With global equity markets soaring to new heights, value investing has become harder to do in most places of the world. This is especially true relative to the opportunity set available in the 2008/09 period. In fact, before jumping to apply our analytical minds to current investment opportunities, perhaps the best first move is to step back and ask oneself: Is this a no-brainer that screams at me? Back in 2008/09, many decent businesses with good balance sheets were priced for bankruptcy. Now, it seems quite a few equities are being priced again based on LBO takeout scenarios. Similar to the period before 2008/09, cheap credit appears to be the key driver behind many valuation assumptions. Value investing is giving way to comparable company analysis and  low interest rate-driven beauty contests. Yogi Berra may say its déjà vu all over again!

So, when I recently picked up the phone to speak with an investor based in Brazil, I wondered what value may be left there besides special situations investing. Of course, there is always something to do, as value investing legend Irving Kahn once declared. And the investor Tiago Guitián dos Reis of Set Investimentos   certainly has the track record and value investing mettle to contend with all market environments. Set Investimentos, based in São Paulo, is a value investing firm established in 2008 as the result of the merger between two private investment clubs (Uranos and Avante) which were managed by the partners since 1998 and 2002, respectively. While the pre-2008 track record of the two investment clubs is impressive on an absolute and relative basis, Set Investimentos has also delivered a 14% CAGR from 2008 through 2012, relative to the benchmark Ibovespas 1% CAGR. Whats behind this superior performance is Set Investimentos value investing philosophy and disciplined execution.

Value Investing 101: What Not to Do

Admittedly, before my conversation with Tiago Guitián dos Reis, I couldnt resist to look up the Bovespa index. With the index climbing towards 60,000, I was again pondering what value may be left in Brazil. The Bovespa index was below 37,000 in November 2008, when the real was at a similar level to the dollar (it was above 70,000 in May 2008, when the real was about 20% stronger relative to the dollar than it is today).  However, Tiago Guitián dos Reis quickly gave me the first lesson when it comes to evaluating investment opportunities in Brazil, or for that matter many other countries, especially in emerging markets (click here for a related article on the Shanghai stock exchange and the much-quoted SSE Composite Index in the case of China): do not use the benchmark index to make conclusions about valuations in the country.

As Tiago Guitián dos Reis explains, the Bovespa index is a much cited, but very misleading indicator of the opportunities available in the Brazilian equity market. While Brazil has a surprisingly low overall count of less than 400 publicly-listed companies, the Bovespa index counts just 64 companies among its constituents. Two of those 64 companies are Petrobras [PBR] and Vale [VALE], which combined represent nearly a quarter of the index. Moreover, nearly two thirds of the index is accounted for by companies in the petroleum, mining, steel, and banking/insurance industries, which are hardly fruitful hunting grounds for value investing practitioners in the mold of Buffett and Munger. This leaves many important sectors of the domestic economy underrepresented, including many consumer-oriented businesses. Ironically, as Petrobras, Vale and other commodity producers have seen their share prices decline more recently, the commodity skew of the Bovespa index has lessened and these companies may be more interesting to look at than before. Be it as it may, our first lesson is to keep an open mind and do not jump to any conclusions based on shortcuts such as the level of the benchmark Bovespa index.

A Refreshingly Balanced View on Brazil

In the below video, Tiago Guitián dos Reis shares whats on his mind when it comes to investment opportunities in the Brazilian equity market. Describing the relationship foreign investors have with Brazil as one of love and hate, Tiago refreshingly acknowledges that investors may currently be in a love relationship with great businesses in Brazil. As a result, Set Investimentos has looked beyond Brazilian borders for value. Unlike many investors who are constrained by artificial mandates, Set Investimentos is a great example of a local value investing  firm that is opportunistic in its quest to find value globally on behalf of its clients.

What to Do in Brazil?

Recognizing that better investment opportunities may be available elsewhere, Tiago Guitián dos Reis has shared a few ideas regarding opportunities in his home market. One such idea is the Brazilian homebuilder Helbor [Sao Paolo: HBOR3]. And while Tiago acknowledges that Helbor is not dirt cheap, he makes a good case why it still may be undervalued at 7-8x current earnings. In this context, we find it instructive that Tiago highlights management quality as one of the key elements of the thesis on Helbor. Given percentage of completion accounting in the homebuilding industry in Brazil, Helbors conservative and incentivized management gives Tiago confidence to trust the reported earnings, and hence find meaning in a valuation methodology based on reported earnings.