Interview Vitaliy Katsenelson (Part 2)

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Do you know Vitaliy Katsenelson?

He’s a great friend and one of the best value investors I know.

In today’s interview, you’ll learn more about his investment philosophy.

I hope it will allow you to become a better investor as well.

In case you missed it, you can read Part 1 of the interview here.

Subscribe to Vitaliy’s Substack and receive his insights.

🎙️ Interview Vitaliy Katsenelson

Compounding Quality: Which key characteristics should a good investor have?

Vitaliy Katsenelson: I am going to sound a bit more preachy than usual, but it is very difficult to answer this question in any other way.

You need three Ps — passion, patience, and process.

Let’s start with passion.

Investing is not a 9-to-5 job. It is a 24/7 adventure — unlike flipping burgers or processing insurance claims, where you can clock in at 9 AM, fall into a stupor, and then reawaken at 5 PM when you clock out. This should be your test: If you catch yourself treating investing as a 9-to-5 job, then you have little passion for it.

You won’t last long in this profession if you are not passionate about stocks. You don’t stand a chance against people for whom investing is a never-ending puzzle to be solved on their life’s journey. All my investment friends are dripping with passion for investing; they are obsessed with it. None of them are in it only for the money.

Next, patience.

Investing is like real life — the connection between effort and result is nonlinear. It is very loose.

You may be making all the right rational decisions: You are buying stocks that align with your EQ/IQ, and they are significantly undervalued, but the market simply doesn’t care. It just keeps sending your stocks down. To make things even more frustrating, while your stocks are declining, speculators who treat the stock market as a craps table at Caesars Palace are killing it, making money hand over fist. It’s painful. It is excruciatingly painful if you have the wrong client base.

This is where patience comes in. My father told me this story, which happened right before I was born.

My family lived in Murmansk, a city 125 miles north of the Arctic Circle in northwest Russia. My mom always went to give birth to my brothers and me in Saratov, a city in central Russia, about 1,200 miles from Murmansk. She wanted to be closer to her parents. My father could not leave work, so he stayed in Murmansk.

A few weeks before I was born, he went to visit his best friend, Alexander. He told him that he was worried about my mom and the birth. His friend told him something that I remember to this day (with a chuckle): “Naum, you did your part; you cannot go back and correct what you did. Now you just have to wait.”

Investing is patience punctuated by decisions.

Lastly, there’s process.

Managing someone else’s money is an incredible responsibility, which you may or may not fully appreciate during bull markets. But sideways and bear markets will remind you quickly.

I don’t want to overglorify what we do — we are not curing cancer or saving people from burning buildings. But IMA clients entrust us with their life savings and tell me, “Vitaliy, please don’t screw it up.”

My decisions may determine whether our clients get to retire, pay for their medical expenses, or help their kids buy houses.

Staying rational when the world around you is melting up with greed or melting down in fear isn’t a capacity that one accidentally stumbles upon. You engineer it through a series of small, repeatable decisions — your investment process.

Compounding Quality: Is there a famous investment rule you don't agree with?

Vitaliy Katsenelson: Buy and hold becomes a religion during bull markets. Then, holding a stock because you bought it is often rewarded through higher and higher valuations. There is a Pavlovian bull market reinforcement — every time you don’t sell (hold) a stock, it goes higher.

Buying is a decision. So is holding, but it should be a decision, not a religion. The value of any company is the present value of its cash flows. When the present value of cash flows per share is lower than the price of the stock, the stock should not be “held” but sold.

Warren Buffett is looked upon as the deity of buy and hold.

Look at Coca-Cola when it hit $40 in 1999. Its earnings power at the time was about $0.80 per share — it was trading at 50 times earnings. Coke was significantly overvalued, considering that most of the growth for this company was in the past.

Fast-forward almost a quarter of a century — literally a generation. Today the stock is at $60. It took more than a decade to reclaim its 1999 high. Today, Coke’s earnings power is around $1.50 to $1.90. Earnings have stagnated for over a decade. If you did not sell the stock in 1999, you collected some dividends, but not a lot. The stock is still trading at 30 to 40 times earnings. Unless they discover that Coke cures diabetes (not causes it), its earnings will not move much. It is a mature business with significant health headwinds against it.

“Long-term” and “buy-and-hold” investing are often confused.

People should not own stocks unless they have a long-term time horizon. Long-term investing is an attitude, an analytical approach. When you build a discounted cash flow model, you are looking decades ahead. However, this doesn’t mean that you should stop analyzing the company’s valuation and fundamentals after you buy the stock, as they may change and affect your expected return. After you put in a lot of analytical work and bought the stock, you should not simply switch off your brain and become a mindless buy-and-hold investor.

Compounding Quality: If you were obliged to invest all your investable assets with one person and you couldn’t choose Warren Buffett, who would you pick?

Vitaliy Katsenelson: This is a question that I will have to answer as a politician by answering the question I’d like to answer, not the one that is asked. I have many investment friends, and I don’t want to offend any of them by choosing just one.

If I had to choose one person to manage my money, their philosophical approach to investing would have to match mine — mine as a client. If there was someone who had better results than others, but I couldn’t relate to their investment philosophy or approach, I wouldn’t invest with them.

Philosophical matches are incredibly important for the client-money manager relationship. When someone knocks on our (proverbial) door at IMA asking to become a client, we want to make sure we are a good fit for each other. We provide a lot of information about what we do and how we do it to prospects.

I was analyzing Match.com, a company that owns a lot of dating apps. I learned that it takes less than two minutes to set up a profile on Tinder — a casual hook-up app. It takes more than 20 minutes to set up a profile on Hinge — an app people use when they are looking for a life partner. I don’t want to take this analogy too far, but different relationships require different levels of commitment. Selecting a money manager is a decision that will impact your financial well-being for the rest of your life, and it should not be taken lightly. If I were looking to hire a money manager, I would want them to have skin and soul in the game.

Compounding Quality: What would you do differently if you could start all over again today?

Vitaliy Katsenelson: I wouldn’t change anything when it comes to investing. Who I am today as an investor is a natural evolution of my good and bad decisions, my successes and failures.

But I have a list for everything else:

• I’d start writing sooner

• I would read the Stoics at age 18

• I’d be kinder to people

• I’d be more present

I’d start writing sooner, not at age 31 but at 18. I wasted 13 years!

Writing is the most important thing that has happened to me as an individual and as an investor. My life would not be as fulfilling if I hadn’t taken up writing. I would only have a fraction of the thoughts I have today. Writing is a thought extraction and correction mechanism. When I write, I extract thoughts from my subconscious and then edit (correct) them with my conscious mind. Writing helped me program myself to enjoy learning and developed in me a thirst for knowledge. I am not sure that was innate in me. I became a student of life only because of writing.

As a child, I kept hearing that humans only use 3% of their brains. I don’t know where that came from, but it’s a myth that has been debunked by neuroscientists. However, I am certain that before I started writing, I was using a lower percentage of my brain. I started writing every morning maybe only ten years ago, but if I had done it sooner, who knows how much of my brain I’d be using today?

I would read the Stoics at age 18.

That would put me on track early to experience lowered volatility of negative emotions. The only problem is that the Stoics might or might not click with me. I read How to Win Friends and Influence People, by Dale Carnegie, when I was 18, but I hated that book. I thought Carnegie was fake and superficial. I reread it a few decades later and thought it was incredible. This is the downside of this type of question — it is your mature version of answering! Vitaliy today is a different person from Vitaliy at 18 or even 30.

I’d be kinder to people.

I’d start looking at life as an infinite game sooner. Your relationships with people are the accumulation of your daily interactions, and they do accumulate. Treating people kindly is the right thing to do, and it has become one of my core values. I’d like to be kind to everyone, all the time. Consistency of behavior is very important. If you treat everyone with kindness, it becomes your automatic (default) behavior — a non-decision decision.

I’d be more present.

I went through a big part of my life wanting to be in the next place. I’d be fantasizing about a trip I’d take. I’d be on that trip and thinking about the next one. My father used to tell me, “Inhale this moment.” It was his way of saying, be present, notice the beauty around you.

Today, at least a few times a day, especially when I go on my daily walk, I pause and look around, taking in all the beauty. Being present is a muscle I’ve developed over the years. I wish I had worked it when I was younger. This quote is stuck in the back of my mind: “Yesterday is history, tomorrow is a mystery, today is a gift, which is why we call it the present.”

Whenever you’re ready

That’s it for today. Here are some other interesting interviews you can read:

• Interview Vitaliy Katsenelson Part 1

• Interview Gautam Baid

• Interview Chris Mayer

• Interview Shreekkanth Viswanathan

• Interview Lawrence Cunningham

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Happy Compounding!
Pieter (Compounding Quality)

Used sources

• Interactive Brokers: Portfolio data and executing all transactions

• Finchat: Financial data

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