Podcast Summary: TIP706 – The Founder's Mindset with Cristiano Souza
We Study Billionaires - The Investor’s Podcast Network
Host: The Investor's Podcast Network
Episode Title: TIP706: The Founder's Mindset w/ Cristiano Souza
Release Date: March 14, 2025
Host: Clay Fink
Introduction
In episode TIP706 of We Study Billionaires, host Clay Fink engages in an insightful conversation with Cristiano Souza, the founder of Zeno Equity Partners. Cristiano shares his extensive experience in managing high-performing investment funds, his transition from Brazil's tumultuous economic landscape to the stable markets of North America and Europe, and the foundational principles that guide his investment strategy. The discussion delves into the critical elements of identifying resilient businesses, the significance of a founder's mindset, and the importance of risk management in long-term investing.
Cristiano Souza's Investment Journey
Cristiano began his career at Dynamo in Brazil, where he was instrumental in managing the Dynamo Cougar Fund from 1994 to 2015. Under his stewardship, the fund achieved an impressive annual compound return of 24% in US dollar terms. In 2022, leveraging his rich experience, Cristiano founded Zeno Equity Partners, focusing primarily on investments in North America and Europe. Since inception, Zeno Equity Partners has matched the S&P 500's return, compounding at 19% per annum.
Notable Quote:
"[...] whenever we can find great businesses to invest in, then it doesn't really matter that much what's happening around us."
— Cristiano Souza [02:36]
Investment Philosophy and Strategy
Cristiano emphasizes a concentrated investment strategy rooted in three fundamental criteria:
- Market Power: Ensuring the company has a dominant position in its market to generate high returns on capital.
- Reinvestment Ability: The business's capacity to reinvest capital at high rates of return during favorable times and protect itself during downturns.
- Trustworthy Management: Companies must be led by individuals who behave like long-term owners, prioritizing sustainable growth over short-term gains.
He highlights the challenges and lessons learned from investing in Brazil's unstable economy, which underscored the importance of selecting resilient businesses capable of thriving amidst economic volatility.
Notable Quote:
"Risk management has to do with the underlying business that we're buying. We're buying pieces of companies."
— Cristiano Souza [30:57]
The Founder’s Mindset
A significant portion of the discussion centers on the founder's mindset, which Cristiano defines as the cultural and behavioral attributes of management teams that prioritize long-term sustainability over immediate profits. He argues that companies with a founder's mindset are better equipped to navigate economic downturns and capitalize on opportunities during recovery phases.
Cristiano points out that achieving and maintaining market dominance requires not just a robust business model but also a culture that fosters continual reinvestment and ethical management practices.
Notable Quote:
"The founder's mindset is how they built this company over time."
— Cristiano Souza [46:59]
Case Study: LVMH
Christiano discusses his investment in LVMH, led by Bernard Arnault, highlighting the company's enduring market power in the luxury sector. He attributes LVMH's sustained growth to the increasing global number of millionaires and the company's strategic capital allocation. Cristiano believes that as the wealthy population expands, particularly in emerging markets, LVMH is well-positioned to continue its growth trajectory.
Key Points:
- Market Expansion: The rise in global millionaires, especially in regions like India and Southeast Asia, fuels demand for luxury goods.
- Capital Allocation: LVMH's disciplined capital deployment and brand management ensure sustained profitability and growth.
- Long-Term Growth: Despite high valuations (23-24x earnings), LVMH's ability to generate consistent returns justifies its premium.
Notable Quote:
"The number of millionaires in the world is still going to grow 6, 7, 8% a year as it has been growing for a long time."
— Cristiano Souza [15:21]
Risk Management and Portfolio Selection
Cristiano distinguishes his approach as prioritizing risk management over benchmarking against market indices. Unlike passive strategies that rely on diversification to mitigate volatility, Cristiano focuses on the underlying business risks to avoid permanent capital loss. This philosophy leads to a more concentrated portfolio, choosing only those businesses that offer low inherent risk relative to their potential returns.
He criticizes the conventional active management focus on short-term benchmarks, advocating instead for strategies that ensure capital preservation and long-term growth.
Notable Quote:
"Avoiding permanent capital loss is about not investing in businesses that run the risk of losing a lot of value over time."
— Cristiano Souza [33:17]
Portfolio Highlights: Lindy PLC and AppFolio
Cristiano provides insights into specific holdings within Zeno Equity Partners, notably Lindy PLC and AppFolio.
Lindy PLC
Lindy PLC stands out due to its exceptional management and dominant market position in the industrial gases sector. The company has doubled its earnings per share (EPS) over the past five years, driven by strategic mergers and favorable inflationary conditions that allow cost pass-through to revenues.
Key Points:
- Market Dominance: Lindy controls a significant share of the global industrial gases market.
- Strong Management: Exemplary leadership with disciplined capital deployment and transparent investor relations.
- Inflation Resilience: Ability to pass through natural gas price fluctuations to maintain profitability.
Notable Quote:
"Lindy probably has one of the top three management teams that I've ever interacted with in my life."
— Cristiano Souza [40:05]
AppFolio
AppFolio, a prominent player in the property management software space, exemplifies Cristiano's criteria for a resilient business. Despite market volatility and the advent of AI, AppFolio has maintained robust growth by embedding AI into its core operations and focusing on comprehensive property management solutions that are difficult to automate.
Key Points:
- AI Integration: Early adoption and continual integration of AI enhance operational efficiency and product offerings.
- Complex Business Operations: The multifaceted nature of property management software provides a buffer against simple automation threats.
- Competitive Edge: Superior management and strategic focus enable AppFolio to outpace legacy competitors.
Notable Quote:
"A lot of people faced with that [AI] would immediately react and feel like they have to do something, I better sell a portfolio, because then software is dead and that's it."
— Cristiano Souza [55:04]
Lessons on Capitalism and Competition
Cristiano reflects on a study by Hendrik Bessembinder, noting that a mere 4% of companies have generated all net returns since 1926. He underscores that competitive pressures inherent in capitalism mean that only a select few companies can escape the gravitational pull of diminishing returns. This insight reinforces his focus on identifying businesses with unique competitive advantages and sustainable reinvestment opportunities.
Notable Quote:
"If you understand that capitalism works and you agree with the assumption that capitalism works because there is tremendous competition, and in spite of tremendous competition, people wake up every day and they think about starting a new business [...] then the only logical conclusion of that is that there are going to be very few companies that are able to escape the gravitational pull that competition exerts on returns on capital."
— Cristiano Souza [10:41]
Challenges and Mistakes in Assessing Management
Cristiano candidly discusses the pitfalls in evaluating management teams, particularly the overemphasis on financial incentives over behavioral traits. He emphasizes the importance of observing management behavior during downturns, their transparency, and their commitment to long-term growth over short-term profits.
Notable Quote:
"CEOs these days, management teams are so well rehearsed and they're so good at telling the story, right? You're not, with very rare exceptions."
— Cristiano Souza [33:46]
Concluding Insights
Cristiano reinforces the significance of patience and long-term commitment in investing, aligning with Charlie Munger’s philosophy that “the big money is not in buying or selling, but in the waiting.” He advocates for investing in trustworthy, resilient businesses and resisting the urge to react to short-term market fluctuations. This disciplined approach, combined with thorough due diligence and a focus on risk management, forms the cornerstone of Cristiano's successful investment strategy.
Notable Quote:
"If you're able to do it and you're able to figure out what works in terms of the businesses that you're going to own, then you can end up, and you live long enough like Charlie and Warren did or do still, then you know, you're going to benefit."
— Cristiano Souza [54:13]
Final Thoughts and Resources
Cristiano encourages listeners to explore more about his investment philosophy and Zeno Equity Partners through his LinkedIn profile and the company's website, zenoep.com. Zeno Equity Partners publishes quarterly letters, providing in-depth analysis on specific companies and broader investment topics.
Connect with Cristiano Souza:
- LinkedIn: Cristiano Souza
- Website: zenoep.com
Learn More About Zeno Equity Partners:
- Quarterly Letters: Detailed investment insights and company analyses available on their website.
- Contact: zenoep.com/contact
Disclaimer: This summary is for informational purposes only and does not constitute financial advice. Always consult with a professional advisor before making investment decisions.