The Rational Cloning: Weekly Ideas #62
Substacks/Blogs & Tweets That Make You Go… Hmm 🤔
Welcome to the 62nd edition of the Rational Cloning Newsletter (Weekly Ideas Series).
Helping you discover the best ideas of others.
Happy cloning.
Weekly Investment Ideas
Substacks That Make You Go… Hmm 🤔
(1) IJW - Petrobras
So I was a bit of a Petrobras ( PBR 0.00%↑ ) hater. I have traded in and out and collected some nice dividends this year, but never with much conviction. I thought Lula would find a way to bleed the company. And it is hardly a contrarian pick as most of FinTwit seems to own the stock. But as the price kept cratering and especially the A shares trade at an absurd 2x forward earnings right now with a double digit dividend yield, greed kicked in and I decided to have a serious look at the stock.
So I did a bit of digging on what the political risk really is. And it isn’t nearly as bad as the headlines would suggest. For starters, Lula has to deal with a pretty conservative senate/house. So his political capital will be limited. And since operation car wash a lot of new legislation has been introduced that greatly limits the damage Lula can do:
The government cannot just Willy Nilly force price caps without compensation on Petrobras (source)
No one who has been in a political party in the last 3 years can join the company (source)
Much harder to force bad contracts/contractors on the firm (source)
Government can no longer force capital expenditures on Petrobras (source)
Even if the payout ratio is only 25%, that is still more than a ~10% dividend yield here. And would mean a 75% cut in dividends from 2022. And it will take some time before Lula is able to put his people in charge. The current CEO’s term ends in April 2023. If the 100% payout is maintained for another 4-6 months, that means probably another $1-2/share in dividends coming soon.
Longer term, Russian oil output will likely decline. In fact Russia has already announced a cut of 500k barrels next year. And American shale has matured/consolidated. China will open up again within the next 2 years. So not a bad time to invest in an oil company at ~2x earnings. I do not have a strong opinion on where oil prices will go, but the supply/demand set up seems somewhat bullish.
So I have taken a sizable position in Petrobras A shares at an average price of $9/share. I don’t think the lack of voting rights matters that much when you get the same dividend. In fact dividends cannot be stripped completely for preferred shares, under Brazilian law, payout must be a minimum of 25% of adjusted net income. So at $80 Brent and a share price of $8.7, at least a 10% yield.
(2) Joachim Klement - Don’t Trust Those Younger Siblings
What happens to younger siblings is that they have to actively compete with their older siblings for scarce resources. From parental attention to money and time, younger siblings are constantly at a disadvantage compared to their older brothers and sisters. To overcome this, many younger siblings develop strategies that can be described as “sensation-seeking”. They take on more risks in the form of more dangerous hobbies or socially risky behaviour like taking drugs. Similarly, they often try to outdo their older siblings in sports, music, etc.
This learned behaviour unfortunately also leads to riskier behaviour when they are managing money, which is fine as long as they manage their own money, but when they become fund managers and start to manage other people’s money, you better make a beeline around them.
Vikas Agarwal and his colleagues managed to identify the birth order of fund managers of US mutual funds and then linked that to the investment performance of these fund managers. It turns out that younger siblings made all the usual mistakes associated with sensation-seeking behaviour and excessive risk-taking. They traded more and had more extreme style biases in their portfolios. If these trades paid off, they would look like stars and gather the attention of their parents or – if that wasn’t available – their investors. Unfortunately, though, this trading and style drift doesn’t pay off in most cases, which is why on average, a fund manager that is a second-born child underperforms a fund manager who is a first-born child by some 60bps per year. And by the way, since you didn’t ask, let me tell you that the effect is the same size for men and women.
In other words, those youngsters think they know how the world works, yet they have no clue. Not only do they mess up the childhood of firstborn children they also lose money for their investors.
Tweets That Make You Go… Hmm 🤔
