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Hello, welcome! This is another Stock Analysis Drops episode. I'm André Leal, and with me is Artur Nunes. How are you, Artur André? Welcome, investor! In today's episode, we'll be presenting a memo from Howard Marx, founding partner and vice-president of Walk, published on May 17, 2024. For those who don't know, R.
Marx is an economist and author. Among other books, he wrote " Mastering Market Cycles" and "The Most Important Financial Thinking." These are two books for the financial market; the latter even includes a review of Warren Buffett. Rob Marx, can I tell you? He started working at City GR in 2000 (sorry, in 1969), worked there for 16 years, and became director of research and equity analyst.
After 16 years at City Corp, he left to work at TCW Group Trust Company of the West, which focused on global equity and fixed income strategies. He worked there for 10 years, and along with five colleagues, left and founded... and now, for those who don't know, you can give... Explanation: What is André?
Yes, Artur? Look, founded in 1995, Capital Management was one of the first investment managers in the distressed debt fund segment, high-yield bonds, and private equity. A milestone in the manager's history was the 2008 financial crisis in the American market, as you mentioned above, right? When the company gained even more prominence because shortly before all this happened, the company raised the largest distressed debt fund ever seen in history, raising more than 10 billion and generating excellent returns for its clients.
The company's IPO on the New York Stock Exchange happened in 2000. Do you want to comment on Tree? So, I knew Robert Marx, I haven't read any of his books, but I even have a little list here where I put book recommendations, because it has... uh, these two that I mentioned, there's a third book of his that I do n't remember offhand, but these two are on my list, that's why I pulled them up.
Uh, so I already knew him by name, just as I knew Ray, for example, but he's not someone I have a deeper knowledge of, like, for example... Warren Buff, right? Charles Munger, anyway, I knew of his existence as well as that of the company, but I never really analyzed the company. Now, with the letter, I found it interesting to comment on.
Look, André, so let's go, right? Here's what I found quite interesting: it has a very robust dividend of 12.45. And if we look at the history, we have an average of over 9%, 99.5%, right? It had a drop in the years 2018 to 2023 and then started growing again, but you see that it has a fairly constant dividend.
It's slightly below the book value, but it's below the book value. And here are some years with zero, certainly some kind of bug, right? But anyway, we see that in some years it was below the book value and sometimes it traded above, not much above, right? 1.22 or something like that, but you see that it's not such a stretched company, right?
A P/E of 14.48, an EV IBID of 13.69, a very good net margin. 38% and a 20% profit growth over the last 5 years, so I'd say it seems quite interesting when we look at the dividend payments, right? We see that until 2017 it was one way, it changed from monthly in 2000 to quarterly in June 2017, and since then it pays every March, every June, every September, and every December.
So for those who want to live off dividends, it seems like a company to study. We see the payment going through the year, right? It has always paid since 2008. Anyway, it seems like an interesting company. I think that those who like dividends have an opportunity to get a company that isn't too stretched out, paying a robust dividend.
Let's go to the letter, André, yes Artur. Let's go to the letter. So, just to do a part, Warren Buffett said that when he sees H. Marx's letter, he stops everything to read H. Marx's letter, which is considered one of the most important things. So, for those who don't know, the letter is on the DAE website, it's called, translated, "The Madness of Certainty." H.
Marx starts by talking about people who take certain things for granted... People are very certain, right? And then he cites, for example, Joe Dylan, who was the president of Biden's campaign, who said she was sure Biden would be re-elected, right? And we know today that he wants to be in the race, right?
He gave up, right? She said, uh, this is before the debate, right? Joe Biden will win, period. And then he cites several things, people are very certain, right? So he starts talking about that, then talks about Trump's election. Ah, before Biden's term, right? It was considered certain that Hillary Clinton would be elected and that if Trump were president, the stock markets would plummet, right?
What happened? Hillary Clinton wasn't elected, and neither did the stock markets plummet with Trump; quite the contrary, there was a 30% increase in the first year, if I'm not mistaken. So André, he focuses a lot on this issue of randomness. Artur, I'm also reading the letter; he focuses a lot on the issue of randomness, right?
I also know how to talk about it. So André, he focuses a lot on the issue of randomness, and then he says that the investor shouldn't... Using terms like "will," "won't," "has," "can't," "always," and "never" doesn't exist in the capital market, not only in the capital market. He starts by explaining politics and then goes to macroeconomics as well, saying that in 2021 the Fed considered the inflation cycle and its progress to be transitory.
Initially, they didn't take action, then they saw that it wasn't quite like that. There were the fastest interest rate increases in US history to avoid inflation. In mid-2022, there was a certainty in the market that the increase in interest rates would cause a recession in the US market, as usually happens, but no recession materialized.
So, firstly, there wouldn't be an interest rate increase; if interest rate increases didn't cause a recession, the recession didn't come. At the end of 2022, the consensus among market observers changed to the view that inflation was decreasing, which would allow the Fed to start cutting interest rates, and so far the Fed hasn't cut a single point in interest rates.
In other words, it's a succession of wrong predictions, and then he mentions that... Some people might have gotten everything right by getting it all wrong, right? So, the person who correctly predicted, for example, that the Fed wouldn't cut interest rates, did n't expose themselves to the market, didn't take advantage of a 50% market increase.
Those who got the predictions wrong and exposed themselves to the market took advantage of a 50% increase... it reminds me a bit of Peter Lynch, right? I really like Peter Lynch. I'd say that of all the books I've read, his is the one I've liked the most so far. He talks about how much money, much more money, was lost fearing crashes than the crashes themselves.
So that's it, right? People think, "Oh, I'm going to stay out because it's going to fall." Because there's always someone who thinks it's going to fall, and eventually they're right, right? Because that's it. I think people get it right by chance, remembering Iná's mother who predicted the death of the Mamonas Assassinas?
She didn't get anything right anymore, but if I keep saying someone is going to die, at some point I'll be right and become famous. So I think that's basically it. I think that happens a bit with the market. I agree with him; I think that was also one of the reasons... I wanted to include the letter because I think there are many people who say such and such will happen on such and such a day, and I confess that I don't know anything.
I can look at a company and say it's cheap, whether it will be cheaper tomorrow, I don't know, whether it will be more expensive, I don't know. He touches on this a bit, right? So he shows how much this occurs in economic policy, in elections. I'll read a phrase from him here, already translated: "Financial science, economics, and finance assume that each market participant is a homo economicus, someone who makes rational decisions aimed at maximizing their financial interest.
But the crucial role played by psychology and emotion often causes this exposure to be flawed." So that's it, right? People end up making decisions much more based on their psychological state than rationally. And then he mentions that few market predictions prove correct, and of those that do, most are right for the wrong reasons.
He quotes a phrase that I found quite interesting from John Kenneth Gabal (I do n't know if exactly like that, probably not, which is said under his name): "There are two types of forecasters, those who..." They don't know, and those who don't know, they don't know something else he mentions. I find it interesting that we, I mean people in general, give too much credit to people who, for example, a good economist who gets a lot right, and think that this person is a kind of guru, someone who should be followed.
So we end up taking that to other areas of life, which we shouldn't necessarily do, because he may be an excellent economist, he may make good predictions. With all this caveat that Howard Marqus raises, which I quite agree with, but there's no reason to follow, say, Warren Buffett's opinion on the Olympics.
So, to conclude, Howard cites two more quite recent events that reinforce his idea. One of them is that he's a tennis enthusiast and was watching the final of the Women's Olympics where Barbara Kova, a Czech tennis player (I do n't know exactly how to pronounce her last name), played against Jasmine Paulini, and the bettors believed in a Jasmine Paulini victory at odds of 25 to 1, and Barbara won.
And another fact... One unpredictable event that can't be ignored was the assassination attempt against Donald Trump, right? Someone had predicted a victory for Joe Biden, who wasn't even in the race, by a few centimeters. Trump almost died, right? He could have died, and it would have completely changed the presidential race.
And now there will be the impacts that this attack will have on the presidential race. So, that's it. There are many things, many factors that can change an election, that can change the market, that can change... He says we have to have a humble attitude towards this, right? So, replacing "I know" with "I think" opens a path for you to study more, to seek out and accept divergent ideas and learn from them.
And we brought this letter precisely to show a little of that: that in the investment market, you need to study, you need to be aware of everything that happens, and there is no certainty, right? Exactly, André, I think... anyway, who am I to say? But that's exactly what I said, right? There are many factors.
Anyway, I think we have to look for good opportunities, preferably discounted companies. We have one that isn't discounted, for example. Nvidia, but it's about looking for discounted companies because we have a greater safety margin in those cases, and when buying, for example, NVIDIA, you have to be aware that there's a risk.
Balancing that in the portfolio is part of it, and I think that's it. You have to do risk management and look for companies that give you a certain security because that certainty doesn't exist. We even mentioned, I think in one of the last videos, that an analyst—not exactly an analyst, the investor—said that NVIDIA will be worth 50 trillion dollars.
I said that I don't dare say that. Anyway, I understand him. Anyway, if you put it in a model, in the model of the 50 trillion dollars, if that will happen, I swear I have no idea. For me, it seems like a good opportunity. I feel comfortable, even though I'm very stretched, investing in NVIDIA. Perfectly, very well, stock analysis drops.
That's all for now. I hope you enjoyed it. We'll be back anytime with news, information, and curiosities from the investment market. A big hug to everyone, until then, bye bye, big kiss.
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