Value Investing

Benjamin Graham is considered the father of value investing and his book, “The Intelligent Investor”, published in 1947, the bible. Warren Buffett has become the most well-known follower of the value investing school.

One of the key concepts introduced by Graham is the intrinsic value of a company. There is not a universally accepted way to determine intrinsic values, and he suggests several metrics for that.

One of the most popular methods to determine the intrinsic value of a company, and used by every investment bank, is the Discounted Cash Flow (DCF) valuation. DCF modeling aims to estimate the current value of a stock by determining the present value of each future cash flow. A “discount rate” is then used to adjust the value of future cash flows.

Obviously, the discount rate is correlated to interest rates. If interest rates rise, so too should the discount rate. And, as the discount rate rises, it has the effect of decreasing the DCF present value.

The recent drops in the US stock exchanges were partially caused by the “perception” of an increase (and by the perspective of further increases) in interest rates – actually, real interest rates did not move up, a theme for another post. Tech (Nasdaq) companies suffered the most, because a larger part of their worth is attached to the perpetuity.

Thus, in the short term, the US stock exchanges performed as expected by the DCF modelling.

Let’s now switch to Brazil. From March 2021 to May 2022, interest rates in Brazil increased 537%, from 2.00% to 12.75% per year. A value investor should then expect a huge drop in the valuations of the Brazilian listed companies. On top of that, the perspectives of the Brazilian economy continue to look bleak, reinforced by the higher interest rates. But, amazingly, the IBovespa is now at the same levels of March 2021 – in a very thin market, any influx of speculative capital (dollars) has the power to distort logic.

Conclusion

One can make money in any market, even in the Bovespa (which, in real terms, is 30% below its 2008 peak), by speculating.

Investments are for the long term. Intelligent investors, such as university endowments, understood that the wealth creation process has shifted from the public to private markets and, accordingly, have moved their portfolios to late stage VC.

To invest in US late stage VC transformational leaders, Fabrica Ventures is the preferential platform.