were right and that the fund is good, and that's why it's going up, and they buy more, even though at times the situation is even worse for you to buy. This real estate fund, this stock, or whatever this asset is, right? On the other hand, when it's falling, you think it's getting worse, that you made the wrong decision, that it's falling because it's bad and not worth it, and then you start not wanting to put money in, and soon you start wanting to sell, "Damn, it's falling too much!
Shouldn't I just sell this crap and get rid of it?" And then Howard Maxx says the most important thing for me, he who invested in toxic assets—we have to understand this—he invested in really toxic assets, like, the kind where everyone said, "No, this company is going to fail," and he would go there and say, " No, then I'll lend my money to them." He says that the most important thing for him, both today and throughout his career, that helped him make this money, was precisely analyzing the probability of permanent capital loss.
So, for example, with a toxic asset from a terrible company, if you don't do a good analysis, you can permanently lose capital. It's like Americanas (a Brazilian retailer), it's a loss that will hardly ever return to its original value, right? It's unlikely. So, it might come back, it might come back, right?
He even talks about the market. He has two simple rules. First, everything is cyclical. And then we have a phrase from Mark Zuckerberg that Marx uses a lot, and that I really like. You can tattoo here, you want to tattoo... don't tattoo your wife's name on your arm if you want something that won't change.
It 's not your wife's name that you'll have tattooed on your arm, it's this phrase: " The market, history, and the market itself, it does n't repeat itself, history never repeats itself, but it rhymes, it resembles, it rhymes, it's similar, the fundamentals are similar, the context is different, but the fundamentals are similar." So you can tattoo this phrase on your arm, it 's not immutable, right?
And that's what happens, being this rule one of the market. What is rule two of the market? Rule two of the market is that people start to think that this is no longer valid, and it is precisely at that moment that this is more valid than at any other moment in history. So that is rule two of the market.
It's precisely at the moment when people think the tree will grow to the sky, when things will reach zero, when they will evaporate, we have the analogy of the farm chicken, right? The farm turkey that we fed for 364 consecutive days. And then everyone says, "Wow, 364 consecutive days, day after day, it was there being fed and getting fatter, you think that on the next day, on day 365, it will get fatter?" Everyone will say, "It will get fatter," but people forget that it's precisely on day 365 that we kill it to make that Christmas dinner, that is, it did n't get fatter.
And then everyone bet that something would happen and it did n't. So, it's knowing this subtlety that nothing gets fatter forever, the chicken won't get fatter forever. Going back to the point, Howard Mars, he has this point that the most important thing is to focus on the permanent loss of capital.
So, there's no way around it, it's over, there's no way to recover. Why is this important? And because... What he says is that it's the most important thing for him, right? A multi-billionaire manager thinks he manages trillions of reais, right? Why is this so important, especially for someone who invests in distressed debt?
Because if you lose capital for a while, it's okay, especially if it's an inefficient market. Now, if you lose capital forever, then it's over, end of story, right? So, for example, why am I so confident buying into real estate investment trusts (REITs) when they're falling? A lot of people are saying, "Oh, the REIT is falling, let me sell this crap already!
Let me put it in fixed income paying 15% per month here at Banco Sofisa, at Banco Master, let me put it here, let me take it out of REITs." For me, I continue buying REITs. First, because it's an inefficient market, and second, because of the market cycle, nothing ever reaches zero. But third, precisely because of this reason: I won't lose my capital forever, unlike a credit fund, where it's possible that this could happen.
When I buy a real estate investment trust, for example, which everyone is running away from, I can't lose my... Capital because the building is there, so... Unless a meteor falls and the insurance company doesn't pay, causing a huge mess, and this applies to all the buildings in the real estate fund, all my real estate funds.
Unless that happens, and then the world ends, in that scenario it's very difficult for me to lose my capital permanently. Because if the fund falls 90%, I still have that fund there, I still have that property there. So why, for example, in the Gari fund, Gari 11 (there's even a video here in the card), why am I raising an alert?
Oh, there's an Artemis 2022, man. Artemis 2022 was something I found out of nowhere, I said let's record it, and then when I started recording I found this thing, I said, "Wait, what's this?" So it's possible I misinterpreted it. There's that possibility, it might not be what it is, the numbers add up in the end.
But if that happens, if it really doesn't add up, if it's something that really is... is... is an XPIN 2.0, if that happens, what is the probability of me losing... My capital is permanently high, even in a fund like J SRE in RBRP, even if the fund falls 90%. What is the probability of me permanently losing my capital?
It's very difficult because the building is there, a building on Faria Lima, how am I going to lose my capital so quickly now? For example, in GAR 11, it could be any fund, if this really is an XPIN 11 2.0, we're talking about a permanent loss of capital due to leverage, the same thing as SUO Logística.
The video is here in the card too, if you don't know, the last moments of SUO Logística, I went to analyze it, and SUO Logística, if it couldn't pay its bills, it had liabilities of R$220 million. Guess how much the fund would lose if it did n't pay those debts? You might say, " R$220 million that it would n't be able to honor?" No, because we forget the LTV, so it had a collateral ratio for those R$220 million of R$340 million.
In other words, if he couldn't pay those bills, he would lose the entire fund. So, even the slightest leverage can lead to permanent capital loss. While a fund like a real estate fund in Faria Lima could fall by 90%, the probability of permanent capital loss is very low. So I really like this book; I find it very interesting.
If you really liked the content, leave a like, send it to your friend, send it! You can send it without fear, let's help this guy! And I'll also be giving away this book here. If you liked the content, leave a comment so I can bring more content like this. And about the most important book for investors, that's it.
I read it, I got a summary up to Chapter 10. But if you liked it, I can bring a part two too. That's it, that's us!
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