Vitaliy Katsenelson - Soul In The Game
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Bill: Ladies and gentlemen, welcome to The Business Brew. I'm your host, Bill Brewster. I hope you're all having a fantastic week. Joined this week by Vitaliy Katsenelson. Vitaliy is the author of Soul in the Game, The Little Book of Sideways Markets, Active Value Investing, everything that you can find at contrarianedge.com. He writes a daily blog. The man has incorporated writing into his process in a way that I think we can all learn from. He's become a friend over the past, I'd say, two to three years. And he's generally someone that every time I talk to him, I have a great time. Hung out with him at Fort Lauderdale and I think it was 2021 and it was just really nice. So, I hope you all enjoy this conversation that we have.
Thrilled to be joined today by Vitaliy Katsenelson. We are discussing his many books. How many books do you have, man? You got, what, four now?
Vitaliy: Three.
Bill: Including Nets?
Vitaliy: Yeah. Well, I got a Tesla booklet. So, I don't know if count it as a book. So, if we count Tesla would be four, but I don't count it as a book. So, really three.
Bill: Are you counting The Intellectual Investor in there? Is that [crosstalk]
Vitaliy: I never finished that one. So, it's still in progress, I guess. I don't know if I ever get to that.
Bill: The Tesla book was one of my-- I enjoyed that. I can't remember it off the top of my head, but I remember when you wrote it and I remember it was a very controversial thing for value investors to write about. It seemed you got open minded, and did a real deep dive, we’re surprised by what you found.
Vitaliy: Yeah. Originally, I wrote it, it was published as a book. But really what I did it just was a lone research paper really. That's what it really was, not really a book. Yeah, so, what happened was, I bought model three and I was so blown away by that car. I'm not a car guy at all. I don't care. Before that car, I drove the same car for 10 years or something. I'm not a car guy, but I was so blown away by that that it just made me realize that we are in the middle of this incredible shift. I ended up spending two or three months doing deep research on the car industry Tesla and everything. I ended up writing what maybe 15,000-word essay basically or the research paper on Tesla.
One thing I realized and this is very important. If you're on Twitter, there're two camps. Tesla and TSLAQ, okay? These two tribes are basically talking past each other. It's either you hate Tesla or you love Tesla, there's nothing in between. What I learned and by the way, this is what you learn in the stock market in general, things are a lot more nuanced. When you talk about Tesla, you have to be able to hold two opposing thoughts. When you talk about Elon Musk, you can recognize he is genius, but you also recognize that often lack of ethics as an example, so I ended up doing incredible amount of work, learned a lot, and never bought the stock. I bought the car, never bought the stock. But some people will say that I wasted my time, I would argue that knowledge is cumulative. What I learned from that research, it helped me to apply to other, will help in the future, and also helped me to do other investment decisions or non-decisions.
Bill: Yeah, well, the non-decisions are as important as the actual decisions, right?
Vitaliy: Absolutely.
Bill: What did you find most surprised you about that research project?
Vitaliy: [unintelligible [00:05:58] and I thought, “Well, companies like General Motors or Ford will be able to come up with cars that can be as good as Tesla.” And that Tesla has a competitor, no-- and those traditional car companies have an advantage versus Tesla. I realized that it's actually not necessarily the case because you look at the electric car and ICE car, and they look like cars. On the surface they look the same, but inside look very different. Just like, if you compare the BlackBerry to iPhone, kind of look like phones, but they exist in very different domains.
Bill: Yeah.
Vitaliy: One the most important insights I had when I was doing my research, I realized that when Chrysler came up with Minivan in 1980s that was revolutionary. Everybody looked at it as a revolutionary vehicle, but it was evolutionary. It didn't really take much time for General Motors and other companies to copy it, right? Well, when you go from an ICE car to electric car that is a change in the domain. Meaning, it's like going from dumb phones to smartphones. It's changing the domain even though the name is a phone, but one is really a device that make phone calls, the another one is a computer that does tons of other things, and also makes phone calls. The skills you had when you were making ICE car or dumb phone may actually work against you when you make an electric car or smartphone.
Let me give an example. General Motors, just think about it. It’s just normal car. It has, I don't know, General Motors has probably thousands and thousands of engineers that are trying to squeeze every ounce of power out of this ICE engine. Because that engine is a very complex piece of equipment. Well, that knowledge is completely useless when it comes to electric cars. In your traditional cars, you have a lot of computers, but they're-- It's mostly hardware, a little bit software. In the electric car, it's almost like a software as important as hardware. So now, you need to have a very different type of workforce.
Tesla has thousands of engineers working on its hardware and software. Tesla has to be both good in software and hardware, and so are the ICE car companies, and those skills are not needed for them. What I learned is basically that your past knowledge may actually hinder you because the baggage from the old domain will hinder your thinking in the new domain. One beautiful example, if you ever look at the Tesla chassis, it's basically-- it looks like a skateboard and there are two engines, the Elica motors actually, not engines, the size of watermelon, they sit on this end. When the General Motors were making their first car, they didn't do that. They actually did a transmission because they know how to make transmissions. So, they put a motor and connected it to-- You see how they were stuck in the old thinking.
Bill: Yeah.
Vitaliy: Anyway, so that was probably one of the most important insights I learned.
Bill: Have you ever watched the documentary, Who Killed the Electric Car?
Vitaliy: Is that about the-- [crosstalk]
Bill: The General Motors EV from I think it was the late 80s. That’s super interesting. People liked it. They loved them. At least according to this documentary and I don't know how much editorial license they had, but it wasn't generating enough service revenue. I believe that there was a clause that General Motors didn't allow people to exercise that was supposed to let them buy the car and General Motors eventually just said no and they crushed them all, kind of interesting to think had they not done that where would they be today?
Vitaliy: Yeah. No, I think there're so many biases. It's so difficult. Let me make this point. I think Tesla is one of the most important things that has happened to our world over the last 20 years. I would say iPhone is number one, Tesla is number two. Why? Because if it wasn't for Tesla, I see companies would never take electric cars seriously. We probably would not see a true electric car for maybe 20 or 30 years, because there were no incentives. I was somewhat surprised now, how serious-- Actually I am positively surprised how much General Motors, and Ford, and others actually embraced electric cars now and trying to come up with electric cars. I think they're just scared when they look at other companies that became irrelevant. Look at Motorola or other companies that became irrelevant because of iPhone. I think that Tesla actually scared them into action and they realized if they just focus on milking ICE vehicles, they'll be fine for a while until they'll become Blackberry.
Bill: Yeah. I have found it interesting when people say or I've heard people say like, “Oh, the Tesla driver doesn't like Tesla's, they just like electric vehicles.” Then when Audi came out with the e-tron, I thought to myself, “I'll go drive that to see if it's really the same.” The way that that thing drives is not even close to the feel of the Model 3 or the Model S. There's just so much torque in the way that Tesla's drive even the low-- I drove one of the really early Model S'. My grandma got one and then she now has Model 3. She doesn't have the souped-up version. And man, when you step on the gas of those things, they move.
Vitaliy: Oh, Bill, it's that but it's so much more than that. It's also the software, the app. It's also the service. I had some kind of weird smell in my car, I went to my app, and I ordered the service. They texted me and said, “I need to replace air filter and If I agree they'll come out to my work, replace it.” It costed me, I don't know $150, but I didn't have to spend a minute of my time dealing with that because they came, they opened my car, they replaced and they left, I never saw them and they charged my credit card.
Some people would say that if I did this with ICE car it would have costed me $50 to $70 maybe. If I had replaced it myself, it would have cost me $15, fine. But I would never replace myself anyway. But the $50, $70 that will require how much of my time? I think their service was so much better. Once a month or once every couple months I get into my car and there is a software update that adds new features. Just all those features could be copied. I think at some point they will get copied. But right now, Tesla is still far ahead of everybody else by huge mile.
Bill: Yeah. I was talking to a buddy about Ferrari and I know this may sound crazy, but I said, I just wonder if as they transition to electric, I wonder if they're going to be able to keep the brand that they currently have. I wouldn't be shocked if they can, but I would argue, at least, from a stock perspective, it implies that they will. So, I think a relevant question is, can they?
Vitaliy: I have a desire. I have a good analogy for you. In 1920s, when people still had carriages and horses-- Right now, I have a few friends who say I will never buy electric car because I like the sound that the engine makes in my car. I'm sure in 1920s when some people were buying cars, the neighbors were saying, “No, I'm never going to buy a car because I love how my horse breezes [laughs] when I take my horse, I like the breathing.” My point is there's two horse racing happening today, right?
Bill: Yeah.
Vitaliy: It's probably not as popular as NASCAR racing, so Ferrari will have to adapt, right?
Bill: Yeah.
Vitaliy: If they don't adopt, they'll become-- They're going to have the best breed of horses and they're going to have a hoarding on this, so that's what they’re going to become.
Bill: Yeah, I think that's probably right. To me a lot of Ferrari is styling, a lot of it is the legacy, I think I understand what they get from Formula One. But I also think a lot of it's the sound and I just wonder about an electric world. I don't know maybe they have some false sound, but that just doesn't feel the same. So, I don't know. Who knows?
Vitaliy: I think in racing, Ferrari has this advantage because the car is incredibly complex and they spend about 10, 15 times more money than most of the other teams. Electric cars almost by definition are less complex. And therefore, it's more difficult for Ferrari to have that kind of advantage.
Bill: Yeah, that's what I wonder about. I don't know, we'll see. It'd be interesting to watch. You've been writing about inflation lately. What are the big market things that you're thinking about?
Vitaliy: Let's talk about inflation. We have inflation coming at us from so many directions. You can argue the original sin was the QE. The first one, they’ve unlimited QE for a long time, and then government just threw money from helicopter. That was the original scene. And then, we paid people not to work. So, that helped. That reduced our labor force, so that caused inflation. But then, I almost looked at this second wave of inflation. They start to come almost at the same time when the war in Ukraine started.
Bill: Yeah.
Vitaliy: Let's look. Oil was already going up, even before the war. And oil was going up because oil prices were so low for so long. Pandemic didn't help. The supply was just shrinking. Oh, and on top of that, ESG, big oil companies became suddenly big oil companies and ESG hates them. Oil prices were already going to go up even before the war. Now, you bring Russia into the mix and Russia produce about 10%, 11% of world’s oil and now, we're going to consume less of Russian oil. So, that's going to put even more stress on that market. They should guess market similar dynamics. You have inflation coming from oil prices, you got that.
Another source of inflation is Chinese lockdowns. The Chinese manufacture for the world and now, they're locking down cities because of Zero-Covid policy. You have an inflation come in from-- That's another source of new inflation or a relatively new inflation. High interest rates. Actually, they are incredibly important for our economy period. So, think about it if you have a rich house in the United States, a medium house costs about $457, which is up I don't know 20% or 30% from a year or two years ago.
Bill: Yeah.
Vitaliy: Okay. When interest rates go from 2.8 to 5.2, the cost over a 30-year mortgage goes up-- When the 10 year, when basically when mortgage rates go from 2.8 to 5.2, the cost of the mortgage increased by about $7,000. Let me put it in the right context. I think medium income in the United States about $6,000 to &$7,000. That's basically just consumes 10% of somebody's income.
Bill: Yeah.
Vitaliy: But I wanted to think about something. You basically buying the same house, you’re just paying $7,000 more. The impact from this are I see several impacts. Number one, I think a very good chunk of incremental spending in the economy came because people felt wealthier, and had that wealth. They would basically sell the house, take some equity out and spend this money at Home Depot or whatever or travel. Well, as housing prices are declining, I think they would have to, because it's not like when the housing prices go up as much as they have and interest rates go up, suddenly these houses become unaffordable, so banks will not lend you money. The banks basically say, “You would like to buy this house? We would love to give you money, but the price has to be much lower.” So, I think that's going to have a significant impact on the housing market. And therefore, it is going to translate into weakness in the economy because consumer spending will decline. Also, consumer spending gets hit, as I mentioned, by oil. But there is another inflationary risk and we haven't felt all of it yet. But I think we will feel in the next six months to a year, food inflation.
Bill: Yeah.
Vitaliy: Second and third largest producers of fertilizer, potash are Belarus and Russia. And exports from Russia probably down to zero closer to Belarus a lot as well. Potash prices doubled or tripled. Also, another fertilizer, nitrogen, which is not very important fertilizer. It's mostly made out of natural gas. So, natural gas price is up a lot. What we're going to see that the cost of all calories will go up and it's going to impact poor nations and poor people and in the wealthy nations a lot more. I'll give you an interesting statistic. I think in Russia or Ukraine average household spends maybe about 40% of the income on food, we spend about 7% or 10%.
Bill: Yeah.
Vitaliy: But that's for the whole country. The poorer you are, the larger the percentage is. Anyway, you look at the consumer in general, to me that looks like one of them could be a weak link in the economy and the consumer is two-thirds of the economy, so you can see how I get-- I'm not very excited about the health of our economy, no, for a period of time.
Bill: Yeah. One thing that's nice about living here is, we do have pretty cheap natural gas to the extent that any shale gets turned back on, we make it a little bit more gassy wells that spit out more gas. And thankfully, we've got our own fertilizer supply. But yeah, I think food is concerning. My general view on housing is that the economy is definitely going to slow. I don't know what happens to prices. The Lennar, what is it that KHB is the ticker. They reported and I didn't think that they sounded particularly scared in general on housing yet.
But Logan always talks about-- Mohtashami, he always talks about, the thing is, the builders are going to protect their margins. The natural consequences they're just going to build fewer and fewer homes and it does seem there's a chance I guess that that mobility decreases, prices don't actually crater like some people are projecting. But I agree with you that the multiplier effect, there's this NBR paper from 2007 called the housing cycle is the business cycle and it lays out why housing is so important to the economy. It's going to be tough. If housing slows materially it's going to be really tough to have the economy power through that.
Vitaliy: I think looking at the housing market just from the perspective of builders isn’t complete way to look at it.
Bill: Yeah, I think that’s right.
Vitaliy: I don't remember the numbers, but I would argue, I'm guessing by now that most sales, probably 90% of sales come from-
Bill: Existing.
Vitaliy: -existing homes here and maybe 10% from-- From a builder perspective, maybe, but it's going to be very difficult. Okay, first of all, so, let me tell you where I agree with you. I think the housing market is a very different animal than the markets you and I deal with on a daily basis. Because people get anchored to the last price they saw and it takes them a long time before they say, “I have to lower the price.”
Bill: Yes.
Vitaliy: I think at first what happens is that the activity declines.
Bill: Yes.
Vitaliy: Okay. So, you and I agree on this. I think then a lot of people who were going to move-- Another thing, I agree with you on, the number of transactions declined for another reason is that if you're going to sell house and you're going to move to a different neighborhood in the same city, now that house you're going to buy could cost you a lot more just because you ate lacking that--
Bill: Your mortgage payment.
Vitaliy: Exactly, yeah. So, that's going to add to that.
Bill: And you might wipe out your equity if you go to sell. You've got a fixed payment that you can afford in the house that you own-
Vitaliy: Yes.
Bill: -versus you've got to find a buyer that wants to pay you the price at current rates, and then you've got to find that you want, and then you've got to find a seller that's willing to sell to you at the price that you want to buy at, that's going to be tough.
Vitaliy: I think you and I can agree on something 100% right now that you don't want to be a real estate broker right now.
Bill: [laughs] Yeah. You do agree on that.
Vitaliy: It’s not a profession you want to go. That’s not a profession you want to go unless you have masochistic tendencies. But I think what's going to happen at some point, some people have to move.
Bill: Mm-hmm.
Vitaliy: When you think about housing, some of it is like I would like to and some of it I have to.
Bill: Yep.
Vitaliy: I think I would like to-- those people would probably, a lot of those sales would decline. The number of transactions would decline. Some people have to move and I think those are the transactions that will move the housing prices lower, I think. And I think what happens after that, the housing prices are priced on the past sales and therefore those are the sales that will reset the housing prices lower, but it takes time.
Bill: Yeah.
Vitaliy: When you and I talk about individual stocks, I have a lot more confidence because that's microeconomics. When we talk about microeconomics, I look at microeconomics from a couple of frameworks. Number one, Seth Klarman says that, “We worry macro and do micro,” and I agree with that. Another one, I almost look at it. I don't want to be a weatherman. I want to be a climatologist, when I look at-- as an investor. In other words, as an investor I spend most of my time analyzing individual companies and I don't spend much time thinking what the Federal Reserve is going to do next.
Bill: Yeah.
Vitaliy: Because that requires a huge amount of effort and it has a very short shelf life. What I tried to do is identify a climate change in events and position or portfolio to avoid them or benefit from them. This is why you and I can have this discussion about all these different things and I'll be the first one to tell you that economics is such a complex entity that’s incredibly difficult to really forecast what's going to happen next. I go through these mental exercises with you and I just went through, but at the end of the day, when I look individual companies, they say, “Okay, well, how much exposure do I have as a consumer and I want to have less of that.”
Bill: Yeah.
Vitaliy: And that's what it adds to basically. Yeah.
Bill: Yeah, and one of the conversations that we had when you were in Fort Lauderdale, I remember was, you just said, I look at some of the growth factor and I wonder how much of that is rates driven or environment driven, and how much of the growth rates would come in if we were in a different environment. I think we're all going to find that out together.
Vitaliy: Yeah.
Bill: I guess, like everyone in a bear market, I've gotten more interested in macro. But where I do think it matters is, I do think there's an element of reflexivity, which if you're underwriting certain individual companies, I'd argue. It's important is to at least have a sense of the terrain, a general sense, but I agree with you. I'm not going to be big macro moving my portfolio around based on big macro thoughts, it's outside the scope of what I'm capable of.
Vitaliy: Yeah, actually, let me tell you something I've been noodling about for last couple weeks. I was thinking about all this dotcom 2.0 blowups. That's how I look at what's happening. There're a lot of high-tech companies.
Bill: Yeah.
Vitaliy: You can call Cathie Wood companies, but it's more than that. Let me give you this analogy. I compare that to dotcom like 1999 and there're a lot of similarities. It's never perfect. It's never perfect comparison, but there are still a lot of similarities. But one thing I realized is that if you remember Y2K, basically what it did-- You already had a bubble in technology and then Y2K scared everybody to upgrade their technology that in itself pulled a lot of future sales forward.
Bill: Yep, just like COVID.
Vitaliy: That's exactly where I'm going. Now, Bill, let me give you a list example of a company. Let's say you have a company that’s naturally growing 10% a year. That's natural state of growth. And now, suddenly, one year instead of doing 10% growth, it does 40%. And everybody thinks that actually, maybe that's the new rate of growth. What happens is this. Management now thinks, “Well, we can't be not prepared for year two where the growth is high again.” We can't, because we'll get fired. What do they do? They hire a lot more people, they invest more in CapEx, and then the year two comes and the growth is not 40%, but now is zero. The reason it’s zero because that last year, it stalled next three years of growth.
Now, what happens? Your cost structure is bloated even if you were just growing 10% a year. But in steady growing 10 a year, you're growing at zero. I think this is oversimplified mental model, but that's the mental model I'll be using when I was analyzing a lot of those digital darlings. Because I think a lot of them, basically-- What happens and actually I recognize this as a CEO of my company. I can only focus on so many things at a time. When we're growing very fast, I don't think as much about expenses and I think about growth. If the growth stops, I'll be spending a lot more time thinking about expenses et cetera. I think what happened to a lot of this companies, they probably did not have-- When they were growing, suddenly growth accelerated and they were already growing before this. They probably had a much looser expense structure.
Bill: 100%.
Vitaliy: Also, they were competing for scarce talent against the competitors. I think we're going to go through this very difficult time, where a lot of them are going to have to go through this significant restructuring. And so, as I look at this companies, I realize as an investor I need to realize that things will probably get worse before they get better, probably a lot worse before they get better. I would have to be buying them when things look horrible. But that's when probably opportunity is going to be, I would have to almost close my eyes to some degree. At that point, have a little bit of imagination to realize that things will get better for them, but first, they'll get a lot worse. And then, so, that's how I look at this dotcom 2.0 blow up.
Bill: I actually think part of what you're touching on is some of the argument to fade the inflation narrative a little bit. It was funny in 2019, I was talking to a buddy who was in a YPO for Tech Execs. I said at the time on Value: After Hours or whatever, but he said, “A lot of the Execs that I am friends with are hiring insane amounts of engineers.” They know that it's not the economic thing to do, but they're doing it because they want to brag about how many engineers are joining their firm because valuations are being dependent upon how much growth they're having. It's not a bottom-line driven issue at all. It's a, we hired X engineers, and we have these perks, and look at how much we're growing.
He said some of them are flat out saying like, “We only have one chance to get really, really rich and this is our chance, so we're not worried about the bottom line.” In a world where people start worrying about the bottom line, I could see labor becoming a little less tight. And then on top of that, Walmart had mentioned that they were overstaffed because they were expecting more people out with Omicron and then actually went out. They were overstaffed. Then they're going to lay off some people to get right sized again. It'll be interesting to see in a year and a half what we're all discussing. Something tells me we might be discussing deflation at that point.
Vitaliy: I think the road to deflation is through stagflation in other words.
Bill: Yeah.
Vitaliy: I agree with you 100%. I think that's the risk. One thing we haven't touched on, which I think that's-- Again, this is where you become on one hand or another hand the economist kind of thing.
Bill: [laughs]
Vitaliy: One thing that I don't know what to think about is that as interest rates rise, how government is going to have to-- The government is basically going to feel the impact of $30 trillion of debt we have, which we haven't before.
Bill: Yeah.
Vitaliy: Just think about 1% increase. I understand that not all debt-- I think only 30 something percent of our debt is short-term maturities less than one year. Very simple math. 1% increase in interest rates would cost us about $300 billion of interest expense. That is basically one-half or one-third of our defense spending, I mean one-third of defense spending, 3% would be equivalent to our defense spending today. Just think about that.
Bill: Yeah.
Vitaliy: That means the government isn't going to spend less. That's not what it does. It's going to print more money. So, that's inflationary. I can see inflationary and stagflationary enforces at the same time. But I can see how for sure higher inflation will slow down the economy. Yeah, that is a significant risk.
Bill: It stinks that we didn't issue 50-year bonds, now we could attack them when rates go up, and they go down, we could buy them back.
Vitaliy: Oh, absolutely.
Bill: The government is not a hedge fund. [laughs]
Vitaliy: That’s right.
Bill: One thing I want to talk to you about is how you think about this and the exact question is, what has writing done for you and what is your daily routine writing look like? I think when people hear the answer, they're going to understand the question why I'm asking it. But you talked about it in the book and I'd love for you to wax poetic on what writing means for you and your process.
Vitaliy: Yeah. I’d argue writing is probably one of the most important things that has happened to me as an adult. When I say this, I put it on par with having children, probably right there somewhere. But as a thinker, that is probably the most important thing that happened to me. Writing basically rewired my brain. The conversation you and I had, a lot of these thoughts came to me when I was writing. So, I have a scattered brain. I can't really concentrate for very long. I get distracted. I get up every morning at 4:30, 5 o'clock and write for about two hours a day. That is my focus time. That is the time where I do this intense thinking. That thinking basically changed the way I look at the world because it makes me more open minded. I always look for stories, I always look for analogies. I see and apply mental models a lot. Because of that I'm aware of more mental models, but I also apply them a lot more.
Let me give you a mental model. Actually, I'm going to give a mental model that you know so well, but most of us did not even think to apply it. Charlie Munger says invert. Well, somebody asked me recently, “Vitaliy, should we be looking--?” We have this sensation going on. “Should we be looking at 70s and 80s to see what happens to the 60s and 70s, my guess, 70s and 80s to see what happened in the academy.” And then I said, “You can do that or you can just look at what's happened in academy last 20 years and invert it.” Just think about it. Because the interest rates declined, what happened? Profit margins actually ended up going higher. Price to earnings went up higher, consumer spending was higher, housing prices--
Now, inverted, you say, “Well, if interest rates go up, [unintelligible [00:40:12],” you have inflationary environment, you have probably lower profit margins, lower P/Es, lower housing prices. The consumers feel less wealthy. This is a mental model that you and I know about because we go to Berkshire Hathaway every year and we hear Charlie Munger say it. But actually, applying it often it's a very different animal. Writing, what it does for me, it allows another way to look at it. I'm a big believer in that conscious-subconscious mind relationship. Let me just be very clear. When I talk about subconscious mind, I'm not talking about my mind connecting to the universe of other subconscious minds. That's not what I'm talking about. I'm just basically, look at our mind structure as two computers. One, conscious mind and subconscious mind. We are aware what's going on our conscious mind because it's available to us. Subconscious mind, we'll think about how many books you read over the years. How many of them you remember? Probably, very few.
Bill: Not that many. Maybe 15 or so.
Vitaliy: Not that many.
Bill: If you just asked me to pull it up.
Vitaliy: Yeah, but even from every page you read, even from the books you remember, it’s still-- [crosstalk]
Bill: Soul in the Game is one of them.
Vitaliy: Oh, thank you, thank you.
Bill: [laughs]
Vitaliy: Because you have to reread it twice a day now.
Bill: Sankaran is another for those that are looking for fiction.
Vitaliy: [laughs] But my point is this. All the reading we do, all in your view just can recollect some of that, but a lot of it actually goes into our subconscious mind. It's not complete loss to us. When I write, what it does, it's basically focus. This is how I'm accessing my subconscious mind. It's the knowledge that I have, but it's below the surface. It's a focused energy, it's the focused process of connecting conscious and subconscious mind that allows me to get those thoughts out onto a piece of paper. I tell you, when I write, part of the reason why I love writing, because I am as shocked to what I wrote as people, because it surprises me all the time. I'm like, “Oh, I did not know I think that.” This is what writing does for me. It has been probably one of the most important things for me. It added me 20 IQ points, which I needed desperately-
Bill: [laughs]
Vitaliy: -and it made me a much better investor and I think a much better human being in general.
Bill: Do you handwrite or do you type?
Vitaliy: No, I have no muscle memory of handwriting. I mean I can, but I haven't done it for so long. So, now I type.
Bill: Yeah.
Vitaliy: I get up at 5 or so, like, this is how it looks. I get up at 5 in the morning, I have a writing chair, and I have a laptop sitting right next to it and headphones. I go downstairs, make Americano, do 30 pushups, go upstairs, and start writing for two hours.
Vitaliy: Hmm. Just one Americano? You said that you drink a lot of coffee in the book. But then you stop at 8 AM.
Vitaliy: Let me tell you what happened. I found maybe six months or a year ago that I actually-- When I came to the office, I've been drinking insane amount of coffee, like, six cups of coffee. A lot of it was happening mindlessly because I would sit in my desk, I would get bored, I would go get coffee because I liked the taste, and I drank six cups of coffee. I have this new hack. For every cup of coffee, I drink, I have to do 30 pushups.
Bill: Hmm.
Vitaliy: My consumption of coffee declined to two or three cups of coffee a day.
Bill: [chuckles] Make sense.
Vitaliy: Okay?
Bill: Your chest is like, “I don't want to do this.” [laughs]
Vitaliy: Well, because it's topped my list. Because when it comes to do a pushup, I'm like, “Do I really want to do pushups?”
Bill: Yeah.
Vitaliy: It's good for me. I am healthier. Because I'm going to drink less coffee and I'm healthier because I'm doing pushups.
Bill: Yeah.
Vitaliy: That's my new hack that I think I've been doing it for maybe four months now. Yeah.
Bill: Do you want to talk a little bit--? You wrote a piece that I called you up after last week. You wrote it about Putin. I thought part of you that I had never really realized was growing up a Russian Jew. I didn't realize how scarce your upbringing was. And then, the other thing that just this doesn't have to be part of the question, but I couldn't believe is how little sunlight you saw as a kid.
Vitaliy: [laughs]
Bill: And now, you're in Denver, which is a real-- I think you're in a better place now. But just talk a little bit about your journey. Some people-- I've talked to two people today that I told I was interviewing you and they were like, “Ah, I'm really looking forward to that. I don't really know that much about him. I know of him, but I don't know about him.”
Vitaliy: Yeah. Well, so, I grew up in Murmansk, Russia. If you look at the Russian map, you look up, you look to the left. We say, look up, to the very top of it. Murmansk is located above the Arctic Circle. It's a very, very cold. In the wintertime, I forget for a month or two, there is almost no sunlight. I would walk in the morning to school and it's dark. The Sun comes out for 10 minutes while I'm in school and I miss it. When I walk back, there's no Sun, it's dark again. And Bill, so if I moved to Murmansk now, I would be miserable, because I live in Denver, which is the sunshine state. Maybe California wants to argue about that, but that's okay. But there's a lot of sunlight. I would be miserable because I'm so used to it. Because I grew up in Murmansk, that's all I knew, it didn't really bother me just because that was the reality of my life.
A couple of things. Number one, there was very little vegetation, very cold permafrost. There's very little vegetation. We would see very little fruits and vegetables during the wintertime. To get us any vitamins, we would have to drink fish fat. That was probably our biggest source of vitamins. I am 5’10”. My son, Jonah is 6’4” or 6’3”, something like this. People ask me, “Why is kid so tall?” I said, “Well, it's very simple. I grew up with very little sunshine. If I grew up in Denver, I would have been 6’3” and I would be blonde.”
[laughter]
Vitaliy: It's interesting. I look back at my life and now, it looks like it was very scarce life, there was a lot of scarcity. I didn’t really care like that, because if you're born into it, it seems absolutely normal. We never went really hungry. I don't think we have a start. But my parents loved me, I had a great family. That life overall was a more or less happy childhood until I was 11 years old. My mom got brain cancer and that so, I lost my mother when I was 11. That was the most traumatic experience of my life, I guess.
What happened was on a day after her 50th birthday, on May 6th, 1984, she was admitted to the hospital because she had pain, a headache. They did the scan and they found that she has brain cancer. My mom, this vibrant, beautiful woman with brown hair goes to the hospital and this is a person I remember seeing. And then my father sends me to pioneer camp because he has to do with my mom's surgery, etc., and he just can’t deal with me. I come back a few months later and I see this woman at home who's has a short gray hair, doesn't recognize me. It's my mom and I was shocked.
They did one or two brain surgeries and they were not successful. Basically, my mom died in October. I went to a psychologist right before pandemic because nothing was happening in my life, but somehow I had some anxiety. I didn't know where it was coming from. We talked a lot about it. She said, “Well, the problem is you never really said goodbye to your mom.” If you think about it, because the woman I remember is my mom was that vibrant woman and then suddenly, she disappeared. And the woman who died, I couldn't really relate.
Bill: Yeah, you went to camp, you came back, she was totally different.
Vitaliy: Yeah. In fact, this chapter in the book, the other way I write about my mom, I actually didn't even write it for the book. My psychologist said, “What you need to do, you need to go back and just relive those memories.” How I do this? I write. I actually wrote that part even before I sit down to write a book. I wrote it basically for therapeutic reasons, and then I it was writing the book, I ended up putting that into the book. So, [chuckles] that's how that portion of the book came about. But one thing that I even hate saying those words. But the silver lining of the story is that my mom passed away, it brought me closer to my father and I appreciated him so much more. When I say this, a lot of decisions--
When we go through life, there is always something that feels more urgent to do right now. Things that we think we should be doing get superseded by emergence-- things we know that seem to be [unintelligible [00:51:17] at this point in time. Well, I always try to override those things and intentionally spend more time with my father. We would go for morning walks, I would go for breakfast two or three times a week, we would have breakfast two or three times a week. I make sure that when we travel together a lot. That actually, my mum passed away in my early age made me appreciate and value my father a lot more than I would otherwise, which is a weird dynamic, but that's what happened. Yeah, so that's my childhood in Russia.
Bill: Yeah. When I was reading about your mom, I was thinking I had my first and only serious girlfriend outside of my wife. Her mother died of brain cancer and it was really abrupt. I never got to tell her. I know she knows how much she meant to me. But I wish I had said something while she was still here, at least called while she was in the hospital. We weren't together when it happened and it was like she went in one week with a headache and then the next week she was gone. I don't know. I relived a little bit of that.
Your book is so unique, because here's a value investor I'm reading about. We've gone from The Little Book of Sideways Markets to Life Lessons, I guess, would be how I would characterize this book. But one of the things that you really let people in into your personal life and how you now look at the world. I think that one of the takeaways that I have implemented in my life and will continue to is the idea of you may be doing something for the last time. So, enjoy it. I don't know. I want to thank you for embedding that into my brain because I think it's made my life a little bit better.
Vitaliy: That is such incredible concept. Yesterday, I met this woman who has a son, who is a year old. I said I know when I had my first child, I always wanted them to get to the next stage. When he was laying, I wanted him to crawl, when he was crawling, I wanted him to walk, when he was walking, I want him to be able to ride a bike. And now, I look at that and I realize, and I applying to this to my older-- Actually, I'm still applying it now. I'm just focusing on the now and not wanting the next stage. Not craving for the next stage in their life. That makes me appreciate my kids a lot more actually, because I know that. I'll give you one example. I look forward to driving my daughters to school as a privilege. If you think about it, my Hannah is going to go to 11th grade. So, I basically have two more years of driving her to school. That's it. I don't know how many school years, school days, 200 something school days per year, whatever the number is. There is only 400 more times. That's it. And so, every single time I drive her to school, I try to be present. Driving by itself that's not what I'm talking about actually being with her in the car and being present when I'm doing it. Yes, because there will be time when I'll be driving her to school for the last time and there will be time when I drive my age eight rear old daughter, Mia Sarah for the last time. So that concepts from stoics I thought it was extremely powerful and I'm glad you found it powerful, too.
Bill: Yeah, I liked the section on stoicism. It's actually two sections of the book.
Vitaliy: Yeah.
Bill: What are some of the things that you think that, I don't know, people that need a teaser is to go get the book? First of all, you should buy the book, folks. But second of all, what should people take from the stoics, you think?
Vitaliy: Yeah. Bill, my parents never talked about this. I don't think I ever got a formal education of how to behave and how to deal with life. I tried to learn as much as, my father tried to teach me as much as possible, but I don't think he even had the tools. Basically, our behavior in life is, when you're born, we’re this blank thing and then a piece of hardware, and then that software gets written to that piece of hardware over time. And a lot of times, it's just shaped by random experiences. By the friends we have, by our parents, by things that happen in our life. An example I gave you that appreciated my father. Well, that is actually stoics call it negative visualization. That's a concept direct from stoics. It was written into me because my mom died, a completely random experience. That's how I appreciated my father a lot more.
What stoic philosophy does, it provides an operating system for life. It's a system that basically helps you to handle your everyday life, and reduces the negative volatility that comes with your life, and allows you to frame your life differently. When I stumbled on it, I was shocked. I was just shocked how powerful that is. In fact, to make things even more interesting, I basically finished my book. I was in the last chapter of the book when I stumbled on to study philosophy. The book was done. I was literally going to send it to the publisher in a few days or something. I stumbled on stoic philosophy and I told my publisher, to my editor basically I said, “I need more time.” I didn't tell him how much. I said, “I just needed more time because I wanted to spend more time on that,” because I didn't know how long it would take. And so, I wrote this stoic philosophy section as much for myself, as much as for my kids, as much for you, and everybody else who's reading the book.
When I was writing it, I tried to do a couple things. Number one, I tried to use as much of this stoic philosopher’s voice as possible, because their writing is brilliant. I tried to tell through stories, I tried to make it practical and interesting, and I am the first one to admit that there's still a lot more I need to learn. But I think the basics are introduced in those two chapters. There's one about stoic operating system and another one is about values. I think those two sections basically give you a very good introduction you tell me. But I think the given introduction gets you interested in stoicism. I think if you get interested in that, the next thing you should do is to learn more. Don't stop with that.
Bill: No, I agree with that. I guess what I was thinking about as I was reading and I've recently been going through this evolution where I've begun enjoying the process much more than the outcome of whatever the heck, we all do. I would say, collecting tidbits from the world and then trying to express it in some bets that you think you have an edge in. What I was taking from it and I think it applies to the personal life. I also was applying it to investing where it's about saying, was I wrong for the wrong reasons, was I right for the right reasons, was I wrong for the right reasons? The negative visualization when you're underwriting a thesis, I think is really powerful. What could actually go wrong here for real is the things that I was thinking about from an investment perspective. I think from a personal perspective, I really like the idea of, you can't control what happens to you. You can only control how you react. I can't help but hear-- Do you ever listen to Zig Ziglar?
Vitaliy: I have little time ago, but-- [crosstalk]
Bill: Oh, man, he cracks me up. He's on my iPhone. For some reason, his stuff is in-- It's in my iTunes. Sometimes, when I get in the car it's what auto plays. He's got this older Texas accent and this story that he tells cracks me up. I don't even know if it's true or not, but it's great for teaching. He's talking about how he goes to the airport and a woman says, “Your flight’s delayed.” And he goes, “Fantastic.” She's like, “What do you mean, fantastic? Everybody else is mad.” He's like, “Well, if this flight wasn't delayed, you might have put the plane in the air too quickly, and somebody might have not done the maintenance, and I could fall out of the sky, and this could be my last day on Earth or whatever.” I like the concept of having your mind reset to spin your original reaction into a different light and realizing that-- I forget how you refer to it in the book, but your first reaction is like your emotional reaction and then you can control the ones thereafter.
Vitaliy: That’s right. God, there're so many things-- there’re a couple of things. Number one, I'm reading this book right now and I'm going blank on the name. But it talks about conscious mind, subconscious mind. One point he makes about subconscious-- Think about picture of ship. You have a cruise ship. You have a captain and then you have the engine room. Your conscious mind is the captain. The subconscious mind is the engine room. The most of your evaluation of what happens happens in the conscious mind. The engine room, the subconscious mind is the one that basically runs your body, that's the one that actually executes your decisions, but it doesn't evaluate them.
When you say, it is a joke, “Oh, I'm an idiot, oh, I'm stupid.” You know what? Subconscious mind does not understand sarcasm. [laughs] It's good. You can talk yourself into anything you want it to be. If you do what Zig Ziglar did and said, “Fantastic,” guess what? You actually conditioned yourself to accept what's happened to you as a positive thing. This is the beauty of stoic philosophy is that, there are two concepts. You touched on the first one is that the economy of control. This is Epictetus saying, “There are certain things that are up to us and certain things aren't.” Well, here's the reality of life. Most things are not up to us. What is up to us is how we react. How we frame things? Basically, what feeds you. Everything else, which your wife says, if the street lights turn on when you want it to turn, if the plane is late, all those things are not up to you. Not at all. But now, it's up to us to frame it. This was Zig Ziglar was doing. To frame what happens to us in a certain way.
True story. My son, Jonah, he called me up yesterday. He was flying from Europe to home. He got to Frankfurt, he missed his flight, not for his reasons, because of the airline reasons. He had spent an extra day, 24 hours in Frankfurt, which is probably the least favorite city I have in the world.
Bill: [laughs]
Vitaliy: There are beautiful parts of Germany, Frankfurt is not one. It's not that. Anyway, so, he ended up spending 24 hours in this hotel, where there was no air conditioning, this kind of thing. Anyway, he shows up, and he's tall, and he finds out that the legroom he paid for is not there. The flight is oversold and he got a seat, but there's no legroom. He calls me up and says, “Dad, this is the worst day of my life” and it was 4 o'clock in the morning.
Bill: He didn't want to hear, but the right response is, that's a pretty good life.
Vitaliy: Yeah, I said, I hope this is the worst day of life.
Bill: Yeah, that’s right.
Vitaliy: I basically said, “Think when this is the negative visualization that comes in perfectly. I said, “You’ve realized that the worst part is happening to you, you'll be in the air-conditioned airplane, where you'll be a little bit uncomfortable for 10 hours, but you’re still going to be able to watch all these movies you want to watch and to listen to all the music. And so, is that really that bad? Could things be a lot worse?” He’s like, “Yeah, I guess, I can see this way.” Suddenly, that relieved some of the pressure. And then, when he was saying that the Lufthansa people at the counter were rude to him and dismissive and I said, “Jonah, did they get into your brain and just were hitting you in your brain or you allowed them to make you feel bad? It's completely up to you how you take what they tell you and it doesn't have to offend you. It's up to you how you frame it.”
All these concepts come from stoic philosophers. Are they unique to stoic philosophers? No, because they are part of everyday life, but it's just what stoics do, they put them into this curriculum. A lot of this it's a common sense. The problem is it's not that my parents never taught me this. The stoic philosophy gives you this very simple curriculum that you can go through and just making tiny little changes in your life. It could actually make your life so much happier.
Bill: One of the stories that you share that I think could be really relevant to the listener base was I'm not sure if that you had taken over control of IMA yet or you were just helping, and you had a customer concentration issue and you visualize that customer leaving. When they did leave, and I think you would agree that it was good that they left, they were measuring you on a weekly performance which is not what you do. It didn't hurt as bad.
Vitaliy: Yeah, it's interesting. No, this is great. I was writing IMA at the time already, but it will be worth 40 something million dollars and it was a $3 million account. That's all.
Bill: Yeah, that matters.
Vitaliy: Yeah. Today, we make a difference. But then, when we got the client, he told me all the right things and then maybe a month later or something, he starts checking our performance and telling me if we underperformed or outperformed on a weekly basis, which is insane. I have zero insight what our stocks are going to do on that time frame, probably even six months or on a year timeframe, it's completely random. And yes, so what I did, basically, I assumed that this client is gone. The problem is, today if I had this client, I would probably, practically, gently nudge him to leave.
Bill: Yeah. But at the time you couldn’t.
Vitaliy: At the time, we just couldn't afford it. I basically visualized that we lost them. I made the internal decisions, the capital allocation. It was in the company assuming we lost them as well. When he left, I was actually relieved and it didn't really matter. I think that's a very good trick. By the way, when I did that, I had no idea about stoic philosophy.
Bill: Yeah.
Vitaliy: But now, it's part of the stoic philosophy framework.
Bill: You mentioned that stocks are completely random over the short term. How much do you take, if anything from stock price movement? You've been doing this for a while now and I'm curious how many times have you seen stocks go way down and your thesis remains correct over the long term versus how many times has price signal, if you have a sense of that?
Vitaliy: That is such a good question. I think the price signal is completely lost in five days, almost stopping attention to this and a complete market sell off, completely lost. But the thing is, when I say it sounds obvious, but we still look for it. But even though-- [crosstalk]
Bill: Sometimes, maybe even a little bit more in a sell off. I know that that may sound silly, but--
Vitaliy: Yeah. I'm trying to think. There were a couple of times where I really got hurt, where the market was so right and I was so wrong. The adjustment I made from those experiences is that I double down on quality. Even if the market is right, if the quality is high, I'll be okay. When I say quality is high, it's three things. It's the balance sheet. In those situations, I start with a balance sheet first. Because that's what gets you in trouble in the short term, like that's immediate. Business rarely unglues overnight though it does happen. But it's usually the balance sheet—business and this is something I appreciate a lot more now than ever before management.
To your listeners or viewers, this is going to sound very banal, because you all know this. But when you have somebody who owns a lot of their stock, when you have a management that owns a lot of the stock. That is such a huge factor. It's so underappreciated, even though everybody knows that. It's so underappreciated and I can tell you this. I am owner of IMA. I have terrific employees. They are terrific. But my heart will bleed exponentially more for IMA than everybody else's here. It's just impossible not to. I think Warren Buffett has this great-- This is one of the annual meetings, somebody asks would they ensure that SpaceX, when it goes to Mars or whatever or to space, if the astronauts or something, if SpaceX goes to space, he says, “Yeah, there'll be one price if Elon Musk is on board and other price if he isn’t.”
Bill: Yeah.
Vitaliy: But that tells you everything you need to know. Not that Elon Musk doesn't care if people will die as soon as we're done because he cares deeply. But this is our innate programming to care about yourself more than for others on you or for your family more than for strangers. Anyway, so, in other words, if I own company-- To answer your question, if I own a company that's extremely high quality, and the stock price declines, and I don't understand it, I worry a lot less about this than the company where that's not the case.
Bill: Yeah, that makes sense. How have your views on position sizing changed or as you've done this for a while? I came into this through reading Buffett. He's so pro-concentration, and I'm so-- I'm willing to get concentrated, but it's not my natural tendency. I think I really need to see what I perceive to be a fat pitch.
Vitaliy: I'll tell you two stories. I think in our industry, especially in the value investor crowd, position sizing like being concentrated is almost measuring someone's manhood kind of thing.
Bill: Yeah, I was actually thinking that. [laughs]
Vitaliy: Yeah. This is a true story. I forget the year. I think it was 2007 or 2008. I was speaking at the Value Investing Congress. Before the event, we went for dinner with other speakers. I'm sitting right next to Mohnish Pabrai. I'm like, Mohnish “How can you have this portfolio that has only has 10 stocks at night?” He's like, “Listen, don't look at me. There's a guy.” I'm not going to mention his name, because it didn't end well for him. “There's this guy next to us, he only has three stocks.” Well, I'm not going to mention the guy's name, but he had a three-stock portfolio and that conference he did a presentation on Kelly Criterion. He basically said because of Kelly Criterion, his three or four stock portfolio is [unintelligible [01:14:57] diversified.
Well, six months later, his largest position has exposure to natural gas. At that time, I forget the natural gas prices declined from $11 to $7 or something. He said they can go below six or something because that's below their production cost. Well, you know what happened after that? [crosstalk]
Bill: Yeah, they went for less [crosstalk] through the floor.
Vitaliy: Yeah. This guy, before that, he had a company 35% a year for four or five years. And then he lost it all in a matter of few weeks. This is an extreme-- The position sizing, first of all, I would argue, no matter what your position sizing is. Unless you're managing your money, I would argue owning three stocks is irresponsible unless you represent 2% of your clients that are some very small percentages of your client’s net worth.
Bill: Yeah, that makes sense. Because then they're diversified outside of that.
Vitaliy: Yeah, then that's fine. It doesn't matter. The problem is, in his case, a lot of people give him all their money. I would argue that those people's fold as well, because they just will magnetize by 35% a year track record and they ignore the fact that he only has three or four stocks. They looked in the past history and said, “Well, the last five years, it's worked. So, it's going to work in the future,” which is I would argue that's not the right way to look at it, because over the last five years of observed history, it worked, but thinking of the future, it may look different from the past. I think position sizing-- I'll give you a couple answers. Number one, on one side, when you have this-- I give you the pitfalls of coming three-stock portfolio. When you blow up, it's very difficult to recover from decline in 30% or whatever, if one of your positions blows up.
On the other side, you look at a lot of mutual funds and they have 200 positions, they've had 20 stocks, and they're 50 basis points each. The overdiversification, I would argue it's horrible as well. A couple reasons. Number one, it's very difficult to stay on top of 200 stocks. Number two, it just leads to indifference. Your 50-basis points position has doubled and you are 1%.
Bill: Yeah, who really cares?
Vitaliy: Yeah, who cares or it declines 50 percent, who cares? I'd argue you need to get into the number of positions where every decision matters. But at the same time not one position can blow you off that you can recover. That is very important. You have to find your position sizing has to match your EQ. For Mohnish Pabrai, because that's a ten-stock portfolio, I couldn't do this. At the same time, I have some friends who have 50-stock portfolio, I couldn't do that either. We found that we need to be about 20, 25 positions. That's how many stocks we have. Now, and that's how many stocks we can cover and do a very good research.
Bill: Yeah.
Vitaliy: Our position sizing, I look at as the matrix and I don't think ever talked about it before. We rank every company in our portfolio on quality. It goes from A to D, probably 70% of the companies we own maybe are A's, maybe some B's, one or two C's. And usually, we don't buy a B, C. It's B that slips into C.
Bill: Hmm, okay.
Vitaliy: That's the quality. And then we have a price to fair value for every company. Think about it. The higher the quality and the cheaper it is, should be larger position. The lower the quality, the more expensive it is, should to be smaller position kind of those two extremes? And so, our positions basically go from 73% roughly. We have to make only two decisions. We have to figure out what the fair value is and we have to figure out what the quality is, and then we have a spreadsheet that computes position size. Because what I find that when you buy a stock, you are usually infatuated by that. You're not as rational. Or, when things go bad, it's same thing. You're not rational other side. This will become quants for second basically. Let me put it this way. This prevents us from blowing up.
Bill: It makes sense.
Vitaliy: Yeah. Position size basically it's our decision when we are the most rational. That's what limits you, [unintelligible [01:20:32] that’s basically how a whole portfolio is constructed.
Bill: Yeah, that makes sense to me. I got pretty concentrated on Qurate for a bit. Even with the way that that turned out, it didn't hurt me that badly. I did end up writing a lot of the return back down which stunk, but thankfully, it was cheap and I knew what I was looking for. But that would be the only type situation that I think that I can live with getting too concentrated, which may sound silly to some people, because it was a risky. It was perceived as a risky bet at the time.
Vitaliy: Well, I think what made Qurate less risky is that you're getting your capital back.
Bill: Yeah.
Vitaliy: That de-risk. [unintelligible [01:21:14]. To me that's what de-risk the stock substantially.
Bill: Yeah, and then the world changed, right?
Vitaliy: Yeah.
Bill: Yeah, something that I am trying to figure out how to cope with is hiring people. You talked about covering 20 positions, which I would need somebody else to help me with, and then you talk about a lot in the book, and you actually mentioned one of the things you like about Tesla is that they saved you time. I know that you say you hire around your weaknesses and maximize your time. When did you learn how to hire around your weaknesses and what advice or what have you learned in hiring people that you think people should think about or maybe I should think about? [laughs]
Vitaliy: Yeah. Okay, let me make a small promotion here. If you buy the book-- [crosstalk]
Bill: When? When you buy the book? [laughs]
Vitaliy: Yes. Let me program your subconscious mind.
Bill: That's right. [laughs]
Vitaliy: Now, when you go buy the book right now, when you buy the book and go to soulinthegame.net, there was an email address there. If you email your receipt, I'll send you four bonus chapters. And one of them-- I wrote all of them after the book came out. There was 15 pages of my hiring travails in 2021 and how we basically created brand-new hiring process for IMA.
Bill: Oh, interesting.
Vitaliy: Yeah. So, that's not in the book. But let's talk about hiring the weaknesses. Let me tell you one thing I learned. This is going to sound so banal and so simple. But everybody has strengths and weaknesses. But what I started to do, I started to look at people and a lot of times when they have really good strength, I stopped looking at their weaknesses as weaknesses, but look at their weaknesses as the source of their strength.
Bill: Hmm. Interesting.
Vitaliy: Let me give an example. I am a creative person. I'm not very organized person. If I tried to be very organized, it would consume a huge amount of effort for me.
Bill: Dude, I will be so tired iI was super organized, it would be insane.
Vitaliy: Exactly. It's same here and that is just the source, the lack of organization, that's actually what makes me creative. I have an assistant. If I hired an assistant, who was disorganized as I am-- [crosstalk]
Bill: [laughs] not so.
Vitaliy: Okay. I have this terrific assistant, Barbara, who is incredibly organized, but I would argue she's not that creative and I could be upset. You know what I do? I don't give her creative tasks.
Bill: Yeah.
Vitaliy: I could get upset about for not being creative or I can realize that, “Well, this is why she's so organized.” Since you're a podcaster, you can relate to this well in addition to other things. We created a podcast. We have, what I call a Lazy Man's Podcast, which is basically my articles read to you by this guy, Elliot. When I came up with this idea, I basically went-- My marketing guy wanted me to do a podcast for a long time. I never wanted to do it, because I don't like it. I love being a guest on the podcast, but I know how much effort, how much energy it consumes for me to create this podcast. That's not something I wanted to do.
I came up with this idea. I'm going to write articles, we're going to have a guy read them, it's going to be almost like an article on tape, that's what my podcast is. I have a terrific, very creative marketing guy. I basically said, “I want you to create this.” He spent a month doing all the research and figured out everything we need to do. In fact, he created the whole podcast. He hired the guy from Upwork, who's going to read my articles, he created the website, he chose a service, he went through this whole thing, he created the art for the podcast, he did this whole thing. Then he produced the first five episodes, created the process for that, and now, Barbara, produced the last 150 episodes.
Bill: Huh? Yeah, that makes sense.
Vitaliy: If I asked Anton to do the last 150 podcasts, number one, probably, not the right use of his time. But more importantly, he would be miserable and he probably would not do a good job for getting things on time. Because he is very creative and not as organized. Barbara, she now, Anton has created a process for her that she follows perfectly and she does it perfectly, a great job of getting the podcast done. So, that realization that everybody has their strengths and weaknesses. I just want to make sure when I hire somebody, I really need that strength for the job and I'm fine with their weakness.
There're a couple more lessons here. When you recognize that everybody has strengths and weaknesses and this is going to sound banal as well. Teamwork becomes extremely, extremely important. Because now, Barbara has to go to Anton and say, “Can you help me with this and which is a creative task?” Anton has to be able to go to Barbara and say, “Can you help me with this?” That requires some work. Usually, they have the symbolic posters, etc.
Usually, when you have anything turned into poster, you become almost desensitized to it, because you see it everywhere, you're thinking about it. Well, unfortunately, but actually, it's incredibly important in the firm, the teamwork and especially when you have this framework that you have strengths and weaknesses, and then somebody else. For us to work better together, it's almost-- In economics, in microeconomics, we have comparative advantages. It's the same thing. And so, for comparative advantage to work, you need to have free trade, right?
Bill: Yes, indeed.
Vitaliy: [chuckles] On a micro level of a small company that free trade is teamwork.
Bill: Yeah.
Vitaliy: That's number one. Number two, you want to make sure that people you hire share your values and I try to explain what our values are before we hire. This is one of those things that people will tell you what you want to hear, but you really find out if you share your values only after the fact and then you have to follow this advice that I follow that I heard somewhere, hire slow, fire fast.
Bill: Yeah.
Vitaliy: if somebody, their values don't fit our firm, then you have to get rid of them because they're going to poison everything else.
Bill: Yeah, that makes sense. The firing fast it's tough but right.
Vitaliy: I had to fire three people last year. That essay that I wrote as an abolish chapter, in Russia, there is an expression, it's written in blood. The victory. Well, that article was written with a lot of pain. Because foreign people, it was so, so painful, because I basically had to tell somebody, “Well, what I thought I was saying, I don't like you.”
Bill: Yeah.
Vitaliy: But I reframed it. Since I reframed it, I realized, actually, I'm doing them a favor, because they'll be miserable and I'll be miserable. I'm sure there's a job that is a better fit for them that they're going to find a job that is better fit. Everybody we let go, we were very humane and [unintelligible [01:30:09] about this, Yeah, but at the same time, I'm sure they’re at the better place now than when they were here.
Bill: Yeah, it's tough, because you're impacting people's family and their livelihood. Like you said, if they're not performing, they're going to know it and then they're not going to be particularly happy where they're at. So, letting them move on is the humane thing to do.
Vitaliy: Yeah.
Bill: Well, I don't know, man, I got to figure out. I need a little bit of help around here. But not the easiest thing to hire up in a bear market, but it's something I know I need to do to get-- In order to unlock time in my life, I'm just hitting a lot of time blocks and I know I need people around me to bust out of that.
Vitaliy: Let me tell you one hack I have, which has been incredibly important to us. I say this and I don't own the stock yet. Upwork. We have hired a lot of people on Upwork to offset some of our weaknesses. In fact, originally, my assistant, Barbara came to us from Upwork. She lives there. She'd been with me for four years and she's in Argentina. Whenever I need some specific skill-- We found Upwork to be incredibly important. I'll give an example. My book, Soul in the Game is literally right now has been translated into Russian, because I wanted my uncle and my stepmom to read it. I hired the guy from Kyiv, I mean, from Odessa on Upwork.
If you go on to Contrarian Edge, you see this beautiful art. Not my drawings from my articles. That's done by guy and his name is Hazen and he's in Mexico. The guy who is recording a podcast, Elliot, he's in Canada. Again, hire from Upwork. I may have eight people working here, but we probably use another eight or nine contractors that do other things for us that have a unique skill. So, if you need an assistant--
Bill: Yeah, I desperately do. You were talking about scheduling and whatnot. If it's only, I don't know, four times a day, but it's five minutes, that's 20 minutes a week. That stuff heads up. I get buried in administrative stuff a little too much. It doesn't make a lot of sense.
Vitaliy: Well, in the book I talk about in the personal finance chapter. I talk about the subcategories where I have loose budgets and one of them is buying time.
Bill: Yep.
Vitaliy: I'm sure I took myself into it. So, my subconscious, I was the worst follower of my own advice. But I absolutely hate assembling IKEA furniture.
Bill: I understand that. [laughs]
Vitaliy: Some people listen to it and think they just lost all respect for me right there.
Bill: I did a lot as a kid. I'm too old for that now.
Vitaliy: I just get agitated. If you asked me to do anything with computers or anything creative, I'll be right there. But following instructions and it's so-- Anyway, I'm trying to convince my wife that she should not to look at her husband to do this, but hire somebody to do this. This is a constant debate we have.
Bill: [laughs]
Vitaliy: I have this brother that I love dearly, who loves doing this. My wife, instead of hiring somebody, just asks my brother to come and do it. [laughs]
Bill: That I understand. Yeah, I think around the house, my wife would argue that she wishes that I was a little more handy, but she knew who she married when she married me. I never promised I'd change.
Vitaliy: Good.
Bill: There's a lot of curse words that fly when I start fixing stuff around the house.
Vitaliy: I think at the end what happens, I didn't do it, because I break things. [crosstalk]
Bill: Yeah. We need to hire somebody eventually anyway, and I've gotten to Home Depot twice, and nothing has worked out. I do wish that I had those skills a little bit better. But then again, I've never done anything to change it. So, how bad do I actually want it?
Vitaliy: Yeah.
Bill: Yeah. So, what else do you want to talk about, man? I'm here for you.
Vitaliy: Well, you actually read the book, which I was somewhat surprised. [crosstalk]
Bill: Come on, now.
Vitaliy: But I don't know why. I don't really know why. I didn't expect you to read it. I don't know why. Absolutely, you gave me no reason to think that.
Bill: Well, I'm a little surprised when people that come on here actually listen to the podcast. So, I can understand it. I think it's maybe a little bit of a defense mechanism.
Vitaliy: Possibly. Maybe it's such a different subject than investing.
Bill: Yeah, we put a lot into it, man. I really liked your chapter on personal budgeting. That’s a fantastic chapter.
Vitaliy: The irony of this, because I'm in the finance industry, people expect me to think I'm given advice as a finance professional. I'm not. I have a data. What it is? It’s just how I do this. This is not because I took all this financial planning classes, etc., whatever. I haven't. When I was growing up I thought, if you may just make a lot of money, you're never going to have money problems.
Bill: Yeah, not so.
Vitaliy: And you actually, and I listen to your podcast, and I know based on your family that's not the case. [laughs]
Bill: This is true. This is definitely true. [laughs]
Vitaliy: I want to spend more time thinking about this and I'm going to write more on this, on mindfulness. What is mindfulness? The best way to say is, what is mindlessness? Mindlessness is when we do things on autopilot.
Bill: Okay. Yeah.
Vitaliy: When we do things because we do things. I would argue a lot of things that happen in our personal finance are happening mindlessly. You wake up in the morning, and you go to work, and you stop by Starbucks. Why do you stop by Starbucks? Because at some point, you did it and now you're doing it.
Bill: Yeah. Now, it's your habit.
Vitaliy: Yeah, now, it’s your habit. And then you do something else, et cetera. And then the sum of these decisions basically impacts your budget. There're so many lessons. If you create a budget, number one, you start prioritizing what matters to you, because that's what budget is. It's just basically, if you go to Starbucks and you receive a huge amount of enjoyment from drinking coffee, then that should be on the higher level on your budget. If you go to Starbucks and you really just doing it because you were doing it mindlessly and you don't even care about the coffee, then probably should be lowering the budget. Maybe that becomes a source to pay for something, Chipotle burritos.
When you create budgets, basically you're saying, I value this more than this. Remember, if you value everything, you value nothing.
Bill: Yeah.
Vitaliy: You need to make these decisions, what I value more, what I value less. By the way, money buys you more when it buys you what you value.
Bill: Yeah, I buy that.
Vitaliy: Yeah. That's the lesson number one. Lesson number two and you aren't probably too sophisticated for that lesson. But if you're younger that was very important lesson for me. When we get married, my wife and I -- I have a friend, Mark Bauer. He's 10 years older, I was 28 by the time he was 38. That was a huge age difference because he was more mature than me by a factor of five probably. He took us to lunch, and he gave us this-- it wasn't quite sure we quite [unintelligible [01:39:07] thing. But [chuckles] he told us about budgeting and I was a bit insulted, because I had a CFA at the time and I'm like, “Listen, I have a master's degree in finance, I got a CFA,” and I know how the income statement works, the same thing. But then he basically-- [crosstalk]
Bill: This was probably my favorite chapter that you're discussing right now by the way.
Vitaliy: Really?
Bill: Yeah.
Vitaliy: [laughs]
Bill: It probably says something about what I needed to hear.
Vitaliy: Yeah, well, there's something for everybody in the book, right?
Bill: Yeah.
Vitaliy: And then he told me about the sinking funds. Basically, just think about like, when we create the budget, we put the things we can absorb at this point in time. The cable bill, the rent, etc., all these different things. But there are so many expenses that happen to us over time. We know they are going to happen. They just don't happen in this moment in time that we don't think about it when we create a budget. Your car insurance has a deductible. At some point, you're going to have a car accident. You probably want to have some money saved for emergencies. At some point, you're going to need to buy-- I was writing this when TVs were very expensive. I think we were buying a $2000 TV. So, actually, at the time we were actually saving money for the TV. Now, the cost is lot less. But there's some things you're going to buy. You're going to buy new furniture every five or 10 years. You're going to go on vacations and you're going to retire. You want to do, you want to identify-- [crosstalk]
Bill: Or, you are going to have kids.
Vitaliy: You're going to have kids and they are going to-- [crosstalk]
Bill: Kids are more expensive. This is probably why I've been thinking about it. I've got my middle is into golf and I'm like, “Oh, my goodness, this is going to be expensive.” I love this chapter. I thought it was great advice.
Vitaliy: Well, you are exactly right. You identify all the expenses that are going to happen in the future and then you're going to put them-- Again, there's a whole bunch of financial geeks listening to it, think of it as a depreciation of the future expenses in the present, except the depreciation in the financial statements, it may look at non-cash expense, but you make it a cash expense. You put this money in a sinking fund. I'm so glad by the way I can use the financial language when I talk to you and your listeners, because they actually get it.
Bill: [laughs]
Vitaliy: Okay. Turn the depreciation into current CapEx. How's that?
Bill: Yeah.
Vitaliy: Suddenly, what you find that you have a lot less money to spend on frivolous things. The most important part, because what gets us in trouble is that those onetime expenses that really not one time and this is how we get into debt. Once you get into debt, it's the treadmill to hell, basically. Again, I'm doing a much better job explaining that in the chapter. I think that's an important lesson that I luckily I had a friend Mark who taught me that. It’s kind of funny when I-- This book is dedicated to my kids. It says to Jonah, Hannah, and Mia Sarah, because you don't read my emails.
Bill: [laughs]
Vitaliy: If you think, this is exactly what I want. I want to actually my kids to-- My son read half of that and he listened to the whole thing on audiobook. He was actually proofreading the audiobook.
Bill: Oh, nice.
Vitaliy: My daughter, Hannah read the whole thing and my eight-year-old, Mia Sarah, she listened to some chapters on the audio version. But it's really a lot of it is advice for my kids, but for other kids, too.
Bill: Do I count as a kid, because I got some good advice out of it.
Vitaliy: Well, and for me too, I wrote a chapter for myself.
Bill: Yeah.
Vitaliy: Yeah, so, it's a four. Yeah. You are asking the thing-- [crosstalk]
Bill: The thing I like about it, man, is these chapters are like what. They're four or five pages long one, some are two and it's your thoughts that you've collected through life.
Vitaliy: They are because a lot of them were my articles that went into the book. But I tell you, this book is almost becoming like a chick flick. Because what happened is, think about it. Probably, 80 People who read my articles, there was a very good overlap between people who read my articles and who listen to this podcast.
Bill: Yeah.
Vitaliy: Let's be honest. It's probably 90% male.
Bill: Yes. If the data that I get is correct, then yes. It's about [crosstalk] 90% male.
Vitaliy: It’s probably-- [crosstalk]
Bill: Yeah. Between 25 and 40.
Vitaliy: Wow. Yeah. It's same thing with people who read my investment articles. But then I started to get emails from people who bought the book and they said, “I bought the book for myself and now my wife is reading it and she's loving it as much as I do. In fact, it's became something we did together now with my wife.” And that makes me feel so good because I'm helping now the whole family.
Bill: Yeah.
Vitaliy: [laughs]
Bill: Well, I think that's awesome. If you can get the wives to start listening to the pod, please do. I wish my stats weren't the way they are, but seems the finance skews heavily male.
Vitaliy: Well, I'll tell you this. My wife does not read neither one of my books until this one.
Bill: Oh, yeah?
Vitaliy: Yeah, she read this one, but she didn't read my Active Value Investing. She did not read The Little Book of Sideways Markets or my Tesla book. But she did read this one.
Bill: As somebody who wrote The Little Book of Sideways Markets and Active Value Investing and on your website a sell discipline, what did you take of the art of not selling and then that getting turned into never sell?
Vitaliy: Well, listen, I think think about what happens to you when you sell during the never-ending bull markets. Every single time you sell, you've been taught a lesson not to sell, right?
Bill: Yeah.
Vitaliy: And then over time it becomes a religion, and then that religion gets destroyed by bear markets, and then Sideways Markets. I would argue, it's interesting. I just have zero interest on updating my Sideways Markets book. It's not interesting to me. But I would argue this book does not require update because basically it's more relevant today. Actually, more relevant today than when I wrote it. Because at the time, I started writing in 2005 and we’re already five years into this Sideways Market. I would argue that today, we are in the year one or something of a new Sideways Market. So, that book is actually more relevant today than it was then.
If you decide to get one of those books, like, Active Value Investing and Sideways Market, number one, you have to buy the Soul in the Game first. Then if you decide to get either one of the two. So, my advice would be, if you want a very quick and easy read, get The Little Book of Sideways Markets, because it is basically derivative of Active Value Investing. It's wildly has a series called Little Books Of. John Bogle wrote one and James Montier, etc.
Bill: Yeah, Greenblatt.
Vitaliy: Yeah. I think Jim Rogers did. It's a good series.
Vitaliy: By the way, Jim wrote very good series of books, because especially, I'll give you one example. James Montier has a great book called Behavioural Investing, which I read. And then he wrote The Little Book of Behavioral Investing that would argue so much better. Just because what happens-- For him to write and same thing with me, actually. For him to write, he couldn't have written The Little Book of Behavioral Investing without writing the first one, the big one. Because I would not have the confidence to write a little book because all the data was in the big book and that gave me the confidence to say, if somebody questions what I'm saying, I say, “Well, just go spend $35 and buy another book and you see where the data came from.”
Bill: Yeah.
Vitaliy: As a writer, that confident is actually extremely important. Also, I would argue a Little Book is better book, because I was able to take my Active Value Investing, and rewrite things better, and simplify things, and just leave the end of the essence. And so, it's a much easier read. However, if you're looking for all the details, if you're like a diehard, super value investor, you may actually benefit from the Active Value Investing. If you just want to get a light read, The Little Book is better.
Bill: Yeah. No, I like it. I think they're good lessons, I think people will be revisiting them. I'm glad I learned a lot in the last bull market. I'm glad that it extended my brain in many ways and I'm glad that I avoided some of the traps, and I'm not sure that another one's not going to start, but I wouldn't put a high probability on that.
Vitaliy: Well, there's something I always wanted to tell you and I think I told you this in private, but I think it deserves to be. One, I have this tremendous admiration for you for basically not trying to show yourself as the person who knows at all and be willing to be vulnerable, which is not something that people do in our profession. It was your struggles that when you go through them. I think that is actually, that's what makes you unique and just you're willing to be your authentic self in public. I cannot tell you how much I enjoyed that honesty that I see that you're not trying to hide the pains you went through or going through, etc. I think that's one of the qualities I admire about you. Yeah.
Bill: Well, thank you. I appreciate that. I think it's why we connected and it's led to a lot of great things.
Vitaliy: Hope so.
Bill: I don't know. I'm going to continue to do it. [laughs] It's been fun, it's led to great connections, and I've learned a lot, man. I started out on this journey trying to learn. I think one of the things that has been a little bit of a struggle is sometimes when you're in people's ear, they impute a lot of knowledge on you that I'm not sure is warranted. So, I just hope that people really take do your own due diligence seriously, because I mean it.
Vitaliy: When I publish articles, I used to write a lot more about individual stocks than I do now. In that case, when I write letters to clients, it's 30 pages and probably 20 pages of them are about individual stocks via one of the client’s accounts. But I noticed that I published fewer and fewer individual stocks in public. The reason for that because one thing I find is that sometimes people just read my article and buy the stock. That’s it.
Bill: Mm-hmm.
Vitaliy: And do zero research and that really, really bothers me. The reason it bothers me, because I might change my mind tomorrow, because facts change. Because I learn new information, whatever. But I don't feel I have an obligation to communicate to my subscribers and it's also important in the context of my portfolio, and how much I actually allocated this position. Because I may be writing about a company, it's 3% position. And somebody takes and puts 30% of their money into the stock.
When people listen to a podcast, when people read my articles, what you want to learn from them is the process of thinking. This is why I share them because I'm sharing different mental models, I'm sharing how I think about that. But I have a portfolio of stocks and by definition not all of them are going to work out and it just happened to be that the one I wrote about, then the other one I published is the one that won't work out. But I think people that listen to your podcast, there's so much they can learn from you, but the last thing they should learn is that, you bought this stock, I should go and buy this.
Bill: Yeah, I think that's right. When I used to do more single stock ideas on Value: After Hours for a while that was what I would do. I don't know, man, I'd be lying if I said some of it wasn't insecurity driven and trying to prove something. I just don't feel I have that anymore. I think people should expect less ideas out of me, not more. But if I'm doing research and I'm deep in something, I'm still going to ask single stock questions. But I don't know that I'm going to advertise single stock conclusions nearly as much as I once did.
Vitaliy: I think that's smart.
Bill: Yeah. Well, it turns out that a lot of people that have been in the business longer than I say that that is smart, and they were right, and I was, you know, ignorant to how right they would be. [laughs]
Vitaliy: I think you, sometimes in life, you need to make your own mistakes. But then as you learn from them and just don't make them again, yeah. Now, I do this.
Bill: What's funny is the commitment and consistency stuff. I really, to this day, I don't think I suffer from that that much, because I'll flip on a name pretty quickly. Once I see what I'm looking for it goes the wrong way, I'm out. But to your point, I don't feel the need to update people on what I've done. Naked Wines is one today that got totally destroyed and I had talked about that on a previous podcast. I hope nobody bought it. I sold it a long time ago when I perceived them to have inventory issues. I don't like to talk about that and I was never big anyway. So, it's just really hard.
Vitaliy: I have a rule. I never, ever, ever write about or even talk about tiny companies just because it's very difficult. When I talk about a small company and people buy, it is going to move the stock. There will be perception that I wrote that-- Even though, that's not why I did it that I did it to move the stock.
Bill: Yeah, no, you can't win in that situation.
Vitaliy: Yeah. Number one, people think that I wrote about the company to move the stock. If I ever talk about a company in public now, it’s usually the company where I can talk about as much as I want. It’s not going to move the stock. Couple of months ago, in fact, I'm not going to mention the company, but you and I went to a conference in Richmond, and I presented this company, and it was a small company, and I ended up doing a writeup about a few mental models I learned when I was researching the company, and I published those mental models, but I never published my stock idea. This is why I never talk about at a small conference, where it's a tiny group of small and sophisticated investors, and we talk about small company, because I know those people will be making the decision after-- They hear my idea and they'll do their own research. But I will never ever talk about this tiny company in public just because this perception is just very difficult to wash off.
Bill: Yeah, I totally agree with that and it's definitely where I'm going with the way that I do things, too.
Vitaliy: By the way, Bill, no fairness. I didn't come to that overnight. In late 2008, I think I went [unintelligible [01:56:34], which was a $500 million market cap company. I was very public about ownership and I was not trying to move the stock, but I just wrote my thoughts and my analysis. And now, today, I would never do this. My point is, I learned from the experience that because some people actually thought that I was trying to move the stock, which we really didn't. I was just sharing my thoughts. At the time, I was less known than I am today. So, don't feel bad that you're making the same mistakes. Because I made them before and now I don't make them, and I'm just a little bit older than you. [laughs] [crosstalk]
Bill: Yeah. Well, I think what I might do is, I may ping a couple people and say, “Can you send me the mistakes that you used to talk about that I just didn't pay attention to and this time, I'm ready to receive them.”
Vitaliy: [laughs]
Bill: I won't make them from now on.
Vitaliy: That’s right. Yeah, so, I'll take it more seriously this time. Yeah.
Bill: Well, sir, I have a child that is screaming in the background. I'm going to have to wrap this up. I have sincerely enjoyed talking to you, man, and thank you for coming on. We've been talking about doing this for a long time.
Vitaliy: Exactly. I wanted to wait until the book comes out. Because I knew this the only way I get to read the book. That's why I did.
Bill: I would have read the book. I read the chapter on the stoics when you sent it to me, but I am glad that we did this and I really did enjoy it. I hope that that someday I have the courage to write something similar. I think the podcast is my form of it for now. But really, I enjoyed it, man, and I thank you for sharing what you've learned, because I know that I have pages marked, I've got stuff flipped down, and I've got notes on the pages in the margins. So, I will be revisiting it.
Vitaliy: Well, this is great, I'm glad we did this podcast. Again, I'm a huge fan and you're doing a phenomenal job, and I'm glad we had an opportunity to do this-- [crosstalk]
Bill: Well, likewise, sir. It's mutual admiration. So, I look forward to future connections and we'll speak soon.
Vitaliy: Absolutely. Thank you. Thank you, Bill.
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