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Advice from Investment Management Associates CEO Vitaliy Katsenelson

One of my favorite things about the Investing for Beginners Podcast is that a lot of the information is timeless lessons that you can go back and listen to over and over again and always take something new from it.  Episode 93 with Vitaliy Katsenelson, the CEO at Investment Management Associates is absolutely no different!

Katsenelson has BS and MS degrees from the University of Colorado and has written two great books, ‘Active Value Investing’ and ‘The Little Book of Sideways Markets.’  He has been featured on many top publications such as Barron’s, Forbes, MarketWatch and others and was even called “the new Benjamin Graham” by Forbes.

Chances are, that last sentence likely gave you a great look into Katsenelson’s investing strategy as Graham was really the Father of Value Investing.  Value!  All about that value.

Well, as I mentioned, Andrew and Dave had them on their podcast back on episode 93 and I thought that episode was worthy of me going back, listening again, and then summarizing a few of the top five takeaways that I had from the episode, and trust me, there were many more than the list below that I could’ve chosen from.

1 – There are 6 commandments of value investing 

Vitaliy has 6 commandments of value investing that you can either listen to or sign up the receive them in a free email fashion.  I chose to sign up to get the free emails so that I can try to slowly reflect on one each day, but at the same time, I am also very impatient…

The commandments are also listed on the IMA website and I’ve listed them below:

  1. Treat stocks as businesses, not widgets
  2. Have a long-term time horizon
  3. The market is your servant, not your master
  4. Leave room for error in your buy price
  5. Fear permanent loss of capital, not volatility
  6. Expect stocks to revert to fair value

I love all of these!  I think that we’ve talked about all of these, either directly or indirectly between the podcast episodes and various blogs that you can read at einvestingforbeginners.com.  I mean…

We always preach about making sure you’re viewing these companies as you truly being a business owner, because when you buy a stock you are…and the importance of investing for the long-term…and Mr. Market…and margin of safety, emphasis on the safetyyou only lose money if you actually sell low…and that stocks will eventually return to their real market value!

I know that was a run-on sentence, but that legit is everything that we preach at einvestingforbeginners.com.  If you’re craving more, checkout Vitaliy’s website get more great insight!

2 – There are only two ways for the you to make money on your investments, not counting dividends

These two ways are either earnings growth of the company or expansion of the P/E, and it’s very, very important to know which one is happening so that you can make sure that you’re being properly invested. 

If a company has doubled their earnings, then the share price of the company should theoretically double as well, right?  I mean, the company is making twice as much money so the shares of the company should also be worth twice the value as what they were previously. 

The other way is P/E expansion.  P/E is simply the Price/Earnings Ratio.  15 is commonly referred to as an ideal P/E, meaning the company’s market cap is 15 times the company’s earnings, but that also is significantly lower than the S&P currently as we’ve seen the S&P 500 P/E nearly reach 25 before the coronavirus impacted the market. 

The P/E is now currently sitting around 20 but that could change drastically too as the full earnings start to come in and we see that P/E skyrocket back again.

But why is this important?  Well, if a company earns $100 million and their market cap is $1.5 billion, then the P/E is 15 as the market cap is 15 times the earnings.  If that company still is earning $100 million and the share price increases drastically and now the market cap is $2.5 billion, then the P/E is now 25. 

That is one popular ratio that many use to show if a company is overvalued, meaning that while you’ve reaped the rewards of the share price going up drastically, it’s also going up without the earnings changing at all, meaning that it might be a good time for you to consider exiting your position!

3 – “The stock market does an incredible job to turn in any inspiring investor into trader”

I can 100% agree that this happened to me.  When I first started investing, I thought that I could play the market, but I knew absolutely nothing.  I was trading off of gut instincts and Yahoo Finance news but the issue with that is that if an article is on Yahoo Finance…chances are, people that day trade for a living also already know about this news…so I’m either buying or selling late…and that’s a recipe for disaster.

It’s so tempting to try to buy and sell and time the market, but the thing is, timing the market is one of the worst things that you can do.  Just maintain your strategy of dollar cost averaging and buy in consistently, at consistent dollar amounts, to average out your risk to make sure you’re not buying in at the highest market point.

This is the best way, by far, to manage your risk and make sure that you’re entering the market properly and efficiently.

Unfortunately, value investing and dollar cost averaging are BORING.  All that CNBC cares about is “Final Trades”, “Options Actions”, “Fast Money” and many other things related to high risk, high reward and timing the market. 

Did you notice that I really just named some CNBC shows there and then some of the popular segments like “Final Trades?” 

It’s easy to get sucked into this as an early investor, and I think that most investors will likely feel the hard pain of this lesson at some point in time, which is why I suggest that you look at your portfolio daily

I think that if you can look at it daily, you will become desensitized to major swings in the market which will really help you in the future, or worst case is you make some huge mistakes and lose a lot of money.  But you will make those mistakes and hopefully learn some major lessons when you have less invested in the market than what you might have in 5, 10, 20 years from now. 

It’s all about knowing yourself and setting yourself up for future success and avoiding day trading is step 1!  Day trading?  More like Day Losing!  BOOM! Lol.

4 – Importance of EQ

If you are unaware, EQ is Emotional Intelligence.  EQ is incredibly important when it comes to making stock decisions because while you might think of investing as a numbers driven industry, so much of it is tied to emotions, especially when you’re trying to decide when it’s time to actually cut the cord with a company.

The reason that this is so important is because if you don’t have your emotions in check then there’s a high probability that you’re going to make an emotional decision at the absolute worst time.  This is a skill that’s not necessarily intuitive for everyone, so I think it absolutely takes some coaching! 

In the previous piece of advice, I talked about the importance of checking your portfolio daily and I think that this holds true even more so in this piece of advice.  So many people will experience a downturn in the market and sell, but that’s the exact point in time that you should be buying more!

I know people that sold at the market bottom in 2008, but if they had just held on then their portfolio would be twice as high as it was BEFORE the crash in 2008.  The stock market is an extremely volatile place and if you don’t have the EQ for that, either for an individual stock or for just investing in general, then you need to know that about yourself before things really get tough.

That’s not me saying that you shouldn’t invest, that’s just me saying that you need to have a foolproof plan in place to keep you from making a mistake.  Maybe that means that you use a financial planner so they can be your sounding board.  Or, I’ve even heard of people not knowing their login info for their brokerage so that they couldn’t buy/sell stocks without someone else at least being involved in the conversation.

Personally, I have two small rules that I use in my investing journey just to add a couple extra “speed bumps” so I don’t make any impulse decisions.

  1. When I look at my budget daily, I don’t look at it in my brokerage – I only use Yahoo Finance.  Doing this keeps me from being close to making a sell or buy decision impulsively.
  2. I don’t let myself buy or sell stocks on my phone.  I have to do it on my computer.  This also just adds a little bit extra hassle, per se, that will slow me down from making any impulsive decisions.

I know that I am impulsive, so I have taken concrete steps to protect myself from myself, and you need to do the exact same thing if you want to be a successful investor!

5 – Investing changes

Vitaliy was asked if P/B was still a relevant metric and he essentially said that it depended on how you defined the “book” of the Price/Book Ratio.  If you defined it as Book is historically defined, such as being the company’s assets, then that likely is an outdated metric. 

But if you think of the Book as being the actual value of the company, which with a lot of companies nowadays being tech companies that might not have physical assets as you normally would think of with a book value, then it could be a useful metric now.

The thing is that businesses change and adapt, and your investing strategy needs to as well.  Even Warren Buffett’s strategy changed when he teamed up with Charlie Munger.  If Buffett is willing to change his strategy, then shouldn’t you be willing to change yours as well?

That’s exactly why I think that we need to keep monitoring our strategy as well and be willing to adapt.  Personally, I have a short-term portfolio and a long-term portfolio.  I have some stocks that are value-stocks, some are more so speculative gambles since I have a long investing timeframe still, and now I am really looking into momentum investing as well.

The thing is, no strategy is 100% right and no strategy is 100% wrong.  You can make investing work for you and make a ton of money as long as you have a defined strategy and you’re actually prepared to stick to it.  As the world adapts, you should adapt too, and that’s why I recommend that you try different strategies throughout your investing journey.  The more that you can get out and learn now, and make mistakes while learning, will just set you up to make you a better investor in the future.

Personally, I loved going back and listening to this podcast episode again and I got a ton of great value from it.  I think that Vitaliy did a great job of breaking down his immense knowledge of investing into simple, easy to understand takeaways.  I am all about trying to walk away from every podcast, every book that I read, anything at all that I’m doing to learn with some new knowledge and a tangible takeaway that I can implement into my daily life.

Hopefully you were able to get some value from this post!  I’m going to be going back and doing a few more of these podcast recaps so be on the lookout for me key takeaway blog posts – coming soon!