Good Investing Talks - Why do you like Mercado Libre, Lucy Chou (Luna Partners)?

Episode Date: February 19, 2025

Lucy Chou started her partnership Luna Partners recently. We invited her to discuss her investment philosophy and why she is invested in Mercado Libre.

But we're trying to build our firm as we're building our strategy for the long term. And partnership is an incredibly important part of that. I think the rest of it is, you know, staying authentic and true to ourselves. And what I mean by that is, you know, we are young. We lean into that. We're scrappy and we love that. We're really hardworking. We're honest and we think about honesty as general, but also intellectual.

It's the deeper analysis. It's how do you take all that information and actually come to the investment decision? And the art, I think, is where differentiated thinking comes into play. And so how do we execute the art? So we are fundamental value investors at our core, but what we've chosen to do is take a modern approach to it. And so, or another way that we like to talk about it, is value investing with a twist.

So what does that twist entail, right? We use additional frameworks and analyses in order to better our investment process. They could be the dominant leader in e-commerce, and maybe in payments, they are in a strong duoppel, right? Either of those scenarios could play out in 10 or 15 years. The only thing we're confident in is that Mercado Libre, will be some sort of clear some sort of clearish leader in these spaces.

Dear viewers of good investing talks, it's great to welcome you back and it's great to welcome Lucy Chu of Luna Partners for the first time. She's an emerging manager and she started with her firm in late 2021. And for the beginning of the interview with Lucy, maybe I want to start with the firm name. So Luna Partners, does it have a deeper meaning or is it? it just a firm name? And hi, Lucy. Hi, Tillman. Thank you so much for having me. Yeah, so I love our name. It's actually the combination of my name and my partner's name. So my name is obviously Lucy. My partner's name is Nate. So it's the first two letters of my name and his name put together.

And then, you know, we also love the fact that it's sort of celestial, right? It's the Latin word for moon. And, you know, we're big fans of space. My partner is like an amateur or astronomist. So, yeah, I think it combines our names, shows partnership, and then has the steeper meaning of moon. So investors can go to the moon with you. Yeah, that would certainly be the hope and the dream over the long term, yeah. Yeah.

What is your why for starting your own firm? So when I looked at UCV on LinkedIn, you had Merrill Lynch, Goldman Sachs, Stockbridge, investors, just small, pure firms you worked with. Why is it like, why haven't you kept going on building career there and why did you choose the more painful part of being an emerging manager? Yeah, it's a great question and it's something, you know, I've given a lot of thought about because to your point, right, I certainly could have just continued being an investor at someone else's firm. And I think about this answer sort of in two ways. First is the investment strategy and philosophy that we have built at Luna. I think, you know, what we have built is really unique and being able to build it from the grounds up

really allows us to create a strategy, a process that's entirely our own and differentiated. And then the second part, which I think is equally as important, is building a culture and a firm that feels very authentic to who I am and who my partner is. I think, you know, working at some other firm and, you know, I've worked at amazing firms with incredible people. but creating your own firm is an entirely different bucket right you have to build from the grounds up every aspect of it and so that was really important to have a firm that felt very very authentic to who i am what didn't feel authentic at these other places you don't have to dump them but you also seem to be building something against some of the things you learned in the industry or these other places Yeah. Look, I know, to be clear, like I loved the firms I worked at. I think they had incredible people, incredible values. I think it really is two things. You know, the investment strategy aspect I talked about. And, you know, I'm happy to go into more details of exactly sort of the modifications that we've made to traditional value investing, which I think are quite differentiated. But I think on the culture part and what feels authentic to myself, you know, I do feel within Wall Street there is at times,

an archetype of what an investor should look like or what a fund manager should look like, right? And like, I think the easiest example of that is by gender, right? Most people who work in this industry are male or most fund managers are male. And I think, you know, I didn't, it's not necessarily that there was anything negative about the firms I worked at. Certainly not. It's more, you know, I didn't want to fit in a cookie cutter type box. I didn't want to meet certain expectations to look a certain way, to be a certain way. And I think, you know, by building my own firm, I didn't have have to compromise any part of myself. You already mentioned the differentiator or the wish to be different.

So what is it, what makes you as an investor and your firm's culture different? Yeah. So I think the way I think about it and the way I think about investing is, you know, investing is an art and a science, right? The science aspect is information gathering, it's technicals, its valuation, it's the first stab at analysis. The art is putting it all together. It's the judgment. It's the deeper analysis. It's how do you take all that information and actually come to the investment decision? And the art, I think, is where differentiated thinking comes into play. And so how do we

execute the art? So we are fundamental value investors at our core, but what we've chosen to do is take a modern approach to it. Or another way that we like to talk about it is value investing with a twist. So what does that twist entail? We use additional frameworks and analyses in order to better our investment process. Some of these examples would be, you know, we've developed a internal four business model framework, and we only invest in opportunities that fall into one of these four categories, and I'm happy to talk about that in more detail. The second is how we source. We source from the conventional methods, like top down, bottoms up, from colleagues, from other funds, from letters, but we will also source from

unconventional ways, Reddit, social media, or my partner watches documentary, sometimes ideas fall out of that, or we will talk to friends outside of finance to see what products or applications or businesses they're using, or even what I personally will use. And I think the point here is to source from everywhere and the idea that good ideas can come from anywhere and to not sort of fall into, you know, the conventional echo chamber. I think another modification, which is probably the largest modification we make to conventional value investing is the incorporation of behavioral finance factors. And it's based on the premise that things are worth what people are willing to pay for them, right? And so we spend a lot of time thinking about other market

participants and what other other market participants are underwriting. And it can fall into the quantitative bucket where we will consider trading momentum, technicals, ownership trends, even trending of Wall Street estimates, with the idea that, you know, if we love a business and the long-term fundamentals are amazing, but price momentum is against us, we might start that position with a very small size, or we might wait until momentum turns and then invest. And then the second bucket of behavioral finance considerations is more the fundamentals, the qualitative. And so this is where we really ask, what is the market choosing to underwrite or not underwrite that we are underwriting.

And so we're trying to think, like, are we calling the market winner early when there are still a lot of competitors and the rest of the market is not doing that? Are we underwriting higher pricing power for a company or greater margin expansion in the long term versus the other market isn't, sorry, the rest of the market is not yet convinced of that?

So that's sort of the type of fundamental behavioral finance considerations that we factor in. And our belief is, you know, just to be clear, like, we still are fundamental value investors at our core, but we believe these additional modifications and frameworks allow us to, over the long run, come to better and repeatable investment outcomes. So I would say that's sort of how we've differentiated ourselves on the investment strategy side. So you try to understand Mr. Market, but Mr. Market is also manic depressive.

So it's a bit of a challenging way. How do you stay sane when trying to understand such a figure? I mean, that's the thing. I think that's also part of the reason why we initially decided to start incorporating behavioral finance factors, right? Because I think with value investing in its purest form, investing in the market can drive you crazy. Because a lot of times you'll start feeling like, oh my gosh, this is such a great company. But the share price keeps going down. or the value is never being realized the way that I see intrinsic value.

And so we're really honestly trying to take some of that frustration out, where instead of sort of banging our heads and being like, why isn't this happening, we're trying to understand why isn't it happening? And like, can we maybe around timing and sizing invest in a better way where we incorporate some of those considerations around other market participants? So it's also self-therap in this insane setup to a certain way. Absolutely. I mean, it's really, look, investing is about learning about the world. It's about being really curious and thoughtful, but it is also about trying to understand what other people are thinking. And I think when you start, I mean, I love it. I think it's really fascinating to try to understand other people. And this is sort of a grand scale way of doing that. That's surprising because most investors just see numbers and there's no other people involved in these trades.

Yeah, yeah. That's a fair point. Yeah. Coming back to your firm, which goal do you try to achieve for you and your client base? Yeah, I think we like to be quite explicit about what we want to target. And so I think when you look at the U.S. markets over long periods of time, that's typically returned on an annualized basis, you know, high single digits, 9, 10%. And then we looked at sort of, you know, the best long-term value in mind. investors that we could think of. And they typically were able to annualize at mid-teen to 20% target. And so our target, starting this firm, was, you know, we want to be reaching that 20% target or higher, right? And so every investment opportunity, when we think about investment

strategy in the process we're building, our intention is to have them have the potential to reach that 20% or exceed it. And so the way we do that is, you know, as I mentioned, we do this sort of investment, fundamental value investing with a twist. And we've believe our alternative or modern modifications will help us achieve that. So that's what we're trying to bring to the client in terms of investment returns and strategy. The second aspect, and we talked about this a little bit, is about the culture and the firm that we're trying to create. And I guess just to give a little more detail on that of what we want to bring, right? Because that can mean many things. For us, I would say the first and most important thing

is partnership, right? I think, you know, we talked about this, but even within our name, it's the combination of mine and Nate's name. Our partnership is key, but it's not just partnership between us, right? We think about our clients as partners, vendors, colleagues, anyone we interact with, we want to be building a long-term partnership, right? We're not trying to do this sort of impersonal, transactional, based, short-term relationships, but we're trying to build our firm as we're building our strategy for the long-term, and partnership is an incredibly important part of that. I think the rest of it is, you know, saying authentic and true to ourselves. And what I mean by that is, you know, we are young,

we lean into that. We're scrappy and we love that. We're really hardworking. We're honest and we think about honesty as general, but also intellectual, keeping ourselves accountable and knowing that, you know, we have no other incentive or alignment or bureaucracy other than sort of 100% focused on becoming better investors and getting to better outcomes for our firm and for our clients. To follow up on this, how long are you in the investing game for? Is it like you say with 50 we want to do something else? Or are you more in this Buffett model of like, you have to carry me out of here when

I'm dead? Yeah, I definitely think the latter. I mean, we always joke about this, but, you know, Nate and I both recognize how lucky we are and privileged we are to be doing this incredible job so early on. in our careers. But we always say, like, this is hopefully, you know, forever more, our last and final job. This is the last, like, if we can, we want to be building our firm for decades to come. And this is the only job I want to do. And I think it's an incredible job, you know, sometimes when I really think about it, it's pretty amazing to have a profession where,

especially our strategy, right? It's sort of inherent in our strategy as a long-term value investor, where what you're essentially doing is just getting the ability to learn about the world, right? trying to envision in 10 or 15 years how the world will look. And especially as a generalist, I get to learn about everything. And so that's pretty amazing that that is a job just to learn. And sometimes it's just learning for the sake of learning, which is amazing. So yeah, hopefully I can be doing this for the rest of my life. Before we jump into your research process, we already talked about a bit.

Maybe a question about the outside world of investing for the viewers of this channel. It's hard to believe that there's something else outside of investing. But what are important things you have achieved outside investing? Or is there anything you would even label as an outstanding achievement you can share with us to learn more about you? Yeah. I think that's tricky because I would say the most important thing in my life, you know, maybe hand in hand with investing, are my relationships. and so I'm really, really passionate about being a good friend or a good daughter or a good wife or a good sister or even, you know, hopefully in a few months a good aunt, right?

So I also think that, and this is a very common thing where I think, you know, as, you know, I'm in my late 20s, early 30s now and I think, you know, as people get older, people start moving away, right? I feel like in this stage of life, everyone's, all my friends, my family, everyone's starting to move to different cities or different locations. And I think one of the things that I'm really, really concerned but also passionate about is staying in touch and maintaining this relationship because life is sort of taking a different route for everyone right now.

And so I would say as weird as an achievement, I don't know that this is necessary achievement, but I'm really passionate about being on top of my relationships and, like, those are the most important things to me, yeah. And are there any things outside of investing that keep you pushing even harder? to achieve success in your profession. So with Buffett, for instance, it's this relationships he has in Omaha where he is kind of like also saying, I just do this to make my friends in Omaha rich and support the people who trust me and this trust fuels him further.

So is there anything like this for you? Yeah, I mean, I think I think it's a few things, right? Like one certainly is, you know, the trust that our clients. and that my family have put in me, right? So I think it's like a very similar thing to what Buffett is saying is, you know, so many people from my family, my friends, you know, my old colleagues who've mentored and supported me, I think a lot of people have helped me along this journey, and that certainly helps fuel me. I think also part of it is just innate, right?

It's a desire, like I love investing, but to do what I want to do with the rest of my life. It's really, I very much don't view it as a job. It very much feels like a calling or a passion in life. so part of it is innately driven. And then I do think there's maybe like a third aspect, which is, you know, realistically, right, and I don't want to make this into a whole thing, but, you know, finance has typically historically been, you know,

a male-dominated feel. And I think, you know, I've had incredible mentors and it's been such a privilege to get, you know, the things I've gotten. And I think, you know, there is something nice about thinking, even, I guess, even after this day, you know, I'll talk to students from my former college or high school and a lot of young women will reach out to me. And I think that's really important to sort of keep that process going, if that makes sense,

because I've had incredible sort of female mentors who have helped me along the journey. So there's probably this third aspect that is being driven by sort of maybe this external knowledge that, you know, being where I am isn't, I shouldn't take it for granted, I guess, that's my point. So there's also a bit the role model, Lucy, to assertion. I mean, I don't know I would go so far to say role model. I think I'm still quite early in my journey. And, you know, there's, I'm still trying to figure out a lot of things. And so I wouldn't necessarily say role model, but I'd say, you know, certainly like where I've been able to give advice or where, you know, someone can look at me and be like, oh, that's

cool that she's doing it. Maybe, you know, that's something I'm interested in. I think that's incredible. Hey, Timlin here. It's great that you have made it that far into the video. And I think it shows a certain passion for investing you're having. If you want to dive deeper and go further down the rapid hole, you're invited to apply to my community Good Investing Plus. It's a place that's very helpful to people who are ambitious about investing.

It's helpful to investment talent as well as Experian fund managers. So if you're interested, please click on the link below. And now, without further ado, enjoy the conversation. So let's jump to the research part of already mentioned. But before that, maybe can you elaborate a bit more on your style of value investing, value investing with a twist? I hope it's no untwist. We played this too much with my cousins as a kid. Yeah, so I sort of discussed it.

So value investing with a twist, we've made modern modifications to value investing. And so that was incorporating the four business model categories, sourcing from anywhere and everywhere, and then incorporating behavioral finance factors. So I've sort of touched upon those, but maybe I'll go into more detail on the for business model framework, if that works. So when we looked at history and when we looked at sort of our personal investing experience

anecdotally, as well as research from investors that we admired, I think that there were a few characteristics that fell out, that were common shared characteristics of companies that would compound at above market rates for extended periods of time. So we took those common characteristics and created four categories. And those categories are compounders, shooters, cyclicals, and transformers. So compounders are typically market leaders.

We're looking for hopefully, you know, natural monopolies, oligopolis, duopolis, that sort of thing, operating in relatively more mature markets, but with still steady growth. Given those industry dynamics, they tend to have really strong margins and really strong cash flow generation. and we also look for management teams that are, you know, experienced, established leaders. Shooters are what we would consider, you know, future compounders. They are earlier in their market leadership. They're in TAMs that are growing very, very rapidly. And their market leadership is not definitive, but it is early.

There are early indicators of it. For example, you know, they're early, excuse me, they're early indicators of it. And they, because of those dynamics, they may be. aren't super profitable today or but there is a viable path to profitability and so we're looking for early indicators of that like good unit economics future pricing power or increasing spend efficiency and this is a space where we like our leaders to be sort of visionary CEOs like we love CEO founders um cyclicals are companies that you know they have a lot of the same characteristics of compounders and shooters but they operate in cyclical industries but we also recognize that you know

cyclical industries come with their own risks, and not every cyclical opportunity is a great one. And so we also look for additional characteristics in the industry, and timing is really important. So, for example, a recent demand shock with a delayed supply response, or, you know, healthy levels of leverage in the industry, good secular tailwinds that are timed well, that sort of thing. And then Transformers, our final bucket, are companies that are undergoing some sort of transformative action, which we define as, you know, really large recent M&A, some sort of a structuring or turnaround story, with the idea that once they've undergone this sort of transformative action, they will become a compound or a shooter. I would say that what we have found is that

when a company falls into one of these four categories, that's what we would consider a high-quality business and something that would be worth consideration in our portfolio. We've also found that over the past few years. The types of opportunities that we're best well equipped to analyze and then come to an investment on is the compounders and shooters category. So that does make up the majority of our portfolio. We do still look at cyclicals and transformers, but, you know, they are higher risk investments, but also, you know, higher return opportunities. But just for those, we would demand sort of a higher level of conviction. Can you maybe give an example for each category. So what's your Optimus Prime and a transformer space? Yeah. So I would say,

you know, for a transformer, Boeing would be a good example of that where, you know, clearly a lot of recent issues, a lot of restructuring, but the intention is, you know, a few years down the line returning to be sort of a compounder. Cyclical would be Cleveland Cliffs, which is a U.S. steel business. We think it's a really high quality business, a lot of reasons why. So it operates in essentially within the U.S. there are four major steel companies. And so it operates in sort of favorable competitive dynamics. It's run by an excellent management team, but it is still a cyclical industry. Shooters, Mercado Libre is a great example of that where it's an early market leader and really, really rapidly growing TAM. We love that business.

It's actually our largest position right now. For compounders, you know, I think we have a few examples of that, but one would be something like workday, which is really a clear leader in sort of the HR space. It's sort of a mix because it's a little bit of a shooter in the sort of the financial space. But I would say in its core business in HR, you know, it's a clear market leader, mature market, growing well, solid management team that's been around for a while, great business as well. With your research process, what kind of aspect do you spend the most time on? I think we spend the most time on thinking about the business and the industry.

And what I mean by that is, you know, we're making these long-term investments in bets. And so we're trying to think about where all this will look and what the world will look like in 10 years and how the company's products will fit into that world. And so the best way we can do that is really understanding the customer, understanding the the customer's motivations, the product, and how it serves that, and then how the product will also evolve over time. And so I think to do that, you really have to deeply understand, you know, the context, the different motivations, the company's evolution over time.

And I think that's what we really focus on versus more near-term stats or financial metrics. That's still important, but for the long-term bet, I think really understanding the industry and context is more important and more critical. And which three investment mistakes have improved your research process the most? So I think, okay, I'm going to answer this in sort of a weird way because I think to your point, our mistakes have driven changes in our investment process. So maybe I'll start with the process changes and how that came out of mistakes. So I think first is the four business model framework that we talked about.

I think when we initially started, we had a general idea of what a high-quality business felt like to us. But it was much more in some way subjective, right? We were just looking for, oh, good Tams, good management teams, you know, strong growth. But what does that really mean? And I think that led to some early mistakes where being more crisp and defining quality more clearly has allowed us to really crystallize what we're looking for. versus initially, I would say, we invested in some relatively lower quality businesses, which were not the right decision for us.

And so I think really crystallizing these four categories and more clearly defining them and what exactly we're looking for. That's maybe first. I would say the second, and this sort of goes hand in hand with that mistake, is the reason why we looked at lower quality businesses is because a lot of times they come with much higher return. And I think what we have come to realize is, no, there is a quality bar threshold that we will never dip below, regardless of the return, right? That's just not what we do.

We're not well equipped to understand companies that are lower quality. And I also think that this also sort of helped us crystallize our behavioral finance considerations. Because in the beginning, similar to sort of the four business model framework and quality, we knew we wanted to incorporate behavioral finance considerations. But we were sort of vague about it. We were like, we're just trying to understand what market participants are thinking. But now we've really sort of categorized it in two. One is the quantitative factors and one of the fundamental factors. And I think this matters particularly around the value versus quality point

because I think in certain scenarios, right, as stocks get cheaper and cheaper, you think to yourself, oh, this is a better and better buying opportunity. But what the behavioral finance has taught us in some of those scenarios, because we will factor in like price momentum, right, is that sometimes when the price is going down and momentum is against you, you don't necessarily want to invest, right? And that sort of runs counter to a lot of the foundational aspects of value investing, right, which say, oh, if long-term fundamentals haven't changed,

if a stock goes down, it's great, it's cheaper, it's like a better opportunity. But no, we're realizing sometimes, like, the negative price momentum is you, and you can fall into a value trap, or you're trying to catch a falling knife on the way down. And those are scenarios that we want to avoid where you might get stuck in dead money or worse for extended periods of time. So that's the second. And then I think the third is just generally across our investment process and also definitely applies to the first two, is documenting, memorializing things.

We've gotten a lot better of writing down everything we're thinking at a point in time because it's really, really hard after an event has occurred to think back to what you were thinking about beforehand. And obviously, I mean, from the very start, we had, you know, processes where we wrote things down, but I feel like over time we've gotten even more religious about that and really trying to understand when we get things wrong, why did it go wrong? When we get things right, how did it go right and how can we replicate that? And I think it's really critical to our process because it helps us sort of stay accountable

to ourselves, particularly as a small firm with only two partners, right? How can we really, really stay accountable to ourselves, to our mistakes, to our successes and sort of how can our process evolve? Because we see our process as not a static thing, but something that should continuously be evolving. So if you think about your process in two lines, one is showing up and one is showing a downward trend. Maybe go back five years. You started three years ago, but maybe you go back five years in your investing framework. What kind of aspects made this process and what kind of aspects made this process, like going down and up?

And down and up is in terms of like time we spend doing them? Time spent or intensity of research or what is important for you. You already mentioned this a bit, but maybe to outline your transition there. Yeah. I think what I was, yeah, so we have kind of mentioned this, but I think, you know, where we have spent the most time historically, but it only continues to grow more important is around. the quality of the business over the long term.

So really focusing on the fundamentals and how, you know, customer interest will evolve, how the product will evolve. Will this company serve its customers' interests in five years and 10 years? I would say where we spend a lot less time now, but this has been true from the start, but probably progressed even further,

is around metrics. I think when you're betting on things, where you want them to do one, five or 10 years, you know, slight margin moves for a quarter here or there or slight growth dips up and down in a quarter to quarter basis are not super important. We obviously have a long-term model, and that's how we pump out our returns, but, and we run triangulations, we do all the analyses, but, you know, and I mentioned the beginning, I think that aspect of investing is not super interesting, right? It's mostly commoditized. Anyone can do evaluations and technicals. I think the real higher-level thinking is

sort of thinking about five or ten years down the line. And so this smaller category, we still do it, but to me it feels more of like a check the box thing. I think the only other thing, though, I would add, and this is sort of counter to what I've just said in a caveat, is when you are a really long-term investor, it's very, very easy to dismiss short-term movements or short-term volatility or missteps as like short-term noise. They're not important, right? And if anything, a lot of those times where, like, let's say, a company misses one-quarterly earnings, whatever, one-and-a-quarterly expectation, a lot of times that's like a great opportunity to buy. Having said that, you also have to be cognizant of the fact that is that sort of short-term

misstep an indicator of a broader trend changing? That's the only thing that we're really, really cautious about when we sort of think about the short-term things. But for the most part, those don't worry us. And we have the privilege of that because we are long-term investors. You mentioned already that Mercado Libra is your largest position. So let's talk about it. How did you get in touch with the company

and what was the initial dance you did before investing? Yeah, so Mercado Libre is currently our largest position. It's about 25% of our portfolio. I guess just to give a little context, so it's listed on NASDAQ, M-E-L-I. It's about a little under $100 billion in U.S. market cap. So I heard about the name, frankly, a long time ago. I think back at my old job, and that's sort of how it sort of initially sparked my interest.

I've heard about it periodically throughout the years, but when I was starting Luna, that was sort of one of the first names that I immediately was like, it looked really, really interesting, compelling. Let's do a bit more work. And it's been an investment, I think, nearly since we've started. And since that time, it has only grown in position size. And what was the dance you did? At the beginning, like the analysis dance, maybe the dance was a bit too short as a picture. Yes.

So I guess the dance we did was, I guess, so our initial process for looking into any business is quite similar, right? We start thinking we look at the filings, the presentations, that sort of thing. And we're trying to understand at its core, what is this business? What does it do? What's the industry? I think what immediately struck out initially with Melly is the industry context is incredibly important with a company like Melly. It's dealing with a huge TAM with two major secular tailments behind it. So first is Latam e-commerce penetration.

Latam e-commerce penetration is well below what it is in the U.S. It's typically been slower or behind for a handful of reasons, including lower internet connectivity, logistical infrastructure problems. COVID has obviously helped accelerate this. And you have also had companies like Mercado Libre who have poured billions into building out the infrastructure. And so that has helped a lot. The second is payments, right? Latin economies have historically been cash-driven economies. And that's because, you know, banking was inaccessible.

They're incredibly high fees, low transparency, concerns around fraud. And similar to e-commerce, COVID has helped accelerate this. But in addition to that, you also have had the rise of fintech companies like Mercado Libre's product, Mercado Pago. which have allowed easier onboarding. They've had lower fees because of at scale and with their software, and they also have a lot more transparency. And so what's really critical with Mercado Libre and what we've spent a lot of time thinking about

is just the industry backdrop in the context of those sort of two major tailwinds. And then once we figure that out, our next consideration was, okay, so we have these awesome tailwinds, how does Mercado Libre sort of fit within that context, right? And so Mercado Libre is the largest e-commerce platform in Latin America, right? And there are many reasons for that, including, you know, first-mover advantage. They have incredibly strong brand recognition.

They have incredible local expertise. They've been operating in the industry for over two decades at this point. They have tons of investment in infrastructure that I mentioned in fulfillment centers. And then also, and this is really important, is the ecosystem of payments in e-commerce. That's incredibly valuable, right? It makes their consumers across both sort of platforms and all the offerings incredibly sticky, lower turn, higher engagement. They also have access to amazing data. So one of their big payments, growth drivers is around credit, right?

And through the marketplace, they have access to tons of credit data for their customers. And so they're able to use those to incorporate into their credit risk assessments and roll out loans and offer credit cards to their consumers. And so we sort of see this very much as a great case of a shooter, sort of, and from the categories that I just talked about, Mercado Libre is a great example of a shooter, right? You have this amazing TAM growing very, very rapidly with two main secular tailwinds that we really understand, we stand behind, we've seen them occur in other countries, and so we really see that being something that will happen. And then you have an early market leader with what we believe to be sort of sustainable,

competitive advantages. margins, I believe, are in the low to mid-teens, even a margin right now. So it's not super profitable, but at the same time we see really a viable path to future profitability. They have 50% gross margins. They've had increasing spend efficiency. And they have a management team that's sort of led by the type of visionary CEO founder types.

It's Marcus Galperin, who founded the company back in 1999 when he was at Stanford Business School. And so we think it's an incredible business for. for all those reasons. And, you know, we think it's a very reasonable valuation given its growth profile. And so, yeah, it's our largest position. But generally, e-commerce isn't like the best business if there wouldn't be this growth. So you said you focus on good businesses. So how is in a not the best business where you have competition where Chinese people can enter,

where TAMO can enter, where Sheen can enter, where Amazon is always a threat. How do you make sure this melee is a good business? Yeah. So that's a great question because, you know, the competitive landscape is definitely one of the key risks for this company, right? I think what we have decided and spent a lot of time thinking about is how sustainable are the competitive advantages that Mercado Libre has, right? And we think they are sustainable, right? We think, you know, we talked about a few of them, right? They have extreme local expertise.

They've been doing it for over two decades. They have the first mover advantage and strong brand recognition, and they've just gotten the consumers in, and they're quite sticky. We see, you know, the billions of infrastructure investing that they have put in. And I think one of the most critical is sort of what I talked about, the ecosystem between payments and marketplace. And I think once you have consumers who are using both payments and marketplace, they're incredibly sticky.

and they have a lot of touch points with the company, and it sort of ultimately leads to lower churn and just higher engagement. And I think it makes really, really hard for other players to displace them. And I think you're seeing that to slowly come true, right? I mean, I feel like one of the biggest entrants that was quite noisy was, you know, C and Shoppy a couple years back, and, you know, since then, they've sort of pulled out. We also feel like we see it within the metrics themselves, right? Mercado Libre sort of talks about how they don't really see any of their share declining. They, in fact, see their share increasing.

I think you also see it just like broadly in their top line numbers. They aren't really slowing down in growth, but they're still able to grow despite the fact that you have these sort of noisy other entrants coming in. And if you look under the hood with Mercado Libra, it's not an easy case to underwrite because it's an e-commerce play, but then it's also a fintech, so it's turning to a bank and they offer a credit card and lending and lending is like tricky compared to e-commerce. So how do you make sense out of all of this? Yeah, I think that's why, you know, we spend a lot of time diligenceing our companies, right?

You know, we spend, you know, I mentioned weeks, if not months. Actually, most of the time, I don't even know I say weeks, but most of the time months sort of trying to understand a company and an industry. And I think that also, to your point, right, allows us to see opportunities. because particularly with more complicated or complex businesses, it takes time to really, really understand them and sort of be able to unlock that value. So I really think the biggest thing is around time and sort of the dedication to really understand a business well. And like in practicalities, right, the ways we do that are, you know, there's like the obvious, you know,

you go through all the filings, all the presentation, you look at competitors, sort of most of all or most of the publicly available information out there. But you know what? We will also like look at blogs. We'll talk to experts. We'll read expert transcripts. We'll try to, you know, like this in specific to Melly, but just like any of our investments,

where we can like personally test the product, we'll do it. We'll even like talk to other people who have tried the product or all sorts of sort of experts in the industry, that sort of thing. Yeah. But how do you dissect the financial industry? institution part of Mercado Libre that is not like falling into shades at a certain time if they give out that much credit. Yeah.

So they do not give out a ton of credit information. I've seen a couple of reports like under JP Morgan just put one out where they tried to dissect it, but you have to make so many assumptions that I don't know how reliable that ends up being. I think that is a really, really tricky part. And you know what? Maybe this is a good time to discuss like one other thing, type of investments that we try to categorize is, so there are some investments where, you know, we're very, very detailed

in the financials and there's a limited scope of sort of potential earnings outcome, right, in five or ten years. And with those, you know, being precise is helpful and, you know, those can be great investments with great returns. And then there are other types of investments, and Mercado Libre sort of falls in that bucket where the bet is not on precision, right? To tell you with any level of certainty in 10 years that e-commerce penetration is going to be, you know, X percent in eight years or 10 years or 12 years is sort of ridiculous. Or even to tell you, and part of this is because Mercado Libre does not disclose a lot of detail about how, you know, their credit does versus their other sort of fintech products. To tell you with any sort of level of precision exactly how their margin will play out over the next two years, three years, let alone 10 years, is incredibly hard. and I think that's the wrong sort of bet

because we would be precise without really being accurate. The bet with Mercado Libre is sort of a big broad strokes bet, right? Our bet is, look, you have these great two amazing secular tailwinds. They're going to play out. Whether it's doubling penetration

in eight years or 12 years, don't know. And then you have Mercado Libre and we're calling them as a leader. So there are many ways in which it can play out. They could be the dominant leader in both e-commerce and payments. They could be the dominant leader in e-commerce

and maybe in payments, they are in a strong duopoly, right? Either of those scenarios could play out in 10 or 15 years. The only thing we're confident in is that Mercado Libre will be some sort of clear, some sort of clearish leader in these spaces. And the reason why I bring this up is it helps us sort of think about what are the key risks and what exactly are we underwriting. Because to your point, right, it's incredibly difficult to model with any level of certainty, five or 10 years out, 80 companies, but particularly a company like Mercado Libre, which has incredibly complex financials,

incredibly different businesses, and also more important, maybe not more importantly, but equally importantly, right? They're very early in their journey, and there are a lot of dynamics at play. I would also know, like Mercado Libre, they don't give out any financial targets, right? From what I remember,

they don't even give out next quarter or a year from now, so it makes it incredibly difficult to forecast for them. But the way we think about it is it's a big, broad strokes bet. And this is, and just because not all of our bets are like this, right?

There are other bets where we have very, very precise, detailed models, and we track very closely certain KPIs. They're just different types of bets. And a little bit, sorry, I love this passage from security analysis by Graham and Don, where they talk about how security analysis is not always about knowing exactly what intrinsic value is, but it's about knowing that intrinsic value is just adequate to make the relative to market price to justify the investment. And in layman's terms, like, you can look at a man and know that he is overweight without knowing his exact weight, or you can look at a woman and know that she is old enough to vote without knowing her exact age.

And in this scenario, as long as we get the broad strokes big bet with Mellie correct, the returns work out. And so we've modeled, we obviously still have a very detailed model, and we do lots of revenue triangulations, lots of margin analyses and sensitivities. But for Melly, it certainly for us is a different type of bet, and it also sort of speaks to the risks that we monitor. So for Melly, we're more focused on, like, watching the trends and making sure, is there a structural reason why, you know, e-commerce penetration or the rise of digital banking will not happen the way we think it will eventually, right? Is there a competitor coming up who's going to suddenly take a ton of share or sort of hinder Mellie's growth over the next 10 years, right?

that's sort of what we are watching out for versus there are other types of bets where we're much more closely tracking certain smaller financial KPIs if that makes sense yeah it does as a final question on Mali what role does analysis of management play for you with this case and then maybe also in general we didn't talk that much about management yeah so So, I mean, management's really, really important, right? Because it ultimately comes down to their execution. There are definitely scenarios where we feel it's more important on a relative basis, and that would be, you know, transformers, for example, within our four categories.

That's where it's really, really critically important because they're going through some sort transformative action. The execution is really critical. I would say it's still important when you're looking at a compounder, but maybe less critical just because those are established, mature winners and good fields. And so, like, the leaders we're looking for there are more, like, we want experienced solid leaders. Do they need to be the best of the best and the most, like, forward leaning?

Maybe not. Versus, you know, when we look at shooters, which is the case of Mercado-Libre, we're looking for visionary CEO founder types who, like, they live and breathe by their company, right? We don't necessarily love CEOs who jump around from spot to spot. I think that's maybe a CEO better suited for like a transformer if they're really good at executing a very specific thing. And that's what they do from company to company. For Mercado Libre, and I mentioned this, their CEO is Marcus Gaffer. And he's the founders and start really brilliant, really smart.

And I think he's incredibly long-term focused. That's the other consideration for us. And what I mean by long-term focused is he's making a lot of investments today that maybe hurt his P&L. but I think over the long run will pay out. And so when we think about him, right, he sort of falls into our thesis and our bet on Mercado Libre, right? Because we don't care about him sort of managing his margins or managing his P&L today. We care about him making the investments that are critical to set himself up for like five or ten years, right? For a company like Mercado Libre, they can worry about margins, in my opinion, in 10 years when they are the leader.

And there's plenty of time to do that. And so that's sort of how the general framing of how we think about management teams, yeah. Let's sum up the interview or let's close the interview with the topic portfolio construction. How does Malley fit into your portfolio and what kind of role do the other four categories play? Do we have buckets only 10% transformers or? Yeah. So we use a investment frontier. It's based off, you know, the efficient frontier in economics.

But we use an X, Y, chart, and we essentially map two things. The first is an IR. So we look at three-year and five-year IRAs, and that's just off of our base case model. The second input is a quality score that we come up with. So the quality score is subjective, and it's sort of an output of all of the diligence we've done, and it speaks to our perceived quality of the business. but not only that, it also speaks to how much could we have we and could we have diligence to the company? As in, like, if you had a business that we thought was like, oh, this is probably

really, really high quality business, but we just, we can't diligence in for whatever or it was not diligentable, then it brings the quality score down. And so you sort of map those two things with all of our companies and also companies on our watch list, which are interesting companies, but not quite in our portfolio yet. And the idea is to have as much stuff, sort of, most of our portfolio is composed of things sort of out to the top and to the right. In terms of diversification, so I sort of mentioned this, but most of our names are compounders and shooters, right? I would say 60 to 70% of our portfolio over periods of time have been compounders and shooters. I would say transformers and cyclicals make up the rest of that. We do not have hard and fast rules in terms of

size, sector, industry. I think what we're more interested in is diversifying by tailwind. And so we try to think about the key tailwinds impacting our companies and making sure, you know, they don't overlap too much. And also, you know, we want to be concentrated, right? We own 10 to 15 names. And so, you know, if there's a tellwind that we love, we want to pick one, maybe at maximum two names that we think will benefit the most. And then obviously, just like on a practicality purposes, we do like look at correlations as new

names come into our portfolio against our existing portfolio. but we don't have any sort of hard-and-bass rules. That's just sort of a sanity check for us. So that's sort of how we think about portfolio construction. And how did Macado-Libre grow into this 25% position of the portfolio? Or not even grow? Was it like recently bought to? Yeah.

I think it both grew and we have bought more as our conviction in the company has grown. And we've also underwritten the model up a few times, just as it has outperform. I think, you know, it's always been a big position for us from the very, very start. We've always had a lot of conviction in, but just, you know, recently, I think, a combination of opportunity to buys and also its performance over the past year has had it grown. It is one of our, I mean, I would say it is maybe our strongest conviction name and a mid-to-high-level return based on our IRAs. So I think that makes it a really, really compelling investment to have it be our long.

largest. The other thing I would add is, you know, for example, those most recent quarter, they had an earnings miss, but they, you know, met expectations on top line. And because of that, the share price dropped 15% on that day. We looked at that and we very much felt that was sort of a short-term margin issue that was not important to the long-term fundamentals. We also felt like, you know, the stock had been performing well over the last year or so. And so we took that as an opportunity to invest more. So that certainly has helped grow the position a little bit, but we did have a very sizable position before that as well.

And thank you very much for the great interview and your insights. For the end of the interview, there's always the chance to add anything. We haven't discussed or discussed a question. We haven't touched. So do we have something to add? Yeah, so first thing, thank you so much, Tillman. I really enjoyed this chat. And also I just wanted to say, you know,

your good investment community, what you've built and created is pretty phenomenal and amazing. And everyone I've chatted with through it, it has been incredible. Second, you know, if anybody watching wants to follow along, we have a newsletter on our website. Please feel free to join. And then the final thing is just, you know, and I sort of mentioned this early, but I'm very early on in my career and I recognize that. There's still a ton for me to learn and figure out. But at the same time, you know, if anyone's watching, whether you're in college or just out of college, you know, and want to chat about anything. Starting a firm or, you know, advice around banking or public equities,

definitely feel free to reach out. I've certainly benefited and been privileged to have a ton of amazing people above me, have to do calls and coffee chats with me. So definitely, you know, if you're interested in chatting, reach out. I'm available on LinkedIn or via my website. Thank you very much for the kind words. And the link to the website is below. So it's just one click away.

Thank you very much. Bye, bye, also bye to the audience. I really hoped you enjoyed this conversation. If you did, please leave a like and a comment and for sure subscribe to my channel. Traditionally, I want to close this conversation with the disclaimer. So here you can find the disclaimer. It says, please do your own work. This is no recommendation.

What we are doing here is just a qualified talk that helps you, but it's no recommendation. Please always do your own work. Thank you. and hope to see you in the next episode. Bye-bye.