Investing Success Secrets: Balancing EQ and IQ with Vitaliy Katsenelson

When you go and get into investing, you need to have the right philosophy. The investment philosophy. You need to have a good process. Also, success in investing comes not necessarily from your IQ, but from your EQ. It's the behavior. It's how do you behave at the time of extremes? Do you get overexcited and everybody else excited? You get scared. Maintaining a level head is incredibly difficult. And the way to get there is to have a well-defined process. Welcome to Super Entrepreneurs Podcast. I'm your host, Shahid Durrani. Today we have with us Vitaly Katzenelson, who is the chief investment officer at IMA. He is also an author of the little book of sideways markets and active value investing while his primary focus is on discovering undervalued companies for his clients. He's also known for his uncommon common sense. Welcome to our show, Vitaly. I'm happy to be here. I'm glad to see all the wonderful work that you're doing. So what does your typical client look like? What are they in for when they come and see you? So imagine that you have a usually very professional doctor, lawyer, CPA, engineer, who either close to the retirement or maybe 10, 15 years from their retirement, somewhere during the retirement, who basically come to me and say, Vitaly, here's my life savings. This is what I'm going to live on when I retire. Please don't screw it up. We basically build a portfolio of stocks that should get our clients through any environment, any economy. And so they can sleep well at night. So my goal as an investor is to minimize volatility of my client's blood pressure. So that's what we do. Good. Does it include Bitcoin as well or no, just stock? No, it doesn't. No. When we own businesses that generate cash flows, okay. And that I can value. But if I can value business coin or gold for that matter, they have no cash flows. Is that therefore it's very difficult to value it. And since it's difficult to value, it's very difficult to figure out how much margin of safety I have. What's important in investing is to be rational, not when just things are going well, but when things don't. And there are in the stock market, just a matter of time before things don't go your way. If you know what your business is worth, if, and you can, if you have a good, if you have a good idea, because the business generates cash flows, then you can be rational. If you, this Bitcoin, when it declines from 30,000 to 20,000, do buy more or it going to 10, but you don't know this, right? Because it's really of asset has that has no cash flows is what the next guy's willing to pay for it. And so I understand. So the businesses that you find, are these, you find them yourself or these publicly traded companies that you take part and invest in your clients? My, my language is slightly confusing. Let me explain to what I mean, because if you listen to me, you think I'm talking about private businesses. Yeah, but, but I'm not, but this has got it. Okay. So I buy public companies. Okay. But here's the thing, and this is why my language is confusing. When we analyze businesses, we were, we are looking at them as if we were buying the whole company. Okay. This is why my language is slightly confusing. Okay. So when we analyze a company, because I'll go just because it doesn't matter. It doesn't matter to us because we want to own this for a long period of time. That's a cool strategy. Yeah. And, but to me, this is very important when stock market gives you instant liquidity, you can buy in some companies five times a day. If you want it, you will be the Southern types of day. So this, this instant liquidity is a feature in the bug is a feature because when you want to sell a company, you don't want to have make an appointment to sell it, like you sell a house, right? You want it to be able to sell it when you want it, but it's a bug because what it does, it's a lot of times it turns in people from investors into gamblers or traders. Okay. Just because you see this a lot of times when people buy a company and they just know maybe a ticker or maybe slightly what the company does, but they have no idea what the company is worth. So that's not investing that straight or gambling. Yeah. So what are your thoughts on the current condition of the stock market? Are there any specific industries or companies that you think may be undervalued right now? I think right now, if you look at the stock market, it's still very expensive. You had a, we had a dot-com 2.0 kind of blow up about a year ago. And those companies have declined a lot, but they're still not cheap because they were so overvalued. And if you look at the stock market today and you normalize company's earnings for profit margins, that's very high, that's likely going to decline. Then the stock market looks like it's probably the one of the most expensive stock markets we've seen in the last ever or close to. So I, we, this is a market where stock peaking is going to matter again, where I'm finding this gems, there's gems in the rough is going to be become very important. So that's, that's how I see this. How do you do that? Well, you analyze one company at a time. So this is like, you look for, you have a team. So the way we do this, I have a, no, I do have a team. Yes. And I spend seven, eight hours a day doing research. So we wind up doing it for a long time. So I, now I can look at company very quickly, assess if I'm interested to go, to go further. If it's a quality business, if it's run by good management, if there is a, if it has competitive advantage. If the company is attractive, in other words, because I don't want to buy companies that are fairly valued. I want to buy companies that are undervalued. And the reason you want to do this, the reason you want to do this, because it's a matter of time before things will go bad. And, and if you, and, and if you bought a company cheap enough, then even if bad things happen to this business, you're probably going to be okay because you bought it with a margin of safety. So how do you approach risk management when you're making a investment decision? You do it on two levels. You do it on a portfolio level and you do it on the individual stock level. On a portfolio level, I want to make sure I have a portfolio of 20, 25 companies that even if I make a mistake on one or two, I'm still going to be okay. Oh, that's one way. On a company level, you just look for three things, high quality companies, you know, with great balance sheets that are undervalued, run by great people. If you have a collection, if you have a portfolio of these companies, then, then you'll be able to get through any, any economy or any stock market. Now, this is a key, the, I'm a value investor. And for us, volatility of the stock price is not a risk because the market, the market has an opinion on your economy. The market does not value your businesses every day. It prices them. Right? So if I buy a company decline, the stock price declines 30%, but the value hasn't, I'm fine with that. You have to be the investor. You have to have a launch on time horizon. And you have to look at volatility of the stock price as a feature, not a bug. Meaning that a lot of times when the stock price declines, it gives them the opportunity to buy more. Or when it goes up too much, it gives you the opportunity to sell much sooner than you expected. And Vitaliy, do you take advantage of technology when it comes to keeping an eye on some of these companies like AI or any other kind of technology? I'm, we are not early adopters yet, but we've been using that. We've been using a GPT like technology to help us. So it couldn't be to summarize long articles or summarize trans earnings calls transcripts. I can see how we use it more and more, but I, but I'm not sure how yet. Okay. I'm sure we'll find new ways to integrate it. But even though, but in my industry, we use a lot of technology anyway, because we use a, we, we subscribe to databases that have historical data for companies going back 30, 50 years, et cetera. Video screens, not for stocks, not just United States, but globally. It's started to be, it's to this point was a database technology, but not AI, but I'm sure we'll be using more AI in the future. So do you have any kind of recommendations or advice for anyone that plays the stock market, some strategies they can do to improve their investment? Okay. So number one, the word play don't. So if you're playing it, as soon as I, as soon as I said it, I had a feeling you're going to say something. So I actually, I have this recommendation and I was working on the books that I never finished, but I have this chapter that gives you very good primer for what you should be doing as an investor. And you can get it absolutely free. It's a six, if you go to sixcommandments.com and this is where basically spell out value investing principles. This is what Warren Buffett would be using when he invests. Okay. Because I'm a value investor, just like Warren Buffett, and I go to Berkshire Hathaway meetings every year. And so the cool, if you're on sixcommandments.com, you can just download, it's absolutely free, a free chapter on that goes through how for you not to play in the stock market, but how to invest. Wow. It's exactly that. Right. How not to play, but to invest. So what is the minimum you look at when someone from the audience wanted to come and work with you? What's the minimum they should be having? A minimum relationship is a half a million dollars. Half a million to start with. Yeah. What got me the uncommon common sense, which you're known for in the financial circle. Can you share some examples of how you got that name and what that means or that title? I think what happens is that a lot of times when people get excited, you have a lot of kind of crowd thinking. Okay. And a lot of times I, I'm just able to look at things as a kind of a very leveled head. And if you look, if you read my articles on investor.fm, you can see how last, last couple of years, I was looking at this, all this tech bubble, all the tech companies that were trading at insane valuation. And, and a lot of them were terrific businesses. Shopify, it's like a Shopify or DocuSign or many other ones, terrific businesses. But that's the first level of thinking that doesn't make, doesn't mean maybe those are good companies to work for, but it doesn't make him good stocks. Okay. This is a second level of thinking. So identifying a good business, it's good, but for them to be good investment, they have to be undervalued. So that's the second level of thinking. So, but if I don't take this, this, what you just mentioned, I don't take it too seriously, uncommon common sense. I think my, in the, when I look at my friend, I have a lot of investment friends, they have a very similar common sense. It just, they've been doing it long enough to, to see when an investor, investor behavior become very irrational. And it's, and so the, the trickiest part is that seeing that investor behavior is irrational is one thing, but not actually behaving like the crowd takes a lot of, a lot of. Yeah. You could peg it as true leadership too, when you look at things differently. So I, I call it thoughtful arrogance. And let me, thoughtful arrogance. Let me explain to you what I mean. Arrogance in the stock market in general, in life is dangerous because it's, it forces you, it makes you think that just because you are, whatever decision you make is going to be the right decision. And sometimes you'll be right sometimes, but a lot of times you won't be. And when you make those decisions, you may blow up. Thoughtful arrogance is when you make a decision based on a lot of research. And by the way, investing itself is an arrogant, it's an arrogant activity. Why? Because when I'm buying the stock, somebody else is selling or vice versa. Therefore, I'm basically saying I'm right and the person was wrong. Now, if I'm doing it the way we do this, we do it, we do it thoughtfully. We've been thoughtfully arrogant because we've done weeks and months of research on this company. We built financial models, we talked to the management, we read companies' financials, we talked to competitors. We've done a lot of research and we arrived to the arrogance through research. When somebody buys a stock because they like to ticker and they think they deserve to make money because they are who they are, that's how people usually blow up or, and by the way, and I can also see this with professional investors as well, if you look at Masayoshi San, CEO of SoftBank, this is a person with incredible track record, who has built one of the most valuable companies in Japan, his success went to his head. And he basically, he made this incredibly horrible investments over the last five years. And he later confessed because he became arrogant. And this is, by the way, this is not me calling him arrogant. He called himself arrogant in the interview. Yeah. If it gets to your head that way, you can make some seriously wrong decisions. Yes. Success is very tricky because success makes you believe that you can walk on water. Then if you had a stream of success, you start thinking it goes to your head and you start feeling like you can walk on water and therefore you have a mind of starch and the market is a very humble, it's humbles everyone. Excellent. How important do you feel a mindset or the internal belief system is when someone gets into investing? I think that when you get into investing, you need to have the right philosophy, the investment philosophy. You need to have a good process. Also, success in investing comes not necessarily from your, as much as your IQ, but from your EQ. It's a behavior. It's how do you behave at the time of, at the extremes? Do you get overexcited when everybody else excited? You get scared. Maintaining a level head is incredibly difficult. And the way to get there is through have a well-defined process. Good. Excellent. Share. Would you mind telling us what you feel your innermost superpower is that got you to this point in your life? It's not what you expect to hear. My superpower is actually writing. Yes. And the reason for that, because if you had a kind of a sneak preview into my head, you'll find it's like a scissor salad. There's a complete mess. And what writing does for me, and I write two hours almost every day. There's exceptions, but rare exceptions. It helps me to organize my thoughts. And that is, that became a superpower because I basically, it's, I do focus thinking two hours a day, every single day. And that's basically became the source of my superpower. Also, when you write, I find it's very, very meditative. It calms me down. Yes, I agree. Yeah. So yes, I know this is not what you expect to hear, but that is a sort of. No, no, it's good. It's good. It's connected though, right? Because you're enticing the mind when you bring your thoughts onto paper. That is very incredible process. It's very sacred, I feel. Yes. And I just, by the way, you didn't mention, but I, I just wrote a new book. It just came out about six months ago. Okay. Please share it. Soul in the game, the art of a meaningful life. And that book has nothing to do with investing, but not a single chapter about investing in fact. However, I do talk about writing. I do talk about, I talk about many different topics in this book, but I spent a few chapters talking about creativity and writing and where this fight, this is my superpower. Yeah. Good. We'll keep an eye out for that. I appreciate you so much for taking the time to come on our show and audience. Appreciate you joining us for another episode. Vitaly's information will be in the show notes. Take a look at what he's doing. Take his advice as an entrepreneur to park your money in investing. You want to work with someone like Vitaly, very passionate about what he does. So appreciate you guys. And I appreciate you Vitaly. It's my pleasure. Thank you.