Trade Of The Century With Crescat’s Kevin Smith And Tavi Costa [In-DEPTH]

ValueWalk’s Raul Panganiban interviews Crescat Capital’s Kevin Smith And Tavi Costa, discussing their trade of the century idea.

Q4 2019 hedge fund letters, conferences and more

Interview with Crescat’s Kevin Smith And Tavi Costa

Raul Panganiban: Hello podcast listeners. Today’s a very special episode with Kevin Smith CFA founder, CEO and CIO at Crescat Capital and Tavi Costa, Partner and Portfolio Manager at Crescat Capital. Kevin brings over 28 years of investment management experience spanning multiple business cycles. He earned his MBA from the University of Chicago and bachelor’s in economics and German studies from Stanford. Tavi has been with Crescat for six years, where he built their macro model that identifies the current stage of the US economic cycle through a combination of 16 factors. Before this, he work with the underwriting of financial products and an international business at Braservice, a logistics company in Brazil. He earned his bachelor’s in Business Administration with an emphasis in finance and Spanish from Lindenwood University in St. Louis. In today’s episode, we discuss the current state and where they find opportunities and the present environment. We discuss their approach and their trade of the century idea. I want to welcome Kevin and Tavi to the show, and I want to welcome all our listeners. to a very special episode.

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Unknown Speaker: Welcome to ValueTalk with Raul.

Raul Panganiban: All right, yeah, I just wanted to welcome all our listeners to a very special episode. I have Kevin Smith, CFA, Founder, CEO and CIO of Crescat Capital, and Tavi Costa, Partner and Portfolio Manager. And Tavi and Kevin, welcome to the show.

Kevin Smith: Thanks for having us.

Tavi Costa: Yeah, thank you.

Raul Panganiban: All right. Yeah, if we can just begin with your backgrounds and what led you to finance and investing?

Kevin Smith: Sure, I’ll start. So my background I grew up in the San Francisco Bay Area. I went to Stanford and got an economics undergrad there. I went to University of Chicago, where I got my MBA and finance and statistics. Got my CFA along the way. So I’ve kind of been on the path of, you know, towards finance and investing from an early educational career, took some other twists and turns along the way. But, here I am, I started in the business with Kidder Peabody, which was in 92. At the time, they were the largest fixed income underwriter on Wall Street and had the biggest inventory of mortgage backed securities. And so my indoctrination into the business was in in 1994, when we had the bond bear market and kidder Peabody, you know, pretty much almost blew up and Jack Welch, Kidder was owned by GE at the time Jack Welch ended up having to sell the firm to Paine Webber. And so that was kind of my indoctrination into risk in the business.

Tavi Costa: All right. My insurance obviously it’s a little shorter given my age, but I was born and raised in Brazil, moved to the US to play tennis in college. I was recruited to play tennis at Liberty University in Virginia. D1 school, play tennis there, did a transfer to another school in St. Louis called Lindenwood University and then finish up college and move to Denver and started working with Gavin really, and that was sort of my introduction to hedge funds in general and started working as a more in the emerging markets area, I was focused in that part of the portfolio and kind of graduated from that and became more of a global macro analyst and then now a portfolio manager together with Kevin. So today I help in the process in general, not just in managing the portfolio, but also building models in our investment process overall and evolving that and in also helping to find the big trends, macro wise as well.

Raul Panganiban: Oh, nice. Very nice. Yeah. If you don’t mind me asking, How did you find the opportunity to work at crescat?

Tavi Costa: To work aggress? Guess that’s a that’s an interesting question. Actually. I since I played tennis, I moved to a while I’m a since I’m foreigner, I’m a foreigner. I was not, didn’t have a lot of opportunities when I finish up college. So move to Denver and start working at a country club as a tennis coach. And guess who was one of my lessons was Kevin Smith and then I started to talk to him about finance and he needed someone to he I think he thought that I was more of a marketing guy at the time and it got me to work with him initially as an intern, and it was more of a I would say more of a marketing position at the time. But really wearing a lot of hats and kind of didn’t want to be much of the marketing and wanted to be more on the analytical side and kind of grew and, you know, at the wheel. At the time, we had one Bloomberg terminal and I remember, this guy would leave at around 4 or 5pm. And I would take his Bloomberg terminal would stay with Kevin until late night, just just learning with him and learning about companies and the macro themes that he believed at that time and helped him to to really validate a lot of those statements at the time. And I think that was really the start and then started going more on my own and really, hopefully, adding to the to the team overall.

Raul Panganiban: Now that’s super cool. Yeah, just just out of curiosity, the name Crescat. Where did that come from?

Kevin Smith: So, Crescat actually comes from the University of Chicago motto and it’s me basically means to grow or let it grow. And so Crescat Capital means essentially let your money grow.

Raul Panganiban: Oh, nice. Yeah. And then on your site, you lay out your process and focuses on global macro themes, value driven models and prudent risk management. Can you tell me more about your process and elaborate on each of those?

Kevin Smith: Sure, really, those are the three key tenets of what we do when it comes to the investment process. We are, we’re a global macro shop in the sense that that we we like to look for big picture themes relative to to global GDP, you know, whether it’s the most overvalued US equity market in history, according to a composite of eight different indicators that we look at. As it was recently here things like that, or the biggest currency bubble that we think we’ve seen in history in China, based on their enormous banking imbalances and banking system that they’ve created with the huge non performing loans or if you look at something like the battle between the value of fiat money and versus gold. Another big theme of our so we like to look at Big Picture things, but we’re also value oriented. And so, you know, my background is very much coming up from the value oriented stock picking side and using quant models. So that’s a big part of what we do, you know, the value driven model side of what we do. I have a model that I’ve used to help pick stocks that I developed more than 20 years ago, when I was a kid or actually originally and use that to launch along only my first investment strategy, which was a long only strategy still around today, we call Crescat large cap. And, you know, there’s over 50 underlying factors in this in this quant model, and then we still use it today. It’s a big part of what we do in terms of picking stocks. And then the risk management just the other third key tenet of the investment process. You know, that’s probably the most difficult one and, you know, I’d say me personally, I do have a higher risk tolerance than most people. And, so we’re willing to take you in as a value investor, too, I think you have to have a pretty high risk tolerance, because because intrinsic value and market price can, can differ so so much, and those tend to be the things we get the most excited about. And so when, you know when you have such a big divergence, you know, You have to be willing to you know, to be able to ride out the volatility. Anyway, so that’s a little bit on that.