Uncle Mauricio is one of the world’s great guys. If you travel a lot, particularly in emerging markets, you have met him before. He is urbane, jovial, social, bright, and a successful entrepreneur. Uncle Mauricio made a PILE of money in the last economic cycle in Brazil. He started his company in the mid to late 1990s and, although a very tough economic period, his company survived and really started to take off in the early 2000s along with Brazil’s economy.
Image: GDP Brazil – Current LCU – 2000 to 2011 (trillions)
Around 2007 to 2008, Uncle Mauricio noticed that people were saying things about Brazil that were a stretch (Brazil will pass the USA soon, São Paulo real estate per square meter will equal NYC, Brazil will soon be a “rich” nation, GDP per capita north of US$40,000), the stock market was acting irrationally, the currency reached almost unthinkable levels now reflecting back 2X more valuable than today’s current rates, and Uncle Mauricio’s company was valued at a level that he never thought possible nor did he believe was true. Uncle Mauricio decided to sell and he sold to a foreign-based “growth investor” for a PILE of money. He and his family literally and mentally drove to the beach.
Image: Buzios, RJ. Not a bad place to be at all….Uncle Mauricio’s home during the downturn…
This is a funny illustration of a lot of the new Brazilian wealth that is on the sidelines currently. What Uncle Mauricio and his somewhat less wealthy brothers, sisters, and cousins do over the next two to three years greatly affects the investment opportunities in Brazil. Uncle Mauricio’s current absence represents the gap that smart global opportunistic capital can take advantage of. Importantly, Uncle Mauricio’s return from the beach will be the critical shift in the marketplace.
Quick Hello Again and Happy Belated New Year!!!!
For those of you who have read our newsletters over the past two years, we thank you. Due to their surprising popularity and the great people that we have met through these newsletters, InDev will be much more regular in publishing this year. We will be in touch twice a month! The newsletters will continue and dive deeper in their focus on deep-value real estate investment opportunities, and have fun while doing so. While global in nature and outlook, these newsletters will continue to focus on Brazil in 2017 based on the unique opportunity we see for deep-value investors. We will continue to provide market information and also specific investment strategies that may make sense for global investors. As always, our goal is to help global investors source unique opportunities to “buy a dime for a nickel” with a top quality local sponsor as a co-investor and manager. Glad to see you again… let’s get back to our friend Uncle Mauricio before he comes back from the beach!!!!!
Uncle Mauricio Revisited – Investor Psychology
Uncle Mauricio, not necessarily knowingly, is what we may call a “growth investor.” He is about 60 to 70 years old. He grew up in a country with very high inflation (peaked at 84.3% per month in March 1992) and has gotten accustomed to dealing with the highest interest rates on planet earth. While not growing up rich, on a relative basis he grew up upper middle class based on Brazil’s current and definitely historic significant inequality. He recognizes Brazil is far from perfect, and fully admits, sadly, that it will likely not be the next Singapore or South Korea that goes from middle income to wealthy. However, Uncle Mauricio also strongly believes that Brazil is a great place to make money because of the violent and strong nature of cycles. He does not necessarily invest at the bottom, but he understands deeply the psychology of optimism and pessimism in his home market. He has seen significant changes in Brazil’s economy in his lifetime. The statistics speak for themselves.
Uncle Mauricio and Real Estate
Based on his unique background growing up in a country with extremely high inflation, Uncle Mauricio and his family have invested in real estate as an inflation hedge for as long as he can remember. In Brazil’s period of high inflation, real estate and an investment for individual investors called “overnight” were the best and perhaps only real hedges available to upper income Brazilians. This real estate investment strategy was usually a buy-and-hold-forever strategy actually. As his wealth level greatly increased in the 2007 to 2011 time frame, the wealthiest Uncle Mauricio actually developed large office buildings on Faria Lima Ave., the simply rich Uncle Mauricio invested heavily in commercial office floors pre-development / on plan, and the upper income non-millionaire working stiff Uncle Mauricio plowed money into Brazil’s REITs. How did that go?
Image: It was not a good experience….ouch!!!!!!
These 2012 and 2013 investments were Uncle Mauricio’s first significant “bad timing investments.” He did not use leverage so he is not a forced seller at a project level, but it has not been a pleasant experience. The cost basis that he purchased these properties means that he will likely take a loss on the real estate (or perhaps wait until my 1.5-year-old daughter starts her freshman year at Stanford… positive thinking 🙂 ; however, that is not the key issue for deep-value investors.
Actually, the important point for value investors is that the fall seen above (ouch!!!!!) greatly affected Uncle Mauricio’s psychology of investing in a major way. Even though he knows that real estate is cheap right now, he just got burned really badly by investing at the absolute worst time. He was hurt both financially and mentally.
So right now Uncle Mauricio thinks very differently during this downturn. He is very, very cautious and not aggressive. He will not tell you openly, but if you ask him quietly over a nice glass of wine and a very high quality steak on one of his rare visits back to São Paulo he will tell you that the best bet is NTN-B government securities paying a 5.2% real or 10.3% nominal interest rate. He has the largest portion of his money there currently. Why does he believe this?
The True Interest Rate Concept
Currently NTN-B, the Brazilian government treasury similar to the US T Bill, is 10.3% nominal per year and inflation is 5.1% per year. This is equals a real interest, rate above inflation, of 5.2%. This is still relatively high for Uncle Mauricio, and he would rather buy government bonds than real estate. In fact, Uncle Mauricio will likely stay on the beach invested in NTN-B until real interest rates reach at least 3.5% to 4%. His belief to wait until the true interest rate spread gets closer to 3.5% to 4% is based upon recent history and a risk reward profile of Uncle Mauricio. For example, when real interest rates were last at 3.5% in 2013, there was approximately R$ 3.7 billion of individual investor capital (this does not include institutional investment which is much larger) invested in NTN-B. In 2016, when real interest rates reached 7.64%, the total amount of individual investment in NTN-B was R$ 19 billion, a 5X difference. In 2016 Uncle Mauricio was at the beach!!!!!
When he does re-enter the market he will enter with an acquisition and growth and development orientation with a strong focus on top quality assets. Crucially, Uncle Mauricio coming back from the beach and investing again in real estate will define the first sign of the bottom.
Image: Uncle Mauricio on his way home to Sao Paulo…
Deep-Value Orientation
As a deep-value investor it is important to understand Uncle Mauricio’s behavior, why he is still at the beach, and when he comes back. He is very aware of the market and will start reappearing during the early signs of a recovery. If we were to look at the clock of real estate, Uncle Mauricio comes back at approximately 6 pm. At 6 pm the real interest rates are reduced and his yield from government securities is not high enough. He will seek real yield again.
Image: “What time Uncle Mauricio Comes Home from the Beach?”
Currently, we are approaching 6:00 pm in São Paulo. If you are interested in deep-value opportunities, it is time to take a hard look before Uncle Mauricio packs his car and comes back home to São Paulo. If you would like to receive our free guideline for 2017 investments in Brazil as we wait for Uncle Mauricio, please click here.
I will make sure to let you know when Uncle Mauricio passes an important tollbooth 20 miles from Sao Paulo. Let’s hope he drives safely as he is a key part of our deep-value investment strategy.
Joseph W. Williams
CEO & Founder InDev Capital
