Otavio Costa – Build a Strong Framework and Respect Liquidity in Any Business Cycle

Dec 9, 2019

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Otavio “Tavi” Costa is the portfolio manager at Crescat Capital and has been with the firm for six years. Tavi built Crescat’s macro model that identifies the current stage of the US economic cycle through a combination of 16 factors. His research has been featured in financial publications such as Bloomberg, The Wall Street Journal, CNN, Financial Post, The Globe and Mail, Real Vision, and Reuters.

Tavi is a native of São Paulo, Brazil and is fluent in Portuguese, Spanish, and English. Before joining Crescat, he worked with the underwriting of financial products and in international business at Braservice, a large logistics company in Brazil. Tavi graduated cum laude from Lindenwood University in St. Louis with a B.A. degree in Business Administration with an emphasis in finance and a minor in Spanish. Tavi played NCAA Division 1 tennis for Liberty University.

“We all need to be able to respect and apply risk and uncertainty. You know the changes in probabilities.”

Otavio Costa

Worst investment ever

Bearish and bullish are terms that Tavi understands, like the back of his hand, given his background in business model analysis and macro investing. Tavi is an expert in analyzing and predicting business cycles.

The expert is tested

The period between 2014 and 2018, however, put his expertise into a real test. Between 2014 and 2015, the market experienced a global GDP decline of 6%, almost as significant as the global financial crisis.

There were a lot of reasons for that. Oil prices were collapsing, the dollar was strong, and other commodities were collapsing. Also, China was going through a turmoil with Chinese stocks going from a boom to bust in less than a year. And then investors were pulling money out of China. Capital flows started picking up, and businesses started doing well.

Boom! Here comes an unexpected wave

Then came the elections that changed everything. Nobody saw a republican sweep coming. A synchronized growth environment came up, and China printed more money, increasing liquidity. This completely shifted the narrative.

Tavi and his team thought that China was on the brink of a credit collapse and would get a lot worse in the short term. However, this business cycle extended for a couple of years.

Things get bearish

In 2017 the market became pretty bearish, and so the team started to do a lot of research and focused on what other indicators they may have missed in terms of liquidity. They created different macro models that revealed that liquidity was still growing in 2016 and 2017.

Not so perfect model

However, their models missed the fact that liquidity wasn't growing in 2018 and so they ended up missing a bullish moment in 2017. To deal with this, the company had to shrink its positions. They also had to apply new forms of risk metrics to be able to trend those positions and be able to stay in the game.

Lessons learned

Respect uncertainties

You never know the probabilities of when a business cycle could extend for whatever reason. Being aware of the shifts in the narrative is, therefore, very important.

Be open-minded

The world will always look vastly different, than most people expect, five years from now. So stay open-minded to change and apply that to your investment process.

Refresh your portfolio

Work intensely in terms of refreshing your portfolio positions. You want to take a directional position in terms of your trade so that you’re still diversified and not just taking one concentrated position.

Andrew’s takeaways

Have a framework to be able to deal with inevitable change

Change in any investment is inevitable. Have a framework to help you deal with change and manage your risk.

Always question, always learn

Don’t just be curious about your investment always question your thesis and be sure to move into a thesis a bit more careful. You don’t want to go all-in on one thesis. Instead, do your research so that you can expect the outcome, and then put your thesis to test.

Actionable advice

If you’re starting today, do extensive research on liquidity and its historical impacts. You also have to understand how global macro research works.

No. 1 goal for the next 12 months

Tavi hopes to profit from what he believes is one of the best macro setups he has seen in his career and to grow Crescat Capital. He also hopes to continue to evolve as an ambassador and also has a goal to run his fifth marathon next year.

Parting words

“Losing is part of the game but, try to learn as much as you can from other people’s mistakes and apply those lessons to your investment process.”