Episode #228: Danilo Santiago, Rational Investment Methodology, “The Market Will Tend To Overpay When Earnings Are Good And Underpay When The Company Gets In Some Kind Of Trouble”
Guest: Danilo Santiago is founding partner of Rational Investment Methodology and manages the firm’s “fundamental-quant” equity strategy.
Date Recorded: 6/3/2020 | Run-Time: 1:09:05
Summary: In today’s episode, we’re talking stocks and investment process. We take a deep dive into Danilo’s fundamental process that is, to a large extent, automated by programs he developed over many years. We chat about circle of competence, and why Rational focuses on a quasi-static group of about 60 companies, and has done so for over a decade.
We even walk through a case study, and talk about how Danilo thinks about the long and short side of his book.
Comments or suggestions? Email us Feedback@TheMebFaberShow.com or call us to leave a voicemail at 323 834 9159
Interested in sponsoring an episode? Email Justin at firstname.lastname@example.org
Links from the Episode:
- 0:40 – Intro
- 0:52 – SumZero
- 0:56 – The Meb Faber Show – Episode #151: Divya Narendra, “Valuation Is Probably The Most Critical Component Of SumZero’s Thesis”
- 2:06 – Welcome to our guest, Danilo Santiago
- 2:55 – Danilo’s background as an engineer
- 3:54 – Danilo’s path to investing
- 12:00 – The key to success of Danilo’s portfolio
- 13:49 – Rational’s investing framework
- 18:05 – Parameters for including and excluding companies in the portfolio
- 20:20 – How often companies fall into different valuation zones
- 27:28 – Formation of the fund
- 29:24 – Short side strategy
- 30:51 – Case study
- 46:24 – How the portfolio has changed during the pandemic
- 50:53 – Opportunities that are intriguing to Danilo right now
- 54:37 – Behavioral psychology behind the portfolio
- 59:21 – How the research and portfolio management program works
- 1:03:00 – Most memorable investment of his career
- 1:05:30 – The type of consumer matters
- 1:07:41 – Best way to connect: LinkedIn
- Rational Investment Methodology Presentation
- Rational Investment Methodology Modus Operandi
Transcript of Episode 228:
Welcome Message: Welcome, to the Meb Faber Show, where the focus is on helping you grow and preserve your wealth. Join us, as we discuss the craft of investing, and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.
Disclaimer: Meb Faber is the co-founder and Chief Investment Officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions, and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.
Meb: Hey, podcast listeners, hope everybody’s safe. It’s summertime and we got another awesome show for you today. We were introduced to today’s guests by friends at SumZero. If you’re unfamiliar with that company, it’s the world’s largest investor community for sharing investment ideas. You can check out our old Episode 151 last year, with the founder, Divya.
New for 2020, [inaudible 00:00:59] now partial access to the research database of reports from over 17,000 professional investors through the newly-launched SumZero Elite. And if you’re a manager of SumZero cap intro platform, you can showcase your strategy to a pre-vetted pool of over 400 institutional LPs.
Today’s guest is founding partner of Rational Investment Methodology, and manages the firm’s fundamental quant equity strategy. Like me, he is an engineer by training. He’s got almost 25-year career in finance, with stops in City, McKinsey, and Basswood Partners before founding his own fund.
In today’s episode, we’re talking stocks and also his investment process. We take a deep dive into our guest’s fundamental process that is, to a large extent, pretty unique, and the building blocks constructed by programs he’s developed over many years. We chat about circle of competence, and why Rational focuses on a quasistatic group of about 60 companies, and he’s done so for over a decade.
We even walk through a case study, some interesting ideas, and talk about how our guest thinks about the long and short side of his book. Please, enjoy this episode with Rational Investment Methodologies’ Danilo Santiago.
Danilo, welcome to the show.
Danilo: Thank you very much, for having me here.
Meb: As I like to start these all now, I’m at Cambria, global headquarters of the pandemic, which is my bedroom. But we got a nice veneer of Gotham City in the background today. Where are we talking to you from?
Danilo: Yeah, so I’m in Bergen County, in New Jersey. It’s one of those counties commutable to New York City, so 35 minutes you are in Manhattan. So, we were in the epicenter of the whole crisis, of the whole pandemic.
Meb: Well, glad to hear you’re safe and okay, as though you mentioned you have some teenagers, so not without its own challenges. Somewhat the opposite end, I got a three-year-old who may make an appearance at some point during this podcast, we’ll see.
So, all right, so it’s gonna be a fun one today. We’re gonna talk about all things investing, we’re gonna talk about stocks, but let’s get a little origin story. You’re a fellow nerd, a fellow engineer, is that right?
Danilo: Yeah, I’m an electrical engineer. I never worked as such.
Meb: That’s the hard one.
Danilo: Yeah, well, that’s why I usually say all the numbers are there. I worked very briefly as an engineer, actually as a method and process engineer on a headlight and headlamps factory. It was very interesting though, as to start my career, to see real operations. I still bring that with me today when I’m looking at the business for investing. It makes a difference. Sometimes I can remember the times that I was down at a production line and make a relation to the numbers that I’m seeing that at the end of the day, it translated to our real business.
Meb: Yeah. I remember my old man, who was an electrical engineer, used to always say that. He said, “That is a great analytical foundation.” And I would tell myself, then I was just miserable, at the bottom of the library, while my friends were out playing poker, watching football or drinking beers.
All right, so you started out engineering, made your way to finance. What was the path there?
Danilo: Yeah, so I started with my engineering course, it was at University of San Paolo, one of those universities that you have to study like crazy to get in, and much more to get out. So, first job was as an engineer, a methods and process engineer, helping with production. And then although I enjoyed that work, the day-to-day, I wanted to do something different. And the first thing that I managed to do was I went to Citibank in their training program back in the 90s. That was my first interaction with finance, but it was very banking-oriented.
From there, I was doing also a pre MBA course, if you will, also in Sao Paulo. And then I moved to an investment bank, like a local aggressive investment bank. Terrible feat, stayed there for like six months. And then I went to McKinsey. But it’s still Sao Paulo, working as a consultant.
The true transition when I started to build the knowledge that I still use today was when I went to my MBA at Columbia Business School. Now, the house of value investing, I had contact with great teachers there, one you probably know, Bruce Greenwald. That was the one taking the course to a different level there. So, that was my first contact with finance.
Then when I went back to McKinsey, I went to the corporate finance practice, which is still consulting, but now you’re talking much more focused on valuations. Which means if a company was going to do M&A, sometimes the CFO would like to have an opinion before talking to bankers, before talking to target company, if you will, so we would come before the negotiation started to give them an idea of value in process, etc.
That was a great learning, because I would parachute in projects that I knew nobody there, not the client or even the consultants. I was all over the country in many different industries, and we have a few weeks to come up with some useful answer for the CFO. Fantastic. That’s where I learned to be able to get a lot of information, quickly put this on a spreadsheet and get to some conclusions.
After that, that’s when I made my move to the world of investing. So, I went to a big hedge fund, two billion dollars-plus, and I went there to make their valuation process better. They were doing valuations discounted cash flows, but there was room for improvement. I stayed there for a while. It was a very, very busy time in that industry. It was just pre ’08/’09 crisis. So that crisis was very messy in the industry.
And eventually, I had maybe a good idea to launch a hedge fund with a friend. He was in Brazil and I was in New York. So, doing what we are doing now, I have been doing this since ’08. Quite frankly, the technology was already good enough to do video calls and share screens back like in ’08. So, we had a few analysts, and then that’s where we build more knowledge on a lot of companies, and that’s what I still bring with me today. So, some of the valuations that I deal with today, I started working on them ’05, ’06, right? I’m on version 47 or some of those models.
So, then, after having a hedge fund for a few years, eventually the seeders and partners that we had, they ask for their money, we decided to close down the fund. My first reaction was to try to do a hedge fund again. I started talking to some family offices, because it’s the core…family offices are usually the ones that understand the deep fundamental analysis that I try to do. Because many times they have businesses themselves, and so when I show them detailed valuation with a lot of fundamentals on a trucking company, sometimes, “Hey, that’s exactly what we do,” or, “We had a business in that same industry, so we understand what we’re doing.”
So, it’s good for me when the person, my potential clients, whoever is talking to me, knows a particular business, because they understand then my focus on fundamentals.
So then, because the market was already in a seven, eight year’s, nine year’s Bull Run, every single person, every single family office that I was talking to, was feeling extremely comfortable. It’s like, “Well, you know what? Why do I need to do all this? Great what you do, but I will just buy some index and I’ll be fine.” It happens. We know that, right? I mean, when markets are running for too long, people get complacent. And that’s when they take their eye off the ball, in terms of looking at the business that we’re buying, or shorting, for that matter. So, I was not successful in raising any significant amount of money.
And then I started to think about an idea that we had, even when running a hedge fund, which was, can I run the same strategy, the same hedge fund long/short strategy managed account? Is this possible? Because back in ’08, ’09, ’07, because of trading costs, you couldn’t. If you have $250,000, $100,000 in a managed account, and you have minimum trading tickets of $50, that’s it. You can’t not build a true portfolio with risk controls, position sizes, that as granular as you want them. Because again, the trading costs would eat your performance.
Now, fast forward 10 years, what started to happen were companies like Interactive Brokers made that type of investment possible. So, I started to experiment with some of those brokers, and eventually settled on Interactive Brokers, and then did another thing I had on my back burner that I always wanted to do. I’ve been programming computers since I was 12. I mean, I started with a Sinclair computer, 16K of memory.
Meb: I don’t even know the Sinclair. Is that pre-Commodore?
Danilo: Yeah, well, Commodore was like a dream computer. That was black and white, 16k, 16,000 characters of memory, using a tape recorder. And we would do like, you know, me and some friends, we would do presentations at school using that computer. Teachers like, “What is that?” What is that thing that you’re bringing here with a map of the Soviet Union, at a time, presenting, showing where they had coal mine and whatever commodity they have there? Some of their rail lines, they’re blinking on that black and white screen, and it was fantastic. It was like a lot of technology back then.
Over the years then I moved to different languages, Pascal, I don’t know if you ever programmed on that one, C++. And eventually, what I’m using now is Python, which, again, it was fantastic to have the time to redevelop what I was doing.
So, before in a hedge fund, I would build my portfolio with a lot of rules. So, you know, my long positions are at five percent positions, my short are three percent positions, and I will simulate an ideal portfolio with the names that I have. Today, my fair values go back as many years as I want, like five years, 10 years. I arrive today at an ideal portfolio and I replicate that to my clients’ accounts.
Now, with a hedge fund, I could do this using an Excel spreadsheet and some VBA coding. Again, try to do this now with multiple accounts, it starts to get more complicated. So, I took my time and redeveloped all this. It’s the same tool that I was using on a hedge fund with Python.
Now, the beauty, it’s fantastic. I mean, it download my clients’ positions to that code that I wrote, it uses all my fundamental fair values and build that portfolio. Which is even more fantastic is it doesn’t matter how many accounts I have, it literally takes a few seconds to run the portfolio and build the trading structures.
Now, the important point is that I don’t wanna give the impression that I’m a quant guy, although…
Meb: It’s not an insult. Come on, it’s a complement for me.
Danilo: Yeah, if I were to, I really like to code so much that it’s a tendency that I have to say maybe I can do this on a fully automated manner. However, the key for the success of the three portfolios that I can build now to my clients, not only the long/short that I used to build in a hedge fund, but I can run a long-only and a long aggressive portfolio.
Quite frankly, I can run any design that I want because it gets automated, it gets executed and perfectly balanced on a weekly basis, on a bi-weekly basis, depends on how much volatility there is in the market. I could also do some studies that I couldn’t do before. For instance, if I let my positions deviate by around 15% of their target price, I capture some momentum, so my performance goes up. Right?
So again, with a tool like this, I could say okay, what happens when I run simulations, and I match my ideal portfolio every single day? What if I let it goes off by one percent before I trigger the adjustment by two percent, by three percent. I got to the 50% number doing some studies, and fine tuning to compromise between not being on top of my ideal portfolio, but also not missing the momentum.
So, it’s fantastic. You can do all this. You do a lot of that stuff, too. You know, the how important some of those drivers are.
Meb: And a good side business. You got a software company now, too.
Danilo: Exactly, right? If I cannot succeed as an investment manager, we’ll sell some of that software. But then there is one important thing. The key for success in my approach, are the fair values that I have for 60-plus companies. That’s where I spend 80% of my time.
Meb: Let’s talk about that. So, Rational gets started. What year is this?
Danilo: That was early ’08.
Meb: Oh, wow.
Danilo: Terrible timing, right? Yes.
Meb: It depends. You look at it two different ways. You survived, you made it. Give me a framework. You’ve alluded to it. I know audience hasn’t heard it yet. But give me the broad framework of your approach, what you’re looking for, and we’ll drill down into some specifics as we go.
Danilo: Everything starts with fundamental basic analysis of businesses that are prone to be modeled. What I mean by that is I cannot model a new internet company, a new technology company, a new biotech company. My approach will work on businesses that have some level of saturation, and have a lot of fundamentals that I can put my hands around. Take a trucking company, right? A trucking company, they will tell you how many trucks they have, how many miles they run, and how much they charge for a mile. And they’re gonna have some disclosure on their costs. And you can play with that.
The reason for that, key for fundamental analysis and why it works as an investment too, is because if you plot the earnings estimates of those type of companies over the share price, it’s almost a perfect correlation. What I mean is the market will tend to overpay when earnings are good, and underpay when the company gets in some trouble. It could be an economic crisis. Virus is a very particular type of crisis for most of those companies, of course. But usually, you have some sort of cycle. Even in the most stable companies, you’re gonna find some sort of cycles, which will cause some level of fluctuation in earnings. This has a huge bias on the market price.
So, you plot, I sent you some material, and you probably saw that the correlation is just like almost perfect. So, here is the opportunity, which is can I, by looking into some companies in a very repetitive manner, in a very process-oriented manner, can I look into those companies and have a better chance than random in forecasting their earnings?
Again, I’m not talking about precisely forecasting earnings for the next quarter. I can’t do that. Although I mean, if I could, it would be fantastic for returns, but I can’t. What I can do is recognizing where we are in the industry cycle, in the economic cycle, where those earnings are in terms of historical strengths, meaning are those normally high earnings? Are those among the most benign earnings levels that we’re gonna find for this company?
If the answer is yes, do not model that forever. Model a reversion to the mean. Simulate a recession in front of you. And the opposite is true when you are in a situation right now. The earnings that you’re gonna see over the next year or so are gonna be horrible.
Now, the challenge is, can you simulate those earnings, leaving that recession? And for a company that you have 20 years of historicals, which is what I usually for my models, I go back 20 years for those companies, which quite frankly, as you get older, it’s not that far away. Because I do remember those 20 years, working with some of those companies, revaluations where now I’m losing some data already.
It’s interesting, because sometimes I’m updating a valuation and I’m starting to lose ’98, ’99, which was the pre-crisis. So, the first data point that I have is a bottom of a recession. And then you go to the housing boom, very strong recession and not a good economic cycle now, a bizarre level of earnings distress.
But the point is as you build those valuations with extreme care for those companies, the more you work with them. In other words, it’s extremely important to be repetitive. So, I do not run after new ideas. I keep working with a group of more or less, 60 companies, and I keep focusing there because I learn more and more with every single crisis, every single cycle.
Meb: What’s the sort of criteria for inclusion/exclusion of those companies? Is it a spectrum of industries? You mentioned some you just can’t model or it’s tough. Also, is it just familiarity? They’ve been falling for a long time? Is that all large cap? What’s the universe look like?
Danilo: Yeah. So the first rule is exclude whatever you cannot model. Think about a bank. Think about biotech or new technology companies. I love technology, but I can’t model how much in sales and earnings a new company we have in five, 10 years.
A saturated trucking company, a retailer like Home Depot and Lowe’s, that’s a different story. Because Home Depot and Lowe’s is a [inaudible 00:18:46] in the U.S., right? So, your chances of understanding what’s going on there is much higher.
Now, there is some of those names came to me when I started working in a hedge fund in 2005 that I keep following them. They were the type of company that I could model. Sometimes, I do not do a lot of new modeling anymore, but when I was building my circle of competence, that’s how I call that group of companies, there were a lot of valuations that I started and then at a certain point, I’d say, “I can’t really figure out how this company works.” Or there’re so many unknowns, not only knowns and unknowns but unknowns, unknowns, things that you really can’t put your hands around.
Scrap that. It doesn’t matter if you worked many days or weeks on that name, if you get to a point that you cannot really understand part of that business, you have to scrap it. This was done over now, 15 years.
In terms of market cap, you know, I do not do micro caps, not even these small caps. The median market cap is around five billion dollars. So, it’s a mid-cap company. Usually companies that have single line of businesses, they’re dominant in their business. But that segment is not that big.
I do follow a company like Coca Cola and Pepsi, those super huge companies. But they’re not, quite frankly, they’re not very productive for me, because their earnings do not vary that much. There’s much less confusion on the pricing of those names.
Meb: What percentage of the time would you say that if you look at your companies you follow, what percentage of time do you think they fall on like the normal valuation zone, where you’re like, you know what? That’s just not that interesting. It looks like at how it should be valued. What percentage of the time do they fall in the salivating, this is screaming cheap and vice versa, this is expensive. I wanna get rid of it or short it?
Danilo: Of course, on average, they are always off my fair value. But some companies are mostly in line with what you would expect. Like a company like Coca Cola and Pepsi, the market does get their earnings right, and discount that around an eight percent discount rate. Which it’s interesting, we can talk about this later, giving low interest rates in over the last 10 years, one would expect the market to discount that cash flow maybe at a lower rate. But it doesn’t.
The average discount rate that make my names be more productive in terms of producing good returns is around 10%. I think it has much more to do with Daniel Kahneman behavioural finance, loss aversion, and it 10% works very well with humans. Cat Pam probably was very lucky when it was out and about, that it was easy to use a five percent risk premium, market risk premium and five percent risk free-rate. It got close to the 10%. Humans love that, because if I, again, with my simulations, will my portfolio build up to if I vary the discount rate to very low levels, as if the risk-free rate was two percent? I’m always long. In other words, they always seem cheap. And if this is not true, I cannot really make a lot of money. Even in a simulation, you can work backwards and say no, that’s not possible. The market, it’s not counting days, you know, at 15% nor five, so you can find that middle there.
But some companies, the market cannot put its hands around a proper price, because there is always something going on. Get a company like TempurPedic. The product is simple. It was harder to analyze TempurPedic, let’s say 10 years ago, because they were gaining a lot of market share. But now they bought silly, and they have a mix of foam mattresses and regular mattresses.
But there’s a lot of stuff that causes some impact on their EPS from time to time. It could be just it’s a consumer discretionary item, and if we are in a recession, sales will fall. Sometimes they change CEOs. I’m on the fourth CEO now, I think, for the company, right? They say that I’m actually more senior analyzing that company than literally 80%, 90% of the CEOs at the company. Which is very interesting, because you see them trying new things for them. But then you say, no you tried this like seven years ago, and by the way, it didn’t work.
You get some of those companies or a company like Thor Industries that manufacturers RVs, very cyclical. I do my calculations of sales of RVs per capita just by group age. I’m talking about people from 25 to 65 in the U.S., or maybe 75. You look at the roller coaster that sales are in that industry, and of course, earnings, and the market gets super confused.
So, it depends. So, companies with more cyclicality, you’re gonna find them more productive. But not always it will be extremely easy for you to say, “Oh, my gosh, I’m really into this. I wanna buy.” Because sometimes, you have changes of habit that causes for instance, give an example, in the same segment as Thor. If you go back to the late 90s and you look at Harley Davidson, that was a dream company for value investors. They used to love it because, you know, in the store it would go, which company do you know that people tattoo the name of the company on their arm?
So, then Harley Davidson was this thing, you know, that everyone wanted to own because they were growing like crazy. People were buying more and more motorcycles. And it’s so interesting, because you cannot even see in motorcycle sales in the U.S. the ’01 crisis. It doesn’t even show on the numbers.
Now, comes the housing crisis. Sales collapse to one third of what they were, because people were buying a new house, overpaying for the house and say, “Well, since I’m buying this $250,000 house, what is like an $8,000 motorcycle? Come on, it’s gonna be a lot of fun.” So that was coming together. The crisis comes, they lose their house, they get super scared. Sales of motorcycles start to rebound. But then the oil crisis come in ’06, and it was already declining. Declines in 2017, ’18, ’19, and now of course, it will decline even more.
We are now on a sales per capita in the U.S., at a lower level than Europe, which is highly unexpected, because if the number was like three times higher sales per capita in the U.S. versus euro. For once, the U.S. has a higher GDP per capita on average, but also because the U.S. has a lot of space. So, in a tiny small town in Italy, it’s hard to have your Harley Davidson motorcycle. In the U.S., it’s much easier.
So again, highly surprising, how is it possible that over 10 years Americans are now consuming less motorcycles per capita than Europeans? That’s very difficult type of analysis when you’re doing fundamental analysis, because sometimes the reversion to the mean never happens. But then it comes portfolio risk control. That’s why I don’t have all my money in one position. So I have rules to build my portfolios, so loans can be at most, five percent for a reason.
And I have what I call a draw down freeze, meaning if my fair value drops by 25%, not the price, the price might drop by 50%, 70%, since I buy it and then it drops 50%, but I don’t see anything there that should justify the price drop. In other words, I don’t change my evaluations, or if I lower my, let’s suppose that I lower my valuation by five percent, 10%, I do nothing. I just buy more, actually. I recompose the position to five percent. But if it does change because something really strange happened, think about a company like Carnival Cruise Lines. That’s one example. The virus has been catastrophic for the industry. So, my valuations for companies where…I don’t follow a lot of companies in the consumer service, but I do follow Carnival, and it was catastrophic. So, then the company gets into a freeze. In other words, I do not buy more. So that’s then, now we’re talking about portfolio control. How do you go through ’08, ’09?
I told you that I could digress a lot. So, it was telling you the story of the timing of when I started Rational, right? The hedge fund. But it was at ’09 when a lot of those changes were happening. So, it was exciting in the sense that we helped some of clients not to lose a lot of their money. Actually I got my seeding in March of ’09. So, we got at that time, $25 million to start the fund. We started in ’08 with only family and friends money. And by early ’09 we were thinking about closing down shop because like, look, this super crisis, who’s gonna give us money now?
But the point was one family office, a multifamily office was trying to understand what was going on in the market. Right? And they said, like, who are the most prepared professionals that I can find to tell me on a fundamental basis? And then again, it’s a multifamily office in Brazil, and then we were helping them with our locations in the U.S.
So, then we got our seeding, we grew the fund over those years, and eventually, we made good money to our clients. But in part, because we were for four, five years at our maximum net long exposure of 60%, again, that’s the design of the, we can talk about the portfolio rules, but we moved to our 60% net exposure and stayed there for years because there were, back then, a lot of chip names. So, then the whole fund grows from there, and eventually, they decided they could do by themselves. That’s a different story.
But the same thing happened with my clients that I have now. They are all on my long/short strategy, pre crisis, exactly for the same thing. I cannot find longs. I had seven longs, and I had 19 shorts. Again, nothing based on my gut feeling. It’s all based on the deviation of the fair value.
Meb: What does the short side look like? Is it a mirror image of the long? Is it simply just based on valuation? How do you think about shorts? Because I know some people approach it a different way.
Danilo: Yeah, so in my case, because I wanna have continuation on the names that I follow. I will not short companies searching, for let’s say, a fraud. Because again, that would put me on the ideas treadmill. I’ll have to be going after names, and after ideas, because eventually they would implode or not, and then that company would be gone.
So, my shorts are many times, companies that were my longs, it’s just that sometimes the market misprices them. Again, we’re talking about the type of companies that I follow, mid-cap with some big caps in the mix, but all companies with a lot of fundamentals that I can follow. So, the market usually prices them correctly over long periods of time, but then when the earnings are too good because of, it could be because of an economic boom, it could be an industry boom, could be the company just selling a lot of their products because they wanna buy a competitor using shares. That happened with Thor, right? So, they the stuff their channels because they want to buy a company near, and they paid part of that with shares.
So, it depends. Many times, again, I will long for now but I will short a couple of years ago.
Meb: I would love to hear, you mentioned a few different stocks. Are there any particularly useful representative case studies you could walk us through, where you say, “Hey, this is a company I’ve been following. Here’s how I approached it over the last couple of years, or even now”? A framework to give us a picture of how you invest in a certain stock or company. Anything come to mind?
Danilo: We can talk a little more about Thor, a few examples, but we can…I have a long list of companies here, and we can spend, like, hours talking.
Meb: Good. Well, we’ll have you back on. We’ll just keep doing case studies till the cows come home.
Danilo: Yes, exactly. With you and everybody on board. So, in the case of a company, and it’s not only Thor industries, I usually do valuations of a group of companies, a certain sub-sector. So, in the case of Thor, the companies that are in the same group are Polaris, Harley Davidson and Brunswick. Brunswick sell boats, Polaris, the ATVs side-by-sides, Harley Davidson, motorcycle.
The dynamic of all those four companies is very similar to the super discretionary type of item. So, that’s why it’s a nice gauge, because your listeners can go to any website, and look to their earnings over, let’s say 20 years and they’re gonna see the cycles there. It’s very clear what’s going on there.
So, you’ll get a company like Thor. It’s one of the top two RV manufacturing companies. The other one is Forest River, owned by Warren Buffett. From the get-go, you know that the chances of this company getting into a crazy price war is hopefully, very limited.
So, there is always the qualitative side of the analysis. I’d like to start with that. I know, what’s the story of that company? Where do they fit? Because from that point, I start to discuss, okay, so what is the dynamic of RV buying? How people deal with something like this.
What you’re gonna see is, with your classic, discretionary product, no one needs to buy an RV. But it is a very nice toy. The U.S. has wonderful parks so you have, again, this space to go and drive your RVs around. And it’s a great way to spend your vacations. In the summer, for sure, it’s gonna be super popular, you know that, right? I mean, because you can travel.
I’m assuming that the price reaction that we’re seeing now is the market trying to anticipate that. But again, it might be short lived. What matters is not if they’re gonna sell more RVs or not sell at such a low number because of the recession, because now you’re superimposing two things at the same time. There is a recession. A lot of people lost their jobs, so the inclination to buy an RV is of course, much lower. However, you can travel.
So, the challenge in the short term, that’s why I don’t try to focus too much in the short term. Who knows how strong those two vectors will be, and who will superimpose which one in the next, let’s say, six to eight months, to nine months, a year maybe?
We know that this summer will be a very unique summer. So, to make any conclusion and an investment for the long-term in a company based on a very abnormal summer is not exactly the best way to do this. So, you have to start to study the industry first. So, go back 10 years, 15 years, and measure sales of RVs again, per capita, because it matters too.
So, everything, every consumer-led product that I look into, I always have like this huge spreadsheet where the U.S. Census Bureau, they have like a massive database, which is fantastic. It gives you b point U.S. from zero to 100 years, for the next 50 years. It’s fantastic. I did my programming there, so then I can select age groups in that spreadsheet, and say like how many people we have there. How much does this grow, or not grow, or declines? Because again, it matters for calculations like how many RVs per capita will be sold in the U.S.? Those are the numbers that you’re gonna work with.
And then, of course, you’re gonna see zigzag depending on the economic cycle. This is also natural. What you’re gonna see too, is of course, when companies are selling more, their margins go up. It’s the natural SG&A leverage, if you will. It’s a classic. It’s a manufacturing company. They have some fixed costs, which as they sell more, they have a lot of contribution to their margins. Margins make those huge, nice peaks. Earnings make those huge, nice peaks.
But eventually something happens. And I’m not even talking about a huge pandemic, right? I’m talking about your regular recession. A recession comes, consumer confidence goes down. No one will buy a $30,000, $40,000, $50,000 item like an RV. Those are then the super discretionary items that people finance them. It’s almost like an extension to their house.
So, if you look at a company like this, the correlation of price with short-term earnings is just fantastic. Again, listeners can go and plot those numbers too, because it’s easy to do. You’re gonna see how highly correlated those numbers are. So, then what you need to do is take a step back and think about long-term, in terms of how much over long-term cycles, this company, how many RVs they will sell, and what’s gonna be their market share.
That’s when the margin of safety scenarios come into play. So, I have my base case scenario, where I’ll try to do my best to do all the qualitative and quantitative analysis that I can to try to understand how many RVs per capita Americans will buy in the next five, 10 years. Because I wanna do a discounted dividend model, because I’ll model the debt of the company in detail too. Because every time that something got me by surprise, I changed my template.
So, what I learned is that you don’t do a discounted cash flow model. You do a discounted dividend model, because it forces you to model the debt side, right? So, model the debt side of companies, because their ratings will change, their spreads will change over time, and you wanna capture that.
So, what I do to play with the knowns unknowns, right? I know that there will be a certain level of sales of RVs on average, over the next 10 years, right? But I have history to guide me. But of course, I don’t know exactly where this will end. So, I use those as inputs to my scenarios.
So, then when I use my low case scenario, which is my entry price, it’s based on a lot of things not going well for the company. They sell way below the historical average RVs per capita, the margins are lower, their cutbacks are higher. So I punished the company up to reasonable levels, though, meaning I will not make any absurdly a punitive scenario, because then you can bankrupt any company, and you will never buy anyone.
On the great case scenario is almost the opposite. What if they sell at very high levels in perpetuity, great margins and gain market share, and their cut backs is actually lower than historical levels? So those gives me a band, a low case fair value, a great case fair value. And my base case fair value is more or less in the middle. The delta, just to give an idea, between the low case and the great case is usually 100% on average. It’s a lot, but the market sometimes I buy something, and their markets just keep going down like, you know, 10%, 20%, 30%, 40%.
The same happens on the great case side. I short something and it goes up like, you know, 20%, 30%, 50%, 100%. But if your evaluation is right, eventually, the market tends to see that earnings path, and to try to follow it. But again, it might take two, three, four years. It doesn’t matter.
So my success is measured, I measure my own success in relation to how well I was able to forecast that business. And then if I’m successful, then building a portfolio is just like an easy exit.
Meb: Well, I tell you, RVs, certainly if conversations with friends is on forefront of a lot of people’s minds, sprinter conversions are really popular with sort of the younger cohort, because they’re not as big as an RV, but can be pretty mobile too.
But as I was telling most of my friends who are interested in getting one, I said, maybe rent one first for the weekend, before you buy an RV. But I imagine the stock’s got to be going bananas, right? They’ve been doing well?
Danilo: So, they were even crazier before. The valuations were 150, 170 per share, something like this. At the bottom in March, it was trading at $35. It’s getting to $90 now. Again, it’s getting close to my fair value, which is insane, because when I bought that stock actually a couple of years ago, was when they were already in their own crisis. Because they had stuffed channels, and the oil crisis also had an impact on RVs. They had a crisis before an economic crisis arrived.
Again, I never imagined that we would have a pandemic of this size. I mean, that was not why I was short before. It’s not that I hate the company, either. It’s just that earnings went up because they sold a lot to their retailers. Their market just followed those earnings. And it gets like, well, but for those earnings to make sense in terms of off the current price, would have to maintain those levels of sales forever with record margins forever.
Of course, it didn’t happen. It went down to a certain level that 2018 I guess, it was at my low case scenario. I bought it, went up, went down. When it keeps zigzagging, I keep adjusting the positions and lowering my price for sometimes, selling some parts of that stock and just having some realized gains.
And then came the crisis, it went to $35, and now it’s at $90. Now, it’s impossible to justify a valuation of $35 and $90 with fundamentals in what you learned in two or three months. Makes no sense. So, this crisis is very particular.
Now, what happened in my case, I was able to go from seven longs to 16 longs, because my valuations were ready, because we were at an economic peak. They all heard a recession starting next year. Again, I was not forecasting any virus, anything like this.
So when the virus arrived and I had to on the fly, update on my valuations because what I did, I now forecast a very strong recession like ’08, ’09, but quite frankly, for a while I didn’t know if we were going to go into a depression. It was an unknown. I mean, how is this virus a society-destroying virus? Now we know it’s not. It is a very serious disease, but it’s not a society-destroying type of virus.
So, the depression scenario, I think it’s out, but a severe recession is still here. So, I literally, I worked nonstop for, I would say, like six weeks, every single day. Because again, to keep all those six templates updated and relevant, etc., in the middle of a crisis like this, I have to work 10, 12, 14 hours a day. And I have everything, I have a clock running, literally, right now. I mean, every time that I’m in front of my computer, I have a clock that runs backwards, so I can time how much time I’m using in each one of my companies. I cannot spend too much time under any single one.
But the point is after doing a lot of work and trying to incorporate the signs of this new recession, because I was not forecasting an ’08, ’09 recession anymore, I was saying you know what? The ’08, ’09 recession, that was crazy. That’s not what I have to model as the next recession, because that was not normal. And here we are, right? In a recession that in magnitude, on average, right?
I mean, some companies it’s gonna be catastrophic. But for, think about airlines, the size of the damage that it does to the balance sheet. Of course, people will fly again. But the problem is companies, if you let them without sales for too long, the balance sheet gets destroyed, even if the company had no leverage or a reasonable amount of leverage if you have to borrow a lot of money today to survive for one or two years without almost without revenues.
Well, that debt needs to be paid, so the equity holder, as it should be, is the one that loses first. Now, if you can’t come back, then even the bond holder loses. And if the company goes bankrupt, chapter seven, not even 11, even the workers and management loses. They lose their jobs. So, that’s the natural process in the capital markets: equity holders first, debt holders, the other stakeholders, which are the employees and management.
So, we should see some companies that will be as an operation entity, okay in five years, that will wipe out their equity holders, right? I mean, it depends on the timing. Think about the hotels, airlines, cruise lines, even the company…It’s not gonna happen with a company like Starbucks. But Starbucks valuations, it was impaired because they had losses or much less earnings that one would think they would have for a while.
Imagine someone owning their shares like one or two years ago, thinking about their cash flows, which still has some growth because of the international market. They might be vertical saturation in the U.S., but again, it gets impaired. So, the challenge in a situation like this or a company like Thor is now what if we go to scenario where the recession is even worse than ’08, ’09? How much impairment there is in the cash flow of this company that will bring more debt? Which means you equity holder now have less in terms of your rights to claim future cash flows.
Again, it’s a great opportunity, but also it goes to the scary level of opportunities. Some companies are so in such a gray zone that you really don’t know if they will survive or not. So again, my scenarios are such that I’m modeling normal recessions. I had a few when you are in a market peak or an economic peak. I have to revise that, transform them, all those 60s in a strong recession.
Some companies like Coca Cola and Pepsi, there is not really any back there. But nowadays, of course there is. But even though I was able to go from 10% net short to five percent net long, very close to my level, but I’m surprised that I didn’t buy 30 names, 35, 40 names. At this level of distress in the market in the economy, social unrest, it is quite surprising, I have to say, because if I do my simulations and go back to the ’08, ’09 crisis, I buy almost 40 companies of the 60, right? Now I have only 16.
Meb: Yeah. Walk me forward from March, we’re recording this in early June. We’ve seen a rip roaring, romping stomping move right back up. I think NASDAQ may have closed at all-time highs today, and S&P is pretty darn close to flat on the year. What does the portfolio look like now? Has it reverted back to beginning of 2020? Is it look the same as in March? How are you finding opportunities?
Danilo: So, now I have to say, it’s really strange to see the market rebounding that fast. Again, I’m talking about very boring companies that’s under the radar of a lot of people. I’m not talking about things or big companies that are part of the S&P. I’m talking about matrices companies, trucking companies and stuff like this.
Right now, I have a couple of companies that are very close to leave the portfolio as longs, and I have three companies that are close to become shorts. I mean, again, very unexpected, because the ugly numbers gonna start to be released in July, August. Everyone knows that the second Q will be horrible. That’s baked in the cake. Everyone knows that. However, what people don’t know is what will management say? Will, they say, well, and things are rebounding now, or it’s getting worse?
So, I think the market will be surprised by, there will be a lot of noise over the next two or three quarters, because that’s when we’re gonna see the numbers, and we are gonna see the CEO, CFO guidance in terms of how their business are doing in terms of recovery. I think people are, in many cases, people are gonna be possibly surprised, and in many cases, it’s gonna be a nightmare. It’s like, oh, my gosh, it’s not rebounding at all.
Because again, we have to balance the fact that of course, we are in a recession. When we have 30 million unemployed people, consumer power went down. It’s a fact. Every single CEO and CFO is telling me when I read the conference calls and I send them emails, they’re always telling me it’s like, yeah, you’re cutting capex. It’s a classic recession. That was 2000. 2000 was a market-led recession.
Again, I was leaving my MBA and going back to McKinsey, working as a consultant, and for a while, there were no projects. I was a returning analyst. As a returning analyst, you’re a hot commodity on a consulting firm because you cost the same as a young associate, but you know what you’re doing already, because I have been working there for two years. Right? So you know the ropes and you’re much more productive.
Even in my case, I stayed for a few weeks or a month on the beach, what they say. It’s when you have no project. You know, I was doing my modeling, compustat, and trying to build the genesis of the model that I use today, the template that I use today. But that was a classic. Every single CEO, because those were scary moments.
By the way, we had also a virus going on. SARS, was going on, was out. And then of course, September 11, and it triggers recession, the market collapse. Classic, every single CEO stopped their capex program, then the recession intensifies.
Interesting to note, though, and let’s see how this recession goes. If you go back and look at the GDP numbers, the components of GDP on the consumption part, in 2000 it was still growing. It was growing less, but it never became negative, year-over-year in a quarter. So, investments became negative in 2001, because again, it was the CEO, CFO scare.
Fast forward to ’08/’09, everything became negative, right? So in other words, even government spending became negative in ’08/’09. The printing money that we’re seeing now, it’s a lot of transfers. That’s not expensive. That’s not really GDP growing in that sense. We need to see consumption in investments. Those are the ones that really move GDP investments. It’s for sure gonna come down like crazy, so let’s see how bad consumption will be.
Again, that’s gonna be the second time since data is measured, since ’48, that they see the consumption will go negative again. So it’s a strong recession, for sure.
Meb: Are there any names that you see are just massive discounts to your fair value estimates? Is there anything that you can just say you’re licking your chops about?
Danilo: Companies that have a certain level of leverage might be in that situation. So, a couple of examples. One company, it’s Owens, Illinois. It’s the O-I Glass, that’s the new name that they have now. It’s a glass container manufacturing company. That’s an interesting case, because the business is relatively stable. But if you look at the history of that company and by the way, this is a great example why I do not automate my fundamental analysis, right? It’s almost impossible.
I automate the portfolio construction in trading. So when I build my portfolio is according Python, and it writes also my trading instructions. I just upload this to my broker, press one button. I have like one human interruption there, if you will. I’m not crazy towards my machine to kill me and start trading by itself. So, I have one button there that I have to press to release the trades.
But if you look at O-I Glass, they, over the past 10-15 years, they made a major transformation. They had a mix of plastic and glass. They sold all the plastic plants, and now they invested more on glass plants.
Now, you look at the history, and that’s why I study what the company has done. Following management is important. You look, for instance, when they bought some assets in Brazil was at the worst time possible, with the currency in Brazil extremely overvalued. They overpaid, and then Brazil gets into a long-term recession, lasts for like three, four years. Asset prices, they would have bought that by literally a third of the price if they had waited.
So again, companies do destroy a lot of value, because they tend to go into other countries and buy assets when things are doing very well on that segment. They want to buy shiny assets. So, managements are not us, investors. We like to buy things that no one wants, and sell when everyone wants that. Management is the opposite. They tend to buy assets when that is an asset that everyone is looking for.
So, if you look at the historical figures of this company, it’s extremely difficult to figure out what’s going on there. On top of this, they had this massive asbestos liability, which they had a subsidiary of an acquired company that in the 60s sold asbestos, or a product with asbestos. They sold many decades ago, but they were sued for the asbestos liability. That company probably generated let’s say, $100 million on today’s money, in terms of operating profit, and they already paid four billion dollars in penalties. I mean, a massive number.
Now what they did recently, again, I mean, it make things even more complex, they spun off the bad company, the bad asbestos company, if you will. Just like a shell with debt liability there. It doesn’t mean that they can get rid of this. That’s not the point. But they can get rid of that impact in their P&L. Because again, they would have to, now they will pay for that liability, and they had done a lot of provisions. And if they have to pay more, they will have to do more provisions, but it not flow to their P&L anymore.
So, imagine how messy, scary, you read asbestos, spin off, bad company. I mean, it’s just scary. But that’s a company that’s super underfunded. That’s one example. And they have a certain level of debt and people get scared, what’s gonna happen?
Meb: And the nice thing about your approach is so many people from a behavioural standpoint, can get wedded to a company, or a stock. Once you buy something, it’s so much easier to place a higher value on it, and same thing with the shorting side. I mean, on social media and Twitter, I can’t tell you how many people you see that just all they do all day is look for confirming evidence. They have a position, shorts often are some of the worst, and I love my short seller listeners.
But for some reason, you get it in your head once you’re long or what…and it’s the same thing identifying with any label, a sports team, politics, religion, whatever. Your brain just starts to malfunction a little bit. And yours, you don’t see that many people that are sort of willing to envelope or almost Bollinger band a company to say look, there’s areas I like it, there’s areas where I don’t, and there’s even areas where I’ll short it. I think that’s pretty cool.
Danilo: The name of the fund, you know, Rational Investment Methodology, is because of that. It’s because of the…I have a, on my presentation, a picture. Actually, I find it weird to have a picture on a presentation of a methodology, but I do have one which is the name of the tool that builds my portfolio is Odysseus, which is Ulysses, in Greek. It’s there, Ulysses or Odysseus, tied to the mast of his own ship, going through the Siren islands.
By the way, in the mythology, they actually had like birds bodies, not like a fish, but a human’s head. That’s exactly what my portfolio rules do for me, right? Humans are awful. Once, you know, you found a fair value, you did a lot of work on fundamental work, on a company and said, “Look, I think it’s worth that much.” The price falls, you start to second guess yourself, immediately. It’s like, “Oh, my gosh, have I not seen something? What is the market seeing that I’m not seeing?” Although you know that the market is just following short-term earnings or news.
So, the way to counterpoise this is to have rules to get in and out. Another thing is looking to the same companies again, and again, and again, because history will teach you exactly what it just said, right? If you’re getting love with that company and then everything goes wrong and say, “Well, I was not right.”
So, I love to keep some companies that I lost money with them. Those are the ones that I never give up in terms of analyzing the company. Because I said, “Well, if I missed that there was learning there.” Otherwise, the confirmation bias only grows. So if I lose money with company whatever, for whatever reason, sometimes, again, it’s something super unexpected. It could be even fraud. I never lost money to a fraud because of the type of company that I look into, but maybe someone committed a very hard to spot fraud, and you might lose money there. So, this is bad luck.
But when I lose money is because I didn’t see something on the fundamental side. I was not aware, or if I were, I didn’t consider this a possibility. Let’s say a price war. Say, “Oh, I thought those guys would never engage in a price war, and guess what? They did.” So to us, it is my mistake.
So, I think a way to avoid that is instead of going after new ideas, and again, I’m talking about the type of methodology, type of approach that I do, right? I mean, this only works for certain type of companies, this type of investment that I do. I wanna own a company for some years, even shorting for a few years. I hope I can generate a lot of long-term gains for my clients, versus short term gains. I might not be able to, because some of my companies are rebounding so fast, and that if it hits my fair value, I will sell.
But the way to avoid this, in my opinion, is make sure that you look into the business for many years in a row, because then you’re gonna learn about your own biases. It’s like “Oh, I thought this company was going like, no, kill competition, and no, it’s not.” They didn’t, because the other guys are good, too. I mean, they had their counter move.
Meb: How often are you adding or subtracting names out of the universe? Is that pretty rare?
Danilo: It’s literally, like three, four a year. That’s it. Because I key part is how focus-repetitive my approach is, because that’s when I learn a lot. The only way one guy can be knowledgeable about, like 60 companies, how do you do that? First, I don’t have to write reports to anybody, so I don’t spend time like the sales side does doing this. So that, of course, helps me a lot. But it’s because I’m looking into the same company again, and again, and again, so I don’t need to learn about their story.
Meb: Are there any other resources you find particularly valuable? And maybe you could hear about how the software works, is that automatically like scraping the Ks and Qs? Is it manually inputting it? Is it what?
Danilo: Yeah, it’s a combination of a few things, right. The first thing is, I have a template. So, every single, if we do another call and I show you my screen, you’ll see my valuations. By the way, we can do this. I can do this with your listeners, whoever is interested in the methodology. Actually, that is my selling process, if you will. I have an objective to make sure that I show some of those analyses to my clients. They need to see where I spend my time.
So, first they look like the same. In this, I’m very methodical. If you look at my templates, for instance, all my templates are now with a dark background. Better research, it’s better for your eyes, you can concentrate more, wrote a macro in VBA changed every single template or doc format. All my monitors are 4k monitors for a reason. I need that, needs to be super sharp. So, all those details matter. So, using technology, having a template, because a template makes me extremely productive.
Now, the start of my work is it’s fundamental data from FactSet. That’s the only way I can do this, because those databases and of course, I’m biased to say because I’ve been using them for years, it’s excellent. The tool is excellent. It’s like free advertising for them. I don’t know if I should be doing, but it’s just the only methodology.
So, you need to choose one provider that is consistent. That’s my point. Because if you go and download 10 Ks in different formats, and try to build a model from scratch, the amount of errors that are gonna input there is absurd. I mean, you will add depreciation, something like this, you eventually do something silly. So, to avoid that, I download this data.
But of course, I’m gonna read a 10K, open the 10 K. I have like one of my monitors series sideways, you know, huge view big monitor so I can read my 10 Ks and 10 Qs, these of course. And then I will change anything that I think is better for my understanding.
All my fundamental, you know, how many trucks you have, how many miles, is done on a different tab, where that’s where I do all my detailed analysis. That is my inputs page, because they’re a revenue line. That’s the only thing that I need to feed my discounted event model. So, I separate that because I don’t wanna have any sort of ad hoc analysis, new formulas in the template itself, because again, otherwise, you’re gonna have a lot of errors there.
So you need to be super, super methodical. Because otherwise, your productivity goes away, you spend too much time with the model itself. And what I want to spend time is not with the model, but with the calibration of the assumptions. I wanna read the industry reports, talk to my peers, talk to the company if I see something on their 10 K. And sometimes it’s funny, you find mistakes on 10 Ks. They just like, copy and paste, and the number is wrong. It’s like, “Oh, but this number doesn’t match.” It’s like “Oh, yeah.” And then you’ll see later that number being changed. Rare, but it does happen.
So, doing your fundamental analysis, being super careful, is extremely important. Because again, fundamental analysis is the best approach, in my opinion, for this type of company. Right? I mean, not the…
Meb: I’ve seen it, it looks great. You clearly put a lot of work into that software. What’s been the most memorable investment over your tenure? Anything come to mind, good/bad, in-between?
Danilo: When people ask me about my investments, I always like to say a few things that I did right. For instance, if you get a company like TempurPedic, I am on my sixth. So, I have been long or short six times the company, and so far, successful in all those positions. So, it’s four longs, two shorts over the last 15 years. And I find this fantastic, because the story of that company have remained the same, fourth CEO…
Meb: Knock on wood, where does it stand now? Positive, negative, nothing?
Danilo: Well, no. It’s one of my most recent profitable positions now, and might be out of the portfolio soon as the market keeps doing what it’s doing. It’s gonna be again, short term gains, which is not my objective, but it might happen.
But there are things that I did wrong and I said like, look, if people ask you as an investor, have you screwed up on something? Of course, you have done something. So, one recent mistake I made was an investment on Carnival Cruise Lines. So, I compared the current crisis with the other crisis, the SARS and the H1N1, and simulated a recession, a virus impact.
But just to give an idea, even with the H1N1, which was a widely spread virus, the lowest quarter of occupation for Carnival was 98%, in the middle of a huge recession in a virus spread. Now, you’re gonna have multiple quarters off too now, but that’s when portfolio control is important. The hit on my portfolio was around three percent. I have that, now drawdown freeze. And even though my long/short strategy is up for the year, so good.
But again, it doesn’t matter how much work you do, how much you know about that company. And I have every single ship that they launched since ’05, like modeled, I have the name of the ship, how much it costed, the plan for retirement of ships, everything is there. It’s one of my best templates.
Sometimes there is the unknown, unknown. The biggest pandemic in 100 years. Yeah, that’s gonna get you but again, that’s another point, is portfolio control. You need to think about these two, because otherwise, you’ll fall in love with the company, you follow something going down, and then you lose a lot of money. That’s not the objective. You should not be trying to be heroic in any investment that you do.
Meb: Yeah, the cruise customers, they’re like an entirely different species. I mean, there’s people signing up again now, are ready to go on these ships tomorrow.
Danilo: That’s another important point, which is for every company, it could be Cruise Lines, it could be Weightwatchers, it could be RVs, it could be motorcycles, you name it, there’s always a very particular type of person that likes that. So, when you do on a per capita basis who uses that company, it’s always tiny.
So, one of the worst type of analysis that you can do is to say, “Oh, this company only have a two percent penetration, so then they can grow like crazy.” Like no, no, no. Maybe they have had a two percent penetration for 20 years.
You know, one of the first companies that I analyzed during my hedge funds days was Wrigley, before they were bought by Mars, I guess. If you look at gum consumption per capita in different countries, the delta is huge, massive, and it doesn’t move. So, in other words, to assume that oh, now Canadians are gonna gums as Americans, it doesn’t matter. They’re your neighbors, much lower levels of consumption of such a basic item. There is no price barrier. It’s just behaviour.
So, for most companies that you see out there, the adoption ratio is extremely low. That’s another reason why I focus on companies with a lot of history, because that number usually set for me, because it’s important. In other words, if I tell you here’s a product called Coca Cola, try to model something, how many people will drink this? It’s impossible. You have to observe history, penetration in different countries and go from there.
Meb: I was smiling as you’re talking about Wrigley, because growing up, my grandmother was hugely popular with the children, because she would put a dollar bill to take the gum out, put a dollar bill around the holidays, and pass it around all the kids. They’d do a slice of gum, and come away with the dollar. And then on the occasion, you would have the rare kid that’d be upset. They actually wanted the gum. [inaudible 01:07:37]
No, this has been a lot of fun. Where do people find out more if they wanna follow you, your writings? Can they follow in the modeling? If they wanna get in touch with you and chat markets, where do they go?
Danilo: So, the best way to find me is on LinkedIn. If you Google my name there, Danilo Santiago, and Rational. Or if you just go on Google and google my name, you’re gonna find some sort of presentation that’s out there. You’re gonna find my email address there. They can contact me, and I’ll be glad to have a call with them using Skype, showing screens. That’s what I do. It needs to be very focused on the fundamental analysis that I do. I want people to understand that that’s the core of my success or failure. I mean, for that matter.
Meb: That’s a very thoughtful offer, listeners. Take Danilo up on that, but be serious don’t waste his time. As he mentioned, we’re in the middle of a pandemic and we may be working 10-hour, 12-hour, 20-hour days again here in short order. Danilo, thanks so much for joining us today.
Danilo: Thank you very much, for having me.
Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us email@example.com. We love to read the reviews. Please, review us on iTunes, and subscribe to the show anywhere good podcasts are found. My current favourite is Breaker.
Thanks for listening, friends, and good investing.