Active Value Investing in a Changing World with Vitaliy Katsenelson

Episode Summary

Executive Summary: The conversation centers on Vitaliy Katsenelson’s view that investing must evolve from pure “intelligent” value investing into a more creative, adaptable discipline as markets become more dominated by quantitative strategies and unprecedented shocks like COVID. He argues that valuation still matters, but investors must be flexible, challenge assumptions, and recognize how market structure, interest rates, and changing business models can reshape outcomes.

Main Topics: From intelligent investor to intellectual investor (Priority: 5/5): Katsenelson explains that value investing needs a philosophy plus a recipe, and that his new book aims to add creativity to classic Ben Graham-style thinking. Market uncertainty and the Fisher Random Chess analogy (Priority: 5/5): He uses Fischer Random Chess to argue that today’s markets are less predictable, making old pattern-recognition habits more dangerous and requiring smaller position sizes and higher caution. Why the last decade favored growth over value (Priority: 5/5): The discussion breaks down returns into earnings growth and valuation multiple expansion, arguing that growth stocks benefited from both while value stocks lagged due to multiple compression. Good company vs. good stock (Priority: 5/5): Katsenelson emphasizes that even excellent companies can be poor investments if bought at excessive valuations, citing historical examples like Coke, McDonald’s, and Walmart. How value investing can be eclectic and creative (Priority: 4/5): He describes his style as eclectic, willing to own deep value, misunderstood businesses, or growth companies with embedded future value, rather than following a rigid formula. Changing minds and adapting to new facts (Priority: 4/5): He discusses the importance of revising views when facts change, using airline stocks and SoftBank as examples of public thesis revisions. Writing, discipline, and personal development (Priority: 3/5): The interview closes with a discussion of writing as a lifelong discipline that improves thinking, clarity, and self-awareness, and as a major contributor to his professional success.

Key Arguments: Value investing has both a philosophy and a recipe; many investors mistakenly focus only on the cheapness “recipe” and miss the deeper principles. Creative thinking will matter more because computers and quantitative strategies are hard to beat on rule-based, mechanical approaches. COVID and other shocks change business fundamentals so much that trailing earnings and prior assumptions can become unreliable. The last decade’s market performance was driven largely by valuation multiple expansion, especially in large-cap growth names, not just earnings growth. Growth stocks behave like long-duration assets: they benefit more when rates fall and valuations expand. Market-cap-weighted indexes channel new flows into the largest companies, which tends to reinforce growth leadership. A good company can be a bad stock if purchased at too high a multiple; historical cases show even elite businesses can underperform for years after valuation peaks. Investors should reduce position sizes and focus more on balance-sheet quality, management quality, and business resilience during uncertain periods. Publicly changing one’s mind is healthy if the original assumptions no longer hold; the goal is to teach thinking, not provide a finished answer. Writing regularly improves investing because it forces focused thinking, exposes ambiguity, and develops a more disciplined imagination.

Data Points: Years writing the new book: 2 years - Katsenelson said he has been working on his new book for about two years, then paused and rewrote much of it. Daily writing time: 2 hours per day - He described his long-running writing habit as a key reason for his improved thinking and writing ability. Annual writing time: 720 hours+ - He estimated that writing two hours every day amounts to at least 720 hours a year. Immigration year to the U.S.: 1991 - He noted that his family immigrated to the United States in 1991. Approximate long-run U.S. stock return: 11% per year - He broke down historical stock returns over the last 100 years. Return from price appreciation: 6% per year - Part of the long-run stock return decomposition. Return from dividends: 5% per year - Part of the long-run stock return decomposition. FAANG share of S&P 500: About 23% - He cited Facebook, Apple, Amazon, Microsoft, Google, and Netflix as making up roughly 23% of the index. Lost earnings at Uber: $5 billion last year - He used Uber as an example of a company that can still be analyzed through a value lens despite major losses. Airline workforce remote work share: 95% - He cited Comcast call center employees as an example of how remote work can reshape commercial real estate demand. Size of McDonald’s in early 1970s: About 2,000 stores - He used McDonald’s as an example of a great company that was still relatively early in its growth phase. Position count analysis: Look at 50 companies, buy 1 out of 50 - He explained that his team reviews many ideas but only buys a small fraction.

Pivotal Quotes: "The market is there to serve you, not the other way around." — Vitaliy Katsenelson: Part of his description of the philosophy behind value investing. "This is kind of intelligent investing plus creativity." — Vitaliy Katsenelson: He explained the premise of his book Intellectual Investor and how value investing must evolve. "When facts change, we change our mind." — Vitaliy Katsenelson: He described his process for revising investment theses and publicly updating views.

Implications: Listeners should expect more volatility in old investing playbooks, especially in a post-COVID, high-index-concentration market. Success may require creativity, thesis flexibility, and an emphasis on valuation, quality, and humility rather than rigid formulas.