How investing global, Pavel Begun of 3G Capital Management?

Pavel Begun of 3G Capital Management is a Global Value Investor. In our conversation we have covered his investing process and some investment examples.

The interview was done in 2020. We made it public now to give you more materials about our high-quality interviews at hand.


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[00:00:00] Tilman Versch: Hello everyone. Welcome back to our live stream series. This time I’m happy to have Pavel Begun on. He is in Toronto. Hi Pavel! How are you?

[00:00:13] Pavel Begun: How are you doing?

[00:00:15] Tilman: I’m good.

[00:00:16] Pavel: Thank you for having me.

[00:00:18] Tilman: It’s too hot today here in Stuttgart. I hope in Toronto the weather is better. You already told me that it’s not that hot as in Stuttgart.

[00:00:26] Pavel: It is not snowing yet, but I’m sure that’s coming soon.

[00:00:30] Tilman: Toronto, I should visit one day. I’m happy to see the city then and meet you.

[00:00:37] Pavel: Great.

Getting to know 3G Capital and how it started

[00:00:40] Tilman: I want to start with a question, and then I want to show the disclaimer and give you some time to think about the question. It’s a very classical question for you because your company is named 3G Capital, and there are some guys from Brazil who also have a very similar name. Could you explain the difference in what you are doing and who had the name first and who copied it? That’s my question this time.

Before that, I want to show the disclaimer that everybody can get a view on it. Here we go. The disclaimer is also linked below the video so people can find it and look at it.

The short message coming with the disclaimer is, if we are talking about securities, it’s just an opinion. You have to do your work and do your research before you invest. We are doing no advice here. Please do your work.

What is this about 3G Capital, and how are you related or not related to the guys in Brazil?

[00:01:53] Pavel: Well, not related at all. In our case, 3G stands for the investment approach that we practice. In other words, it stands for good business, good management, and good price. I think nobody’s ever going to tell you now that they’re looking for bad business, bad management, and bad price. Later on, I’ll tell the viewers more about our definitions of each of the 3Gs. As far as the other 3Gs, it’s hard to tell why they named it 3G. I don’t think it’s a case of somebody copying somebody else. It’s just more of a coincidence.

Advantages and disadvantages of shifting to a more global concentration

[00:02:41] Tilman: Thank you for the clarification. You started your business as a fund with a focus on the US and then moved globally. Why did you do that?

[00:02:51] Pavel: Right. When we started the business back in 2004, initially, we were 100% focused on the US. We assumed that the governance standards are not solid enough outside the US, and maybe the social behaviors in different countries are just not up to the standard. What we discovered over time is that just the ideas in the US started drying up. If you wanted to buy decent businesses and have decent prices, you would not be able to do that. That forced us to start looking outside the US, and that’s where we discovered this really large investment pool teaming with a crack of investment opportunities.

Right around 2008-2009 is when we went global. It worked out well for us. As a matter of fact, if you look at our track record, our returns have improved quite a bit once we availed ourselves of the global investment opportunities. Since strategy inception, I think we’ve compounded at 15% net versus the global index produced a return of less than 7%.

[00:04:12] Tilman: It’s interesting to learn more about how you did that, but before that, I want to say a warm welcome to every guest here. As always, you’re welcome to post your questions through the chat so that I can see them and weave them into our talk with Pavel.

Now, let’s go back to you. How did you do this process of moving from the US to a global approach? What were your learnings, and what also were your mistakes doing that?

[00:04:45] Pavel: Sure. When it comes to learnings, if you look at the whole evolutionary thinking process, we started off thinking, you cannot invest in those frontiers and emerging markets because, as I said, maybe the standards for corporate governance or the social behaviors in those markets would not allow an investor to consistently generate a good return using a repeatable process.

Over time, as we started looking into those markets, we’ve discovered that actually, it’s not the case at all. You can generate consistent returns using a repeatable process. One way for other people who still think that you cannot consistently make money in those markets would be to sort of say, “Okay, let’s try to separate emotions from reality here. Let’s use the case of the United States of America.” Very instructive to look at the US market over the years.

If you go back a hundred years, when Benjamin Graham was getting started, the US used to be a frontier market. Then over time, it had progressed to becoming an emerging market like in the ’50s and ’60s when Warren Buffet was getting started. Of course, now it’s a developed market. A highly developed market. Then you’d say. “Okay. As an active manager who knows what he’s doing, what has happened to the margin of outperformance that you generate by applying your knowledge and rational thinking?”

What you’re going to see is that the margin of outperformance they should be able to generate as an active manager in the ’20s, which is when Ben Graham was getting started, was the highest. Then it shrank somewhat over time as the US became more of an emerging market rather than a frontier market in the ’50s and the ’60s. Then, as the US became a highly developed emerging market, so today, the margin of outperformance that an active manager can produce has shrunk even further.

I think the lesson here is that instead of saying, “You can’t generate returns in those markets.” what you see is the operative. It’s easier for an active manager who is knowledgeable and rational to generate a good margin of outperformance in the emerging and frontier markets versus developed markets. It is very interesting that when Warren Buffet was asked how he would rank his partnership if he would start all over again today, he said, “Look, I’d be 100% international.”

International investment framework

[00:07:46] Tilman: How did you build your framework to invest internationally, and how did this framework progress through time?

[00:07:56] Pavel: Well, it was quite a bit of work. You cannot just wake up one day and say, “Well, I’m going to be invested in those faraway places.” There is a lot of effort through a lot of work that goes into it. You have to develop the infrastructure to invest globally. A lot of those markets are so-called ID markets. Just to set up, to be able to invest in those markets takes a lot of work. A lot of times, you have to get a separate idea for each separate market. You need to get to know the service providers in those markets. Even more importantly, you need to develop a network in those markets to back up your research.

In any market that you go to, there will be a lot of detail that is very specific to that locale. When I’m here in the US, well, it’s just easier for me to deal with that because you grow up with that, so you already know those little things. In those other markets, well, you have to learn about them. That takes a lot of time, a lot of reading, a lot of talking to people.

You also have to develop the on-the-ground intelligence gathering network because if you’re investing in a market that’s tens of thousands of miles away, you can’t do it via purely desktop research effort. It’s just not going to work. It’s going to lead to mistakes. You need to familiarize yourself with that place. Again, that just takes a lot of meetings, a lot of getting to know people. It takes some trips to those places where you just have to meet with people, et cetera, et cetera. That’s what we had to do. Of course, you do it over the years, and it does take quite a few years to get up to speed. That’s exactly why I don’t think there’re a lot of people who’d do it because the upfront effort that you need to undertake is so massive that people say, “Look, why would I do it? I don’t even know if there’s anything investable in there.” They give up and stick with what they know, which is to stay around the developed markets.

[00:10:12] Tilman: Have you built a certain edge in the international investing space like focus on certain markets, or is it really that you say you’re investing globally?

[00:10:23] Pavel: Well, I think you’re investing globally, and what happens is that that’s what gives you the advantage because it’s just much easier to source investment opportunities if you’re dealing with an investment universe that includes 50,000 names and that’s what we have. Now, if you look at people who operate within a single market, it’s just much more difficult for them because a lot of times, they’re going to face that shortage of ideas. As a result, they might be forced to accept suboptimal investment opportunities. For us, it’s not going to be the case at all.

I would just say that in addition to that, our ads would include the fact that we use a process that’s consistent, repeatable, and in-depth. That process is grounded upon facts and rational analysis, and that process has been battle-tested over decades. It yielded very good results. Furthermore, it does help that we have a small team. It’s only two people; it’s my partner Cory Bailey and myself. This way, there is no politics and no bureaucracy, so we’re very nimble and can be decisive when we need to. I think with larger teams, you run into this issue of “Well, you know what? If you got 10 people on the team, there’s always going to be somebody who freezes at times of stress,” and that just makes the entire decision-making machine ground to halt, and it just doesn’t happen in our case.

Acquiring the best equities despite limited resources

[00:12:15] Tilman: It’s two and 50,000 a lot of this. How do you manage to get the best equities out of this universe? There’s also one question from the chat I want to pick up on this. Do you use screening like PE price book to get to the ideas, or how do you select ideas in this space with the limited resources?

[00:12:41] Pavel: Right. Let me first address the question of the limited resources. We do get this question a lot because people say, “Look, it’s just a team of two people. How do you cover the entire global universe with 50,000 ideas?” Well, I would say that our objective is not to do in-depth research on 50,000 names that are out there. It would be impossible to do it with two people, and actually, even if we had 20 people, it would be impossible.

All we need to do, we need to source one or two ideas a year out of the global universe of 50,000 ideas. That’s a much easier task and can be easily done with two people. We only need one or two ideas because we run a highly concentrated portfolio and use a long-term approach whereby we typically stick with a name for three to five years. As long as we find one in two years, we’re just very happy.

Then on to the screening part. When it comes to screening, we don’t use screens based on quantitative criteria. We just find that if you just strictly focus on the quantitative aspects, you will just not pick up a lot of names that are just good businesses, and you are just going to end up with a whole bunch of stuff that may be low PE, but business is just not going to be that solid.

You just don’t want to be in a position where you use a screen that disregards the business’s qualitative aspect, which is really the most important part of valuation assessment. What we do instead, we focus on basically getting a list of equities for a given country or a region. Then we start going from A down to Z. We just look at those businesses that may be spending a minute or two in each business, reading the brief business description and maybe quickly glancing at the financial performance just to see if that is of interest.

Given that we use very stringent criteria as to what we look for, we end up with a much shorter list of names. Once we end up with a shortlist of names, well, then we go in-depth. At that point, we start looking into valuation as well, and to the extent that we’ve researched something in-depth and the valuation looks attractive, well, that may end up in our portfolio. There will always be names where the business is good, but it’s just not cheap enough for us. Well, that name is going to go on to a list of potential ideas.

At some point, we might be buying that name if the price becomes the right price. I think that list numbers a few hundred names, and we actively follow and track those names. From time to time, we do get a chance to buy them. For example, you can go back to March 2020, when the markets were in major turmoil. We purchased four ideas from that list. Well, the interesting thing is, all those four ideas were on our list of potential ideas for 10 to 15 years. We waited for quite some time, but eventually, it paid off.

3G Capital on price discipline

[00:16:21] Tilman: That’s interesting to wait and to have the patience to wait so long. How do you stick to this? How do you make it that you still be patient if you’ve already looked at an idea and found it interesting? What’s your framework to not act?

[00:16:39] Pavel: Well, this is genetic. On a serious note, look, we’ve seen how other people do it. When we looked at the approach that works, we try to look at the best investors in the world and reverse engineer what they do. Of course, we’ve discovered that they buy those good businesses, but they also have the price discipline. I think with that, we just say, “Look, that’s just the approach.” And yes, sometimes it can be painful to wait, but you have to. That’s pretty much the frame of reference for us, which has become ingrained in our philosophy. You just do what you have to do. I think it’s the combination of patience and decisiveness.

Idea stock criteria

[00:17:36] Tilman: What are the criteria to dive deeper into an idea in stock and do more research?

[00:17:44] Pavel: Well, basically, our sweet spot is finding those businesses that are industry leaders in an industry that has a long-term track record of leadership sustainability. Once you have that and you’re able to identify the factors behind that leadership sustainability, that’s where you can make a judgment as to whether that sustainability is going to persist over the next 10 or 20 years. Once you can make the judgment, you can predict what this business should be worth. That’s the criteria that we use to build our framework.

If we find a business, it’s number one, number two. In an industry where number one and number two stay in the lead for decades, well, it passes the first stage, and then obviously you have to look and say, “Well, how is the return on capital? Is it good?” Then how is the financial condition? Does it have any debt? Does it have cash? Does it have too much debt? That’s the second criteria. Then you’re going to look at the management team, and you’re going to say, “Look, is the management team solid? Have they done more or less rational things over time?”

If you get a positive answer to each one of those questions, then you’re going to proceed into the price, and then you’re going to say, “Well, what’s the price like?” For us, that price has to be anywhere from 4 to 10 times normalized sustainable earnings. If the company earns a pass when it comes to that last stage, it ends up in the portfolio. Otherwise, as I said, we put it on the list of potential ideas, and we just wait. If it takes 10 years, well, we’re going to wait for 10 years.

[00:19:41] Tilman: What are two examples for these leaders?

[00:19:44] Pavel: I think you’re familiar with them by now. It’s a company called Ülker. It’s the largest confectionery company in Turkey. Their brands occupy leading positions across Turkey and the Middle East. If you study the confectionary business history, you see that the number one players in the confectionery industry, regardless of their geographic domicile, actually stay in their leading positions for decades, if not centuries. You can look at Mars, Snickers, Hershey, Cadbury. I mean, pick any one of those.

[00:20:33] Tilman: It’s a sweet position.

[00:20:35] Pavel: It’s a sweet position. For Ülker, they’ve been number one in Turkey since the ’70s. Well, they’re probably going to be the market leader in Turkey in 2017. Their profitability should stay roughly the same. When it comes to margin, obviously, the volumes are going to grow over time. That’s one example.

Another example would be a company like Foxtons, which is an estate agency out of the UK. It’s a similar dynamic. If you look at Foxtons, they’re number one in London by a wide margin. If you look at a business like that and study the history of estate agencies worldwide, you can look at Royal LePage in Canada; you can look at RE/MAX in the US. You can look at certain businesses like that in the UK. What you’ll see is that those market industry leaders stay in the lead for 50 or 60 years, in some cases 100 years.

Again you can make a judgment that if you’re number one in London by a wide margin, chances are you’re going to stay in that position for the next 10 or 20 years. I don’t want to say that we always assume that the past and the future will be exactly the same. The future might turn out differently. That’s why we need to go in-depth and identify the factors behind that leadership.

If you can easily identify the factors behind that leadership, you can judge how those factors will persist in the future. Well, then you’re going to have your answer whether this is something that you want to invest in or not.

Disruption in investment companies

[00:22:23] Tilman: How do you ensure that we have a lot of disruption in the current environment and that the companies you’re investing in aren’t disrupted?

[00:22:34] Pavel: Well, that goes back to studying the factors behind leadership sustainability of the past. I think you just have to say, “Okay, I’m going to look at Ülker. They make chewing gum. Is the internet going to change the way we chew gum?” Depending on the answer you give me, I’m going to be able to tell you what happens to the business.

Again, when I started that question, I came up with the answer that the internet is not really going to change the way somebody chews an Ülker gum. When it comes to things such as newspapers, well, they had good leadership sustainability in the past, but I think those paper newspapers will probably cease to exist because things have changed quite a bit with the internet. That’s the contrast between how things can turn out depending on the specific factors behind leadership sustainability.

Framework for valuation

[00:23:38] Tilman: What is your framework for valuation, and at which valuations do you get comfortable buying companies?

[00:23:47] Pavel: When it comes to valuations, as I said, we look to buy those businesses assuming they pass the test concerning the business quality, financial condition, and management. We look to pay anywhere from 4 to 10 times normalize sustainable earnings. The distinction that I’d like to make here is that we’re not looking at current earnings and saying, “Well, would like to buy a business based on current multiple earnings because current earnings could be either overstated and understated depend on a specific circumstance for the business.”

In certain businesses, especially the cyclical ones, you have to be careful to normalize those earnings and say, “Well, look, in a strong economy, you probably want to make adjustments downward. In an economy that’s very weak, you have to estimate what’s going to be the upward adjustment.” Then obviously, you have to make sure you scrub those earnings to exclude any items that are not sustainable over the long term.

Then the next step is to say, “Well, what kind of multiple am I going to pay?” I can tell you that right now, our portfolio multiple is about six times earnings or so. As to what multiple we specifically pay will depend on a few factors. Of course, it’s going to depend on the business and the market. For the business that has the ability to grow at above-average rates, obviously, we would be comfortable paying a higher multiple to the extent that you buy a business in a market that’s a developed market, and investor protections are somewhat stronger. Well, you’d be willing to pay a higher multiple for that as well. Also, it will depend on what else is available. You’re going to look and see. Sometimes, if you have a portfolio full of really attractively priced names, then just for a business to make its way into our portfolio, that multiple has to be a lot lower.

[00:25:53] Tilman: You said you have to range from for to 10 times PE?

[00:25:57] Pavel: Ten times, roughly.

[00:25:58] Tilman: Yes, when is four acceptable, and when it isn’t? What should be the case for a 10?

[00:26:06] Pavel: Well, it’s hard to give you a precise answer because a lot of the stuff is case-specific. If you have a business that’s just a wonderful business, that is capable of growing at a high rate of return and is based in jurisdictions such as the US, it’s like, “Okay, well, 10 times is good.” But then you have another business that’s based in some other jurisdiction. Maybe it’s in Argentina and maybe just not a fast-growing business. Maybe for a business like that, you would like to pay four times. But then there are just a lot of in-betweens. And like I said, it also depends on what else you have available within your portfolio today. If your portfolio today is an average size of six times and you find something at 10, well, you know what? You might not be buying it. If the names in your portfolio are on average for 10 times and you find something at eight, well, maybe you just buy it.

Global investments

[00:27:13] Tilman: If you’re looking at the world today as a global investor, where do you currently see value?

[00:27:21] Pavel: Well, I’d like to make a small disclaimer before answering the question. I’d like to emphasize that we’re not emerging or frontier market specialists or developed market specialists. First and foremost, we specialize in buying attractively-priced investments wherever they are. We’re not really top-down investors either. We don’t pick a specific country and say, “Well, as an attractive country. Let’s buy names in that specific country only.” If anything, we bottom-up people, and we are just going to look at ideas regardless of their geographic domicile, and then from there on out, if they happen to be in a specific country, well, so be it.

With that, I can tell you that if we look around the world, most of the names that we’re picking up happen to be in the so-called emerging markets. Now there are a few names that we see. There are a few slivers of opportunity that we see in developed markets outside the US. Again, I don’t think it’s surprising that we see the most opportunity today in those emerging markets because if you look at what happened in the markets over the past 10 plus years, the emerging markets have been in a bear market. Then obviously, the developed markets, mainly the US, have been in a bull market for the past 10 plus years. So one would expect most opportunities to be in the emerging markets today.

[00:28:52] Tilman: Is there a special region or sector that’s interesting to you, or is this question too macro?

[00:28:58] Pavel: Yes, that goes back to macro. No. I wouldn’t say there is a special region that’s of interest. I would just say that most of the names that we’re seeing are cropping up in places such as Turkey, China, Brazil, and the UK.

Factoring risks into an investment approach

[00:29:21] Tilman: On this market, if you’re looking, investing in them, you have a dozen of risks like political risk, Brexit in this case, or the government risk related to Turkey or China that there might be an ownership risk. You also have the risk that people try to betray you. How do you deal with these risks and mitigate them? How do you factor them into your investment approach?

[00:29:50] Pavel: Well, I would say that that risk is not necessarily unique to those markets. There is quite a bit of risk in places such as the US and Canada. If you look at the political dimension, if you look at banks in the US, there was just such a backlash against the banks back in 2008, 2009 that it became very tough doing business just politically for those banks. I don’t want to downplay the fact that you face quite a few risks, pretty much anywhere you go, be it the US, the UK, or Turkey, Russia, or China.

Obviously, there are a few ways you do it. I think you do try to spread your assets across those different markets. You’re never going to be fully invested or 50% invested in any given place, be it Turkey, Brazil, Russia, or China. You will have to diversify. You want to make sure you stick with those businesses where politics will play to your advantage rather than a disadvantage.

I think you do have to have to spend quite a bit of time getting the lay of the land from the on the ground intelligence gathering network that we have, just to make sure you’re not stepping into any landmines with respect to either a political risk or maybe dealing with people who are just dishonest.

Managing diversification

[00:31:24] Tilman: How do you manage diversification? How many positions do you have? Do you have a certain limit for a certain region that you say, “I only have 4% in this company because there’s a risk of X, Y, Z?”

[00:31:40] Pavel: Well, we typically around 10 to 12 names.

[00:31:45] Tilman: High conviction. It’s a high conviction.

[00:31:50] Pavel: Yes, high conviction. We do have country limits, and the specific percentage would depend on the country when it comes to a country like the US, which is the preeminent military power that no one can touch. In general, the US’s corporate governance and social behaviors are going to be up to par. With a country like that, we’d be comfortable having 100% of our assets in.

When it comes to, let’s say, I don’t know, Argentina, or the Democratic Republic of Congo, maybe, it’s going to be a different level of confidence, so maybe you say, “Well, we’re going to limit our investments in those countries to maybe 5%.” If you have a country that has a history of capital controls and a history of expropriations well, you just cannot have a lot of money invested in that country.

I can tell you that in places like Germany, I just don’t think we’d be opposed to having all of our assets and in German stocks. Then, of course, there are just many in-betweens like Brazil and Turkey and Russia and China. Probably, not something you’re going to have 100% or 50% in, but more than 5% would be comfortable having in those.

Privatizations in Eastern European countries

[00:33:10] Tilman: Interesting. The other question is coming from the chat on privatizations. Was it a topic for you that you try to invest in privatizations in Eastern European countries or other countries?

[00:33:26] Pavel: I think we’ve been late to the game when it comes to privatizations. I think they were all the rage in the early to mid-’90s. That’s when there was a lot of opportunity in Eastern Europe. We started our fund in ’04. We went global around ’08, ’09, so, unfortunately, we didn’t really get a chance to participate in that.

Crisis investment

[00:33:52] Tilman: Would you describe yourself as a crisis investor? Do you like to take advantage of the crisis in certain markets? For instance, Turkey, with the currency crisis maybe.

[00:34:04] Pavel: Well, I wouldn’t describe it as crisis investors. That would probably not be entirely accurate. We’re not really seeking out the crisis. I think what we do is we seek out attractive investment opportunities and an attractive investment opportunity, regardless of geography. You talk to the US, UK, Turkey, Russia, Brazil. It’s just impossible to have an attractive investment opportunity unless there is some kind of uncertainty going on. The more dramatic the uncertainty, the better investment opportunities that you get.

It doesn’t have to be a specific country. Sometimes it’s a specific sector of the economy. Sometimes it’s just a specific region within a country. If there is a crisis, yes, we might be in that spot, just because attractive opportunities will abound in that specific place, but we don’t specifically seek out crisis and say, “Well, you know what? There is a crisis. We’ll invest.” That’s just not the way it works.

[00:35:14] Tilman: Could you maybe name examples where the crisis was helpful for you?

[00:35:19] Pavel: Yes, I can name a few. Actually, if you go back and look at 2008-2009, which was sort of the first crisis we went through. That crisis was very helpful to our fund investors, first and foremost, because it was a ton of extreme stress, and we basically did the right thing. We allocated capital to the most attractive risk-return opportunities at that time, and that crisis was pretty much the starting point to very strong returns for our investors.

Then we also went through an economic crisis in Russia in 2014, and it was the same story again. It was just something where things were tough. There was a lot of turmoil. It was extreme stress, but we stuck to our guns. Again, we headed two positions when facts and analysis indicated that we should. We took advantage of attractive investment opportunities, and again it was a starting point to a pathway to strong returns. The same thing happened in Brazil, 2015. The same thing happened in Turkey in ’18 and recently in March of 2020 in the US.

If you study history, what you’ll see is that, historically, the best time to invest with us has been the crisis because we always proceeded rationally, in an alternate decisive way to take advantage of opportunities, which doesn’t always happen with people. After all, a lot of times, I see in times of stress, people just freeze.

[00:37:14] Tilman: Send this guy your money if there’s a crisis. That’s the takeaway from that one.

[00:37:20] Pavel: Right. When things are good, please don’t send us any money. Of course, that’s the opposite of how people typically do it.

Deep dive on what 3G Capital Management stands for

[00:37:31] Tilman: You mentioned you want to disclose the 3Gs like good business, good management, good price. We already talked about good business and good prices. Maybe let’s focus first on good management. What is good management for you?

[00:37:48] Pavel: Well, there are a couple of things. First, you want to be sure that the people who run the business are good operators. Basically, you just study the history of the business, and you see what they’ve done. Have they been able to increase the operational value of the business? That’s the first factor.

Then you’re going to look and see how they’ve done on the capital allocation front. When they get the cashback from the business, what do they do with it? Do they put it to good use, or do they just waste it? That’s the second factor.

Thirdly, you’re going to study the incentives, and you’re going to say, “Well, are the incentives aligned with those of the shareholders?” Often, that would mean either the compensation is tied to the underlying performance of the business, or maybe management has a large equity stake in the business, things of that nature.

[00:38:50] Tilman: Do you want to add something on good business and good price?

[00:38:53] Pavel: Sorry, I didn’t hear you.

[00:38:55] Tilman: Do you want to add something on good business and good price we haven’t covered yet?

[00:38:59] Pavel: Right. Yes. I think I should because every person has a different definition of good business. I mean, you’re going to be talking to a roomful of people, and you’re going to say, “Well, how many of you want to buy a good business?” All the hands are going to go up, and you’re going to say, “Well, how many of you are looking to buy a bad business?” Not a single person is going to raise his hand.

Then you look at what they’re buying, and you look at the performance. Only a few of those are going to have good performance. That’s why you really need to dig a little deeper as to what your definition of a good business is. Like I said, with us, it starts with the competitive position. We’re going to look for the number one and number two businesses in those industries where those number one and number twos tend to stay in the lead for decades.

First and foremost, that’s the factor that we’ll look for. Of course, we want to be sure that the return on capital that the business earns is attractive, which normally for the number ones and number twos, it is. You also want to be sure that the financial condition of the business is solid. You don’t want anything over-leveraged.

Thirdly on the good price, as I said, we make sure that we normalize the earnings. This way, we’re not paying a little multiple of earnings that are inflated.

Answering questions from the audience

[00:40:30] Tilman: Interesting. Some questions are coming from the chat that is related to certain stocks and investment ideas. I want to ask you. You have to decide for yourself how you answer them, and what you want to say on this. There’s one question about the space of European REIT in retail.

[00:40:54] Tilman: REITs.

[00:40:56] Pavel: REITs, okay.

[00:41:00] Tilman: There are huge discounts to liquidation value. Dan mentions Deutsche EuroShop. Do you have an opinion on that, on the whole space?

[00:41:13] Pavel: Well, it’s hard for me to comment on specific names. Obviously, I never looked at the name that’s been mentioned. In general, I’d say that could be an attractive business. Actually, we do our own REIT. I think it just gets down to the price that you pay and the value that you get.

[00:41:36] Tilman: Then, there’s a question on Ülker and whether Yildiz will ever IPO Godiva. Do you have a take on that?

[00:41:56] Pavel: It’s really hard for me to comment on what they are going to do. I don’t think they ever tip me off as to what their plans are. It could happen at some point. In the meantime, that business has certain values. Whether it’s public or not public, the value is there anyways.

[00:42:22] Tilman: Okay. The last question mentions, Agrokor, the food monopoly which just emerged from bankruptcy. Do you have a take on the Croatian stock market? It would be interesting to hear something on this as well.

[00:42:40] Pavel: Look, I am sure you can probably find some attractive business in Croatia. I never looked at Croatia. Now, I will. It may be going to be the topic for the next conversation.

[00:42:49] Tilman: It’s interesting. It’s also a nice country to travel to.

[00:42:58] Pavel: Right. I hear they got some good beaches.

[00:43:01] Tilman: How do you do it with building your network on the ground if you’re in a country? How do you go ahead? Do you mail investors you find on the internet or know already, or how do you do that?

[00:43:19] Pavel: It’s a combination of all those things. Sometimes, it’s basically just trying to network with like-minded investors who are based in those places. Sometimes, it’s just getting connected to industry insiders through maybe sell-side people in those places. A lot of times, it’s just developing contacts through conferences. We go to quite a few conferences in those places. That’s their fertile ground for just developing contacts from the ground, meeting those people who are in the know. Then they can help you get the lay of the land.

Last year we went to Moscow, to an investment conference. We actually met a ton of people. We met with the minister of finance, minister of the economy. We were in a meeting with the president of the Russian Federation. We met a lot of investors from all over the place who do business in Russia. With conferences like that, you tend to develop a lot of contacts. Anytime you need to get a REIT on a specific business or an industry, chances are you’ll be able to find that.

[00:44:31] Tilman: That’s interesting. How do you manage the knowledge you get from these meetings? How do you make sure that someone doesn’t want to sell you something?

[00:44:41] Pavel: When you talk to those people, you’re not really paying them for research. That’s typically one quality of data that could be a suspect. These are people who are doing the same thing that you do. They really have no incentive to sell you anything. This is more or where people share knowledge. Of course, I’d never make any decisions based on just one thing I hear from someone. I typically want to talk about multiple sources that are not related to each other. If the story checks across, I don’t know, five or seven sources that are independent of each other, I think you can conclude with a good degree of confidence that the story is probably useful.

Advice to young investors

[00:45:30] Tilman: Interesting. If there are any more questions from the audience, please type them in chat. I want to make the last call for questions. I also want to ask you a question. What would recommend young investors, how they should go about starting their career and going into investment business?

[00:45:54] Pavel: Well, I think the one thing I would recommend is to start building a track record that is audited and verifiable because once you have that, it’s going to be a lot easier for an investor to go to market and say, “Hey, you know what? I’m good. Therefore, I deserve to get your capital.” That’s one of the technical fronts when it comes to just learning the knowledge front.

I would just try to get familiar with as many businesses as possible, just reading about them. That’s going to form the knowledge base of which you will identify proactive investment opportunities.

[00:46:42] Tilman: Do you have something to add to our talk we haven’t mentioned that’s important to describe your approach at 3G Capital?

[00:46:51] Pavel: I think the one thing that we haven’t discussed, but I think that has to play a part when it comes to manager assessment, is the fact that both my partner, Cory Bailey and myself, have the majority of our net worth invested in the funds that we run. We’re also the single largest investors in the funds that we run. Our investors know enough that their interests are close to the line with ours.

[00:47:26] Tilman: That’s a good thing, and it helps too. It’s one puzzle piece to get a good performance besides the good process you already mentioned. Very interesting. Do you want to add something else?

[00:47:39] Pavel: No, I think that’s about it.

[00:47:42] Tilman: Then, thank you very much for your time. Thank you very much for the time of our viewers. If you like the content, please always leave a “like” If you have more questions, please comment in the comments below. Thank you very much. Have a great day. Pavel, please stay on for a second. Bye to the audience.

[00:48:03] Pavel: Thanks for having me.

[00:48:04] Tilman: Thanks for coming.


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Tilman is a very enthusiastic, long-term investor. Over the last years he has taught himself important investing concepts autodidactically. He tries to combine a positive climate and environmental impact with his investments.
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