Interview #78 : Diego B. Milano (Quercus Fund)

Inspired by Warren Buffett’s partnerships in the 1950’s

For this issue we have the pleasure of interviewing Diego B. Milano, Founder and Investment Manager of Quercus Fund.

Diego is a diehard follower of value investing principles, and is in a never-ending global quest to find extremely undervalued opportunities.

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Can you please tell readers about your background, and how you got involved in investing?

Thank you for inviting me, it is a pleasure and I am happy for the opportunity to introduce Quercus Fund and myself.

I have been working in the financial markets for more than 15 years. I was born and raised in Brazil, and graduated in Aeronautics Engineering in 2003. 

After a few years serving as an Air Force engineer and working as a management consultant, I started working in the investment industry as an equity research analyst in 2007, in Sao Paulo. 

In 2009 I got to the proprietary desk of Itau, the largest bank in Brazil, where I stayed until 2017. 

That was when I decided to focus only on what I really love to do: invest in a deep value, long-term, concentrated and totally unconstrained way.

I decided to leave the traditional corporate world, and just invest my own money. I moved to the countryside of Portugal, tuning out all the noise of Wall St or Faria Lima, its Brazilian equivalent. I guess in a sense I was a pioneer of working-from-home.

After my brothers and some friends asked me to manage part of their net worth, I decided to launch Quercus Fund.

I would not be comfortable charging money from them without really adding value, so I decided on a fee structure similar to Warren Buffett partnerships’ in the 50’s and 60’s: zero management fees, and performance fees only above a certain threshold. 

My whole net worth is invested in Quercus Fund, at the same conditions as my partners. In case of severe losses, no one will be worse off than me. Besides, the idea of investing recklessly is just unthinkable, since that would put at risk some of the most significant relationships I had built over my life.

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What does your ideal investment look like?

An extremely undervalued, great business with a healthy balanced sheet. On the verge of a huge increase in earnings, with a long runway for continuous reinvestment at high returns. And with a great alignment of interests between management, controlling and minority shareholders. 

But that is too much to ask for. A crystal clear investment case would hardly ever be extremely undervalued.

There are usually some hairy issues to cloud the future and “justify” the undervaluation: an earnings miss, or “it is Chinese”.

The underlying quality of a business may be hidden within an intricate corporate structure or behind poor disclosures. The company may be highly leveraged, but bound to a significant improvement after the commissioning of a new plant.

The paramount requirement, in any case, is a huge discrepancy between its price and its conservatively appraised value.