Saturday, April 02, 2005
April 2, 2005 - Minyanville.com
Editor's Note: With this article Minyanville is proud to welcome Vitaliy Katsenelson to the 'Ville. Mr. Katsenelson holds a CFA and has worked in the asset management industry since 1995. He is currently vice president and portfolio manager with Investment Management Associates Inc., a private portfolio management firm based in Denver, where he manages portfolios for individual and corporate clients. “This American system of ours, call it Americanism, call it capitalism, call it what you will, gives each and every one of us a great opportunity if we only seize it with both hands and make the most of it" Al Capone My Russian accent and my Russian first name may mislead readers into thinking that I am an expert on Russia. I hate to disappoint folks, but I am not. I have not been to Russia since my gracious exit in 1991. And I’ve never looked back since. Quite frankly, I did not have any reasons to. This great country gave me everything I ever wanted and more. Initially, when I got nostalgic about Russia, I found a quick visit to a U.S. post office served as a great antidote. Its long lines, smile-less faces and atmosphere of human indifference cured any symptoms of nostalgia in a New York second. I don’t have any intentions to offend an army of mailmen; after all I want all my junk mail to be at my door on time. Their behavior is not a byproduct of personal qualities - not at all - but rather a result of an inefficient, semi-socialistic system where perpetual employment is guaranteed no matter what performance is, as long as one shows up to work. In Russia, another criterion was added to the guarantee of perpetual employment - employees had to maintain soberness through out the day. "History suggests that Capitalism is a necessary condition for political freedom." Milton Friedman
Next time your kid asks you about the pitfalls of the large government and / or socialism just take him on a field trip to a U.S. post office. As you can tell, from the above comments I think like a “capitalistic pig”; well, I am one. I truly believe that the United States has the best political and economic system, and although far from being perfect, it is truly the best there is. For subscribers that may not be familiar with my work, let me discuss more about how I look at the investment world. What is your investment approach? At Investment Management Associates, Inc. we are long-term investors. This is really a reflection of an attitude, not a time horizon. We have a long term time horizon, but so should anybody who invests in stocks in our view. If an investor cannot part with his / her money for five years or longer, they should not be involved in stocks. The long term view is also a reflection of our approach to analysis. We patiently wait for the stock price to misrepresent the true value of the company we own for a considerable period of time as long as we get compensated for this with earnings growth and dividends. We look for three elements in every company: Quality, Value, and Growth (QVG). All three elements have to be present for a company to secure a place in our portfolios. Unfortunately this market’s high valuation makes it very difficult for us to assemble an all-star team of stocks that meet all three criterions. Unwilling to compromise, we often have to resort to cash as we believe it is a better alternative. Do you use broker research? I find broker recommendations fairly useless. It is still very difficult for brokers to maintain objectivity in their advice since they are very close to the companies they cover. Sometimes broker research may make an interesting and informational read. However, I care less about their recommendations. We do our own research and when we make mistakes, they are our mistakes; we own them and learn from them. What are your thoughts on the market? First, in the constant search for new stocks and we are having a hard time finding new stocks to buy. It is payback time; this market will be paying for the excesses of the last bull market for a long time. We expect the stock market to go nowhere with plenty of volatility and micro bear and bull markets in the interim. Market valuation is likely to get more expensive as corporate America starts expensing stock options this June. This market will require some fine-tuning to the investment strategy for even a long-term investor. I will discuss those fine-tunings in my future articles.
Second, rising interest rates are likely to become a problem for overleveraged consumers. This is an area of a definite concern and we are staying away from stocks that have benefited in the past from low interest rates and high housing prices. Consumers are very exposed to rising rates as variable rate loans gained popularity. We are avoiding home improvement stocks and financial stocks that derived a large portion of earnings from refinancing. Higher interest rates will likely poke a nice hole in the real estate bubble. Unlike the stock market bubble, deflation of that bubble will take awhile.
Third, I think China is a wild card. I don’t think anybody really has a good read on the Chinese economy, since it is a black box. Economic numbers released by the Chinese government are as trustworthy as Soviet era press releases that were trumpeting Soviet productivity. Using history and human behavior as a guide, China is very likely to be over invested and a correction is likely coming in the not so distant future. In my mind it is a question of when, not if. Fourth, oil may become a problem for the economy in the short term as an increase in oil and gasoline prices should temper economic growth. However, in the long run oil prices are not likely to go higher. I remember reading in the late ‘90s definitive studies that oil would become a $6 commodity. The argument sounded so logical and so convincing that I had to constrain myself not to mortgage my house and short oil. As convincing as the $100 / brl oil argument sounds today, there a lot of reasons I can think of that would make that argument fall apart (i.e. weakness in China and India, hybrid cars, alternative energy etc.). The longer oil prices stay at a high level, the greater the certainty (in my mind at least) that they’ll decline to much lower levels, as prolonged high oil prices stimulate an increase in supply.
I look forward to joining the Minyanville team and adding my contributions to the site. Toddo (Todd Harrison) has assembled a truly all-star team which I feel privileged to be a part of. I hope readers will find my longer term investment perspective helpful and I certainly welcome any feedback.
Vitaliy N. Katsenelson, CFA
Copyright Minyanville 2005