Letter 1 | Where Robert Solow Meets Warren Buffett:

June 1, 2025

In the 1950s, Robert Solow, an MIT professor and recipient of the 1987 Nobel Prize in Economics, developed the theory of Total Factor Productivity (TFP). The theory posits that a country’s Gross Domestic Product (GDP) growth is driven by capital, labor, and the TFP - a residual measure that reflects output growth not explained by increases in labor or capital, often attributed to technological progress, human capital quality, and efficiency improvements.

According to the theory, over time, the economy converges to a steady state, in which adding more capital per worker yields progressively smaller increases in GDP. Consequently, technological innovation becomes the primary engine of long-run growth, driving GDP per worker upwards at the rate of these innovations.

In Brazil, our GDP has expanded at a notably slower pace compared to developed nations and emerging market peers, largely because we haven't managed to enhance our productivity at comparable rates. Over the past decade, real GDP growth averaged just 0.8% per year in Brazil, significantly trailing the 2.5% annual growth rate of the United States. From 2015 to 2024, Brazil's TFP shrunk at an -1.3% annual average, versus a annual average growth of 0.4% in the U.S. In the same period, the labor productivity per person employed in the U.S. increased at a 1.4% average rate, while that of Brazil was only 0.2%.

This disparity has led to multiple structural challenges, notably among them the persistently low returns for equity investors in Brazil since companies don’t improve productivity at high rates. Here is where Robert Solow meets Warren Buffett.

One of the greatest investors of all time, Buffett frequently emphasizes (both in lectures and at Berkshire Hathaway’s renowned annual meetings) the critical importance of identifying companies with strong, durable moats - competitive advantages that enable sustained high returns on invested capital. In his 1992 letter to Berkshire shareholders, Buffett stated: “the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return. The worst business to own is one that must, or will, do the opposite - that is, consistently employ ever-greater amounts of capital at very low rates of return. Unfortunately, the first type of business is very hard to find.”

Even in the United States - a country historically characterized by strong TFP growth - locating businesses capable of sustainably reinvesting capital at superior returns is challenging. In Brazil, given our comparatively lower productivity gains and constrained economic environment, this task becomes exponentially more difficult.

Brazil’s structural issues are evident in the growth limitations faced by its companies. For example, few Brazilian public companies can sustain annual revenue growth exceeding 20% over prolonged periods due to limited addressable markets. Additionally, analysing ROIC and marginal ROIC trends among Brazilian listed companies reveals that only a small number fit Buffett’s definition of "best businesses." Conversely, the United States market offers a richer set of opportunities, particularly in sectors like software, where marginal ROIC is often very high. If TFP is the driver of national growth, then ROIC is the microeconomic mirror — the measure of how individual firms contribute to that growth through innovation, efficiency, and capital allocation.

Over the past three years working with a private equity investment team, I've repeatedly encountered evidence highlighting Brazil's productivity deficit, substantially complicating the task of consistently allocating capital to public equities in Brazil in relation to other markets. While exceptional businesses do exist in Brazil, identifying and investing in them consistently proves challenging, achievable only by a very small set of highly skilled investors.

With that in mind, I've also observed that Brazilian investors, both seasoned equity investors and investors in general, allocate only a small portion of their total Assets Under Management (AuM) globally - where numerous exceptional businesses present significant opportunities for attractive long-term returns.

Inspired by those facts, I decided to found Why Capital to help Brazilian investors gain exposure to some of the world's most outstanding listed businesses.

I'm well aware the path will be rough. Long-term equity investment always is. I'm certain that this strategy will face heavy volatility which can be a blessing and a curse depending on the point of view (subject to another future letter). 

For those that decide to embark on this journey with me, I cannot guarantee long term above average returns, but I can guarantee that I will remain faithful to my belief that investing in outstanding businesses with high marginal ROIC and strong moats pays off in the long term; especially if that is made in countries where the rate of innovation and technological progress (a.k.a, TFP) will fuel future productivity and GDP growth.