Episode 413: Buffett's Departure as Berkshire CEO May Be a Good Thing
On this week's Stansberry Investor Hour, Dan and Corey welcome Vitaliy Katsenelson back to the show. Vitaliy is the CEO and chief investment officer of Investment Management Associates. He's also an author, award-winning writer, and founder of "The Intellectual Investor" newsletter and podcast.
Vitaliy kicks off the show by discussing the difficulty in writing books and how he has evolved as an investor over the years. He explains that through continuous trial and error, he has learned not to dumpster-dive for bad stocks just because they're cheap. He emphasizes the value of good management, knowing your own strengths, and allowing yourself to say no to investments that aren't in your circle of competence. Vitaliy also gives his thoughts on Warren Buffett's retirement and Berkshire Hathaway's stock today...
I am not really enthusiastic about the stock. I mean, it's fully valued... I look at individual divisions. Like I look at Geico, and the last couple of years, it was kind of losing market share to Progressive. Then you look at Burlington Northern Santa Fe, and that railroad is not as nearly well run as other railroads. You can look at the efficiency ratios and you can see it's undermanaged.
Next, Vitaliy shares his experience running portfolios and how his strategy differs from Buffett's. This leads to a conversation about what could happen to Berkshire after Buffett passes and what made Vitaliy decide "I don't want to be like Buffett." He gives his nuanced take on learning from legendary businessmen and other historical figures without agreeing with them on everything. Similarly, the U.S. trading with countries it disagrees with (like Russia) is important. Vitaliy discusses his own experience growing up in the Soviet Union and being "brainwashed" to hate Americans. And he talks more about finding a good work-life balance, no matter your career...
I'm using investing as an example, but it applies to almost any profession. If you are obsessed about anything you're doing, then the rest of the world's going to get pushed out... You get sucked in and it occupies all the real estate in your mind... If you have an obsessive personality – if you really love what you do – then you have to put guardrails.
Then, Vitaliy dives into the psychology behind decision-making and willpower. He quotes one of his favorite sayings as a reminder to investors: "Knowing and not doing is not knowing." After that, Vitaliy shares why he believes Uber Technologies still has a lot of upside today. He notes that the stock isn't cheap, but it is undervalued. And he breaks down his reasoning for wanting to hold the stock long term, including its potential to incorporate Waymo or other self-driving cars on its app...
Waymo can put itself on Uber's platform... Like you know today you have Uber, UberX, Comfort, UberXL? There could be another one called Self-Driving. And Self-Driving is probably going to be cheaper... Let's say you go at 5 p.m. [when demand is high] and you see the Self-Driving wait is 40 minutes. You say, "You know what? I'll just get UberX." And at 2 p.m. [when demand is lower], you can get a Self-Driving in five minutes. "You know, I want Self-Driving." So Uber provides this platform where it's going to be hybrid for a long period of time.
Click here or on the image below to watch the video interview with Vitaliy right now. For the full audio episode, click here.
(Additional past episodes are located here.)
This Week's Guest
Vitaliy Katsenelson – nicknamed "the new Benjamin Graham" by Forbes – has more than two decades of investment experience. He joined Investment Management Associates in 1997 as an analyst and later became portfolio manager. Today, he serves as the investment firm's CEO and chief investment officer.
Vitaliy has authored several books, including Soul in the Game: The Art of a Meaningful Life and The Little Book of Sideways Markets. He has written articles for Barron's, the Financial Times, and many other outlets. He has been a guest on CNBC, Fox Business, BNN, and Yahoo! Finance. And he has taught a graduate investment class at the University of Colorado Denver – his alma mater, where he earned his bachelor's and master's degrees in finance. Vitaliy is a CFA charterholder.
Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.
Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Daily Digest. Today, we talk with Vitaliy Katsenelson, chief investment officer of IMA [Investment Management Associates].
Dan Ferris: Vitaliy is an old friend. I've known him many, many years. He is very insightful on investing and, well, life. So, let's talk with him. Let's talk with Vitaliy Katsenelson. Let's do it right now.
Corey McLaughlin: For the last 25 years, Dan Ferris has predicted nearly every financial and political crisis in America, including the collapse of Lehman Brothers in 2008 and the peak of the Nasdaq in 2021. Now, he has a new major announcement about a crisis that could soon threaten the U.S. economy and could soon bankrupt millions of citizens. As he puts it, there is something happening in this country, something much bigger than you may yet realize, and millions are about to be blindsided unless they take the right steps now. Find out what's coming and how to protect your portfolio by going to www.americandarkday.com and sign up for his free report. The last time the U.S. economy looked like this, stocks didn't move for 16 years, and many investors lost 80% of their wealth. Learn the steps you can take right away to protect and potentially grow your holdings many times over at www.americandarkday.com.
Dan Ferris: Vitaliy, welcome back to the show. Always good to see you.
Vitaliy Katsenelson: Dan, my friend, it's a pleasure.
Dan Ferris: So, it has been a little while since you've been on the show. Last time we talked about your latest book, which – it's a life book. It's not really an investing book, although certainly it does – certainly those ideas impact investing, too. Do you have any more books in the works?
Vitaliy Katsenelson: I'm working – actually, it's kind of funny you say this. I'm finishing another book.
Dan Ferris: Really?
Vitaliy Katsenelson: Yeah, no. The working title is called What a Life.
Dan Ferris: What a Life.
Vitaliy Katsenelson: And it's – and as you can guess, it's not about investing, either. So…
Dan Ferris: So, you're just getting out of the investing game entirely. You're going to write these books for the rest of your life.
Vitaliy Katsenelson: No, I – kind of like the investing game, I can only write about two hours a day. So, I – listen, I write two hours a day every day, so I just finished an 18-page investment letter, which you read parts of it, and so that was a letter to my clients. It was all about investing. Just – if you write an investment book, you have to have something very new to offer. And I feel like I'm not sure I have a book's worth of ideas about investing.
Dan Ferris: That's sort of interesting. I kind of know what you mean. But certainly, I get e-mails from you all the time about investing and it's a book's worth of e-mails a year. Right?
Vitaliy Katsenelson: Yeah, no. I think – but I think – so, I think when you write a book, the standards are much higher, and you need to have an arc. So, I have a lot of ideas – if you invest for a living, you have a lot of ideas. A lot of them are very timely ideas, which are not really book-worthy. But also, when you write a book, you need to have this arc of evergreen ideas. I'm not sure I have a book worth.
Dan Ferris: So, does that mean that you – it makes me want to ask you how you've evolved as an investor because I've known you for a long time. You've been at this game for a while now. And this discussion has me wondering if you've meaningfully changed how you do investing over the past, I don't know, 10, 15, 20 years.
Vitaliy Katsenelson: I think today I'm a very different investor than I was five, 10, 15, 20 years ago. I have evolved tremendously. And as I should. I think any – every investor should evolve over time. I think what's great about investing is it's kind of a contact sport because you're in constant contact with the market and that gives you feedback. And a lot of times your successes and your failures give you feedback, and then you process that and say, "OK, this is what I used to think, but now I realize that I need to tweak my thinking a little bit."
So, when I started out – and I think this is probably true for most value investors, including Warren Buffett. We start out as kind of dumpster divers. We go for the statistically cheap, crappy companies. And I think it's actually – the reason we do this, I think, is because at this point, we don't – when we start out, we don't have experience. And the sole experience we have – most of us passed second-grade algebra or whatever math. We know that 10 is greater than five and 30 is greater than 20. And so, you become – you start out as a statistical investor, statistical value investor. Over time, you learn the qualitative parts of investing. You understand the value of the mold, the value of good management versus bad management, the value of growth.
So, I think over time I became a more holistic investor or kind of a more well-rounded investor. So – and I found that some things today are uncompromising for me. I'll give an example. I found that my emotional quotient, my rationality, is very low when I own deeply cyclical, crappy companies. So, guess what? I don't own them. And by the way, this is the beauty of investing. And I think about – you and I might have talked about this. If you are a surgeon, an orthopedic surgeon, you can't really – and you discover that you are so much better working on the right knee than the left knee, you can't really say, "You know what? I'm just going to specialize in right knees." You can't do that. As an investor, I need 25 stocks in my portfolio. So I can say, "I'm only going to specialize in right knees," or "I'm only going to specialize in high-quality companies," because my emotional quotient is the highest. I'm the most rational.
So, what's interesting, and I look at my evolution as both – as a writer, and as an investor. And see if you can relate to this. As a writer, over time, I feel like I have a lot more courage and a lot more – what's the word I'm looking for? Yeah, a lot more courage to do more, to conquer topics that were – in the past were kind of off limits.
Dan Ferris: You give yourself permission. Yeah.
Vitaliy Katsenelson: I can write about – yes, thank you. I give myself – that's the word I was looking for. I gave myself permission to conquer topics that were kind of outside of what I'm supposed to write about. I'm an investor. Supposedly, I should only be writing about investing. But I've been writing about classical music, life, parenting, all different topics. However, as an investor, as I mature, I give myself permission to do less, to know what my circle of competence is, where I'm the strongest, and say "no" a lot more. That's kind of the – that has been a significant evolution for me now when somebody pitches me a stock and they say, "Listen, this is such an incredible retailer," but I don't do it.
Dan Ferris: Right. Yeah, I think what you describe is – and Buffett went through it, too – I think that's the sort of typical – if you eventually get the idea right, that is the typical evolution. And we've seen, I think, a lot of people have done this. A lot of people on the show have talked about it where they start out – they might even start out looking at chart patterns and trying to guess when the stock is going to go up or whatever. And then they say, "Well, that got me in big trouble. So, then I went on and became a statistical or quantitative value investor. And that got me in trouble. So, then I learned what a good business was. And now I just want to own good businesses."
Vitaliy Katsenelson: Yeah, I feel like I started in a good neighborhood of value investing. But it just – I can – now I limit it to fewer blocks where I feel the most comfortable in those blocks. By the way, I just came from Berkshire Hathaway, and I spent some time with Bob Robotti. And Bob is a phenomenal investor. He has been in it for a long time. And he is – he loves deeply cyclical companies. He – the more cyclical it is, the better it is for him. And I realized both Bob and I could be doing value investing and we have different experiences. We have different skill sets. And he'll do great in deeply cyclical stocks, and if I did what he did, I would do horrible – I would just not do a good job. And that's OK.
Dan Ferris: Yeah, you can have 10, 20, or 100 value investors and none of them own the same stuff. It's a very broad categorization.
Vitaliy Katsenelson: Yeah, absolutely.
Dan Ferris: It makes you wonder what it really means. What does it really mean to be a value investor then? If you can buy mining stocks or Berkshire Hathaway and high-quality companies, what does it mean to be a value investor?
Vitaliy Katsenelson: That's – to me, that is so simple. Value investing is a philosophy. Really, it's kind of an approach. It's an approach to things, OK. And there are some tenets. We can discuss them. But it's basically you have a long-term time horizon. All value investors I know have a long-term time horizon. You're looking for a margin of safety, so you want to buy companies that are undervalued. Now, I didn't say cheap. I just say undervalued. You can have cheap stocks that are actually expensive. And you can have a statistically expensive stock that's cheap. But "undervalued" kind of unites them. So, they're undervalued.
You are – Mr. Market is there to serve you and not the other way around. In other words, you realize, "When I come to work, I'm going to see a lot of volatility." And a lot of times it's very little. And I try to take advantage of that. So, this kind of philosophical – this is – I actually wrote an essay, "The 6 Commandments of Value Investing." And if your readers look for "The 6 Commandments of Value Investing," they'll find it. You can – they can read it.
Dan Ferris: All right. What – I mean, do you want to share a commandment or two with us?
Vitaliy Katsenelson: Oh, I just did. You need a margin of safety. You need to have a long-term time horizon. Mr. Market is there to serve you. Another one is that long-term stock prices kind of come back to the fair value. And I'm probably – and there's a couple more, but I'm just spacing out the other two.
Dan Ferris: OK. Well, that's cool. Thanks. Do you have anything to say about Buffett's retirement? I know you've been to the meeting many times. What do you –?
Corey McLaughlin: Yeah, that's – I was going to ask you, too. You were there, right, when he –?
Vitaliy Katsenelson: Yeah, yeah. So, I'm going to tell you two stories. I'm going to – first, I'm going to answer the question about Buffett's retirement. That guy is so brilliant because a lot of times he does things and then you look at this and say, "Oh my God, it makes so much sense." It just – "that was the only way to do it" kind of thing. So, OK, he's 94. He's going to be 95 in August. Still commanded – I mean, basically answered questions for four hours, which is incredible. But he knows that he still has a lot that – let's be honest. He has – I hope he lives until he's 150. But that's not how the world works. So, he knows that the best way to transition the company from him to Greg [Abel] is actually while he's still alive, because it would be a lot less destructive.
However, Buffett did it in a very brilliant way. He did – he's still chairman and Greg is CEO. And I would imagine even on January 1 next year, if Buffett is in good health, nothing is going to change from what it is today. Because think about it: Berkshire is a very decentralized company. It's not like Buffett over the last two years ago, even this year, or five years ago was actually kind of visiting each division and making sure that Borsheims is run well, etc. He doesn't even do those. He's sitting there reading newspapers and looking for stock ideas. Really. That's what he does. I don't think anything is going to change. So, if three years from now, Buffett is in good health, he's the chairman. Greg is really kind of CEO and COO [chief operating officer], really, but – and doing what he was doing today, and Buffett is still the one who is making whatever investment decisions. So, he did it in a very brilliant, kind of very delicate way. So, yeah.
But the second part of the story, and this is the sad part. And that is – so, imagine, I've been going to [the annual] Berkshire Hathaway [meeting] for 17 years. Seventeen years, show up, spend three days in Omaha. It's like a 17-year soap opera. Listen to me. So, last Saturday – and so, what happened this year, they changed the format. Somehow, they started things earlier. There was no movie preview. That's usually the first hour. Everything kind of got screwed up. So, at 12 p.m., three minutes to 12 p.m., I told my friends, "Let's leave a little bit earlier so we can get out and go to lunch." Because I figured the lunch is going to start in three minutes, and then we'll come back at 1 p.m. That's what usually happened in the past. And then I – we leave, come back at 1 p.m., and I read that Buffett announced that he's retiring. So, for 17 years, I'm attending this meeting, and I missed the finale basically. Yeah. Anyway. So, that's – and so, I have to admit that I was not there where he announced his retirement.
Corey McLaughlin: Well, you've got to eat, though, so that's OK.
Vitaliy Katsenelson: Yeah, I was in the same ZIP code, I guess. Yeah. But anyway, so it's – yeah.
Dan Ferris: That's funny. That's hilarious. So, the company, you don't expect the company to change much, which makes sense.
Vitaliy Katsenelson: Yeah, let's talk about Berkshire a little bit. We are shareholders, but I've got to be honest, I'm not really enthusiastic about the stock. I mean, it's just – it's fully valued. And it doesn't really – I would expect future returns probably may be better than the market just because the market is more overvalued than the stock. But I'm not necessarily – I look at how – I look at individual divisions. I look at Geico. And the last couple of years, it was kind of losing market share to Progressive. Then you look at Burlington Northern Santa Fe [BNSF Railway] and that railroad is not as nearly well run as other railroads. You can look at the efficiency ratios and you can see it's undermanaged. The reinsurance business, which is run by [Ajit] Jain, and that's really kind of – he's probably more important to Berkshire today than Buffett, in that LLC. And Ajit, I saw him on stage and he's probably in his mid-70s, and he didn't look particularly healthy, in all honesty. And so, if you watch, if you go back and watch the – when he was answering questions, you can just see he was not – he has some kind of neurological disorder or something. I mean, just so – you look at Ajit and you say, he runs the biggest and most important division under Berkshire, and if he's no longer there, how's that going to do? So, I don't know. I don't know who's going to replace him, etc.
So, I look at Berkshire – and also, it's kind of funny. As a consumer, outside of See's Candies, you and I can't really consume a lot of their products, except maybe buying Geico insurance or something. But there's one product that I consume all the time when I travel, and that's Dairy Queen. Because in the old Dairy Queen – and I'll be honest, those stores are really poorly run, just in my experience. And so, if this is kind of – if this is just a little reflection of what's happening in other businesses, then I say maybe it's a good thing actually that Greg is taking over and he's probably going to have a – [he'll] probably [be] more hands-on on what he's doing in the operations.
But again, it's a conglomerate. Some businesses are better than others. So, I look at this and I say, "Well, it's 1.7 times book" or whatever. It's not an overly exciting investment.
Dan Ferris: Yeah. And overall, some – Buffett has said some of the things that you've said. He said, "Well, we expect to beat the S&P 500, but it's not going to be anything like what it was. And Ajit is more important than I am." And a couple – so, he has made some of the same observations.
Vitaliy Katsenelson: Well, one more thing about Berkshire. He, Buffett, made an incredible investment in Apple stock.
Dan Ferris: Oh, yeah.
Vitaliy Katsenelson: And I would argue over the last – and he confessed that Tim Cook actually created more value for Berkshire than he did over the last five or seven years. And I think that played out and Buffett brilliantly sold most of his Apple stock. That's – yeah.
Dan Ferris: It's interesting because I saw Tim Cook. Tim Cook stood up and he was in the audience and I thought, "Wow, that's interesting." It's like Buffett sells 90% of his position and Tim Cook still shows up and it's sort of…
Vitaliy Katsenelson: Yeah, I was there last year when Tim Cook was still there and they announced on CNBC that Buffett reduced their position in Apple. And I – you could see this weird, surreal – I had this surreal experience. I see Tim Cook looking at a huge display that's – that showed that Buffett, that Berkshire Hathway reduced its position in Apple. And it was just kind of surreal seeing it last year.
Dan Ferris: That is, it's surreal. Tim Cook at the Berkshire meeting watching a screen reducing the position. That's something.
Corey McLaughlin: Yeah, I can imagine. I remember watching that one and him and those reports on the TV and him standing down there on the floor talking to everybody. I was like, "Oh, I wonder what he's thinking."
Vitaliy Katsenelson: That's right.
Corey McLaughlin: So, yeah.
Dan Ferris: And to me, I wonder how much Buffett does, what he has done just – more than doubling the cash position, more than tripling off of from one point to what it is today. How much – I'd really like to pick his brain [to know] exactly what that's about. When he comments on TV and says, "Well, we don't time the market and any of this stuff," and I'm like "You really don't?" I just – I don't know. It's – I just think all that – the timing of that with other things is kind of interesting to me. And I –
Vitaliy Katsenelson: Actually, I can explain it. This is so simple because this is what I experience running portfolios. The exception – I mean, Buffett is – I'm not Buffett obviously. But unlike Buffett, I don't have constraints of that every decision I make has to be in $10 billion increments. So, I just look – and look, I'm looking for stocks to buy.
I'll give you an example. We get – all our followers here are different from each other, and the biggest difference is when we get the money. So, when we get new money today, we're only 50% invested – 50, five-zero – and the rest is sitting in cash. I'm not timing the market. I'm just literally, I have a list of stocks that I'm buying, and I'm buying them at certain prices and the prices are just higher than my buy levels. So – and I'm looking globally, and I don't need to buy in $10 billion increments. So, I think what it is – it's a market timing in the sense that if the market was cheap, you would be buying. If you saw opportunities, you would buy it. Obviously, you're going to see more opportunities when there is a market sell-off. When the market is making not that far from an all-time high – what, 5%, 10% from an all-time high – then you're going to see fewer opportunities. And I think that's what really is happening.
Dan Ferris: Right. I wonder when we're – I wonder when that's going to happen.
Corey McLaughlin: Yeah, that makes sense. I heard our –
Dan Ferris: Oh, go ahead, Corey.
Corey McLaughlin: Yeah, I heard our Whitney Tilson did an interview yesterday and he mentioned something similar, like they just have to – when they do something they have to – it has to be so big that those opportunities just haven't come up. I just wonder – and that's the big question everybody's asking: What will they do with this huge cash pile eventually? What do you think?
Vitaliy Katsenelson: I suspect that at some point they're going to either stop buying back stock or maybe do a one-time-dividend kind of thing, because at some point, people will look at this cash pile and say, "If you can't put it to work and you have now $500 billion of cash or whatever – you might as well return it to shareholders." Depending on what the stock price is.
Dan Ferris: Right. You don't think they'd buy back stock with it? You think they'd pay it out?
Vitaliy Katsenelson: It depends on the stock price. If they think the stock price is not that attractive, they probably would just pay a dividend so you can buy something else with that.
Dan Ferris: Yeah, I have trouble believing they'll do that as long as Buffett's alive.
Vitaliy Katsenelson: Oh, I agree with you. No, I agree with you. No, I was talking about kind of post-Buffett. Yeah, I agree with you.
Dan Ferris: I've also heard people suggest that post-Buffett there's a potential to break it up and spin pieces of it off.
Vitaliy Katsenelson: It's very much possible. And I think to protect against this, the chairman is going to be Warren Buffett's son, Howard Buffett, if I remember right. That's why he's trying to protect from that.
Dan Ferris: I see. So, if that – that sounds reasonable. And if that's the case, I remember one time, gosh, this was many years ago, it might have been 15 years ago or so, but a very savvy investor named Rahul Saraogi, who has been on the program, he said, "Buffett's building an endowment." And I thought, "Huh, that's an interesting way of looking at this." And the idea of putting Howie in the chairman's spot so that they don't break it up kind of speaks to that a little bit.
Vitaliy Katsenelson: Oh, no, I agree.
Dan Ferris: It's interesting. Well, it has certainly been – he has certainly had a heck of a run unlike anybody else. I mean, and it's the – I think it was Jason Zweig and a couple other folks who have written it's the combination of the return, the 19.9% compounded versus the longevity of it, just for decades and decades and decades. That combination just has not existed. And it's amazing. And the part of Jason Zweig's article recently, it was titled – I think the title is "Why There Will Never Be Another Warren Buffett." And it –
Vitaliy Katsenelson: You know what's funny about this story, is that you see all this, and this is a guy who did all this – to make things seem more grander, he did this while drinking cherry Coke, eating burgers, and See's Candies.
Dan Ferris: And saying, "I don't exercise until very recently."
Vitaliy Katsenelson: Yeah. "I don't exercise." It's just like he won the genetic lottery when it came to his health. But that is doing it in such a great style, I would argue. If I could – let's say I had all his other genetics. But I – if I did this, I probably would have croaked at 65.
Dan Ferris: Yeah. Yeah, you and me both. I mean, I have great genetics. Both of my parents lived to be in their 90s. But I would really not like to bet on getting away with that for 90 years. It's just incredible. But yeah, what an amazing guy. And the other thing that Zwieg pointed out was that he's just completely unusual. He decided at a very early age to forgo any semblance of a normal social life or a normal family life. I mean, he really is a highly, highly unusual individual. And that was another reason why he said, "It's so – you can't expect anybody to live this way."
Vitaliy Katsenelson: And could I add to this?
Dan Ferris: Sure.
Vitaliy Katsenelson: I personally made a decision I don't want to live that way. I remember one of the most important books I ever read in my life was The Snowball by Alice Schroeder, which is a biography of Warren Buffett.
Dan Ferris: Yeah, great book.
Vitaliy Katsenelson: And that book was the most important book for me because this is when I realized I don't want to be like Buffett. I read it early enough that my kids were very young and I realized that Buffett is both a hero and antihero for me. And he was an antihero in a sense that he basically achieved all that at the expense of spending time with his children, which for me was kind of a compromise I was not willing to make. And to me, that would be like – if I did this, it would be a giant hole in my life. So, I think that was probably one of the most important lessons I learned from him as well.
And one thing important about this, you commented on my article about nuance.
Dan Ferris: Yeah. Great. Great. Very timely.
Vitaliy Katsenelson: Nuance is the ability – yeah, nuance is the ability to see this, to look at somebody and say, "I respect Buffett and here's what I can learn from him of what to do." Both to say – look at him and say, "Oh, and this is what I can learn of what not to do." An ability to say, "This is a person who is not perfect," because people aren't. And I can learn whether – Buffett is a kind of a – he's kind of an easy example because he's a person I actually respect. But also, there is other examples where – I think I mentioned in the article, like Henry Ford, who revolutionized the car industry and manufacturing. He was a horrific human being, I would argue, because he was – he was an antisemitic, horrible human being, and still there's a lot you can learn from him.
You and I love classical music and Richard Wagner was a huge – very antisemitic as well, and some Jewish people choose not to listen to his music. In my case, I recognize – I see both sides of it and I choose to listen to his music. So – but it's seeing nuance in saying that even horrible people may have something for you to learn from. And there is – one of my favorite quotes is from a person who to me is on par with Hitler, which is Joseph Stalin. And his quote is, "There is a certain quality in quantity." So, for – Stalin killed probably as many people as Hitler did.
Dan Ferris: Yeah, tens of millions.
Vitaliy Katsenelson: And so – anyway, so this is kind of the nuance.
Dan Ferris: Yeah. And there's a really great philosophical point in here. This is the reason why trade is so good, because trade is the point in time and space when two individuals or countries or organizations can meet in the middle. You can disagree on everything, but if you agree on the price and the quantity of the goods or services that you trade, that is just – that's the best that human beings can do, is to trade.
Vitaliy Katsenelson: I think that's a great point. That is a brilliant point. I think you're so right about this. In my new book, I'm writing about Elon – I'm kind of using – a few times in the book, I refer to Elon Musk. And a few people who read the early copies, they said, "Are you sure you want to be actually –?" I'm just – the kind of things I learned from Elon Musk, like first principles and a few other things. And people were like, "Are you sure you actually want to be mentioning Elon Musk, especially with what's happening today?" And I said, "Absolutely. I'm quoting Stalin." I mean, I –
Dan Ferris: They didn't say Stalin, they said Musk. That's funny.
Vitaliy Katsenelson: Yeah. So, he's not Stalin.
Dan Ferris: "Stalin's OK, but God, Elon Musk? Boy."
Vitaliy Katsenelson: Oh, yes.
Corey McLaughlin: Yeah, it is really – yeah, no, it's amazing how quickly that turned from all the people who wanted a Tesla to now you're going, "What's going on? I feel different about it." And you don't have the nuance to – you hear offhand jokes about it and people trying to talk around it, but it's – so, it's such a great point.
Dan Ferris: Yeah. Yeah, and I'm glad you brought this up so I could make the point about trade because I just didn't understand it. When I was younger, I thought, "Yeah, we shouldn't trade with Cuba" or something dumb like that. And I thought, "Well, that's the reason why you don't embargo the bad countries because you want as much – even if 80% of the goods go into the hands of the top people, like what always happens in these corrupt countries, something will reach the people." Something reached the people who were east of the Iron Curtain – namely, fax machines. Fax machines played an enormous role in the falling of the Iron Curtain in the late '80s there.
Vitaliy Katsenelson: You know what's interesting? When I grew up in the Soviet Union, I grew up hating America. Which is like – no, this is not – it was not unique to me. It was the whole Soviet Union hated America, because I was brainwashed to hate America. And then after the fall of the Berlin Wall, the American movies made it to America – I mean, made it to the Soviet Union. And I remember watching these movies and it humanized Americans. And it changed how Soviets started to look at Americans. Because you almost felt like the Americans are genetically evil. So – no, I'm not – this is what happens when you're brainwashed. And then you find out that Americans are just not that much different.
No, I got a funny story. So, most of the movies, most American movies take place on the East Coast or West Coast, so it's either skyscrapers or palm trees, especially in the '80s. It's kind of a Tango & Cash versus, I don't know, something else. And so – and then I arrived to Denver. And I had such a shock because Denver looks nothing like the East Coast or West Coast. There's no palm trees, no skyscrapers. It's flat.
Dan Ferris: Yep. Surrounded by mountains. Yeah.
Corey McLaughlin: Yeah, especially the airport. Yeah, it's –
Vitaliy Katsenelson: Exactly.
Dan Ferris: All right.
Corey McLaughlin: Can we get back to just a little bit of the part you learned from Buffett, that "I don't want his personal life," essentially. I feel like that's such an overlooked part of investing and just how you're able to balance, I don't know, either the interests of what you're invested in, the time that you put into it, the emotional energy you have to spend involved in it, versus if you wanted to, you could sit in front of a computer 12 hours a day and – or 24 hours a day – and trade or do whatever you want. But that balance between breaking from that and then having like a real life with the family, with kids, I just – I don't know. How do you think about that philosophically? Why is that so important?
Vitaliy Katsenelson: Well, first of all, so, people who go into investing – and by the way, what I'm about to say, even though I'm going to use investing as an example, it applies to almost any profession. If you are obsessed about anything you're doing, then the rest of the world kind of gets pushed out. You could be an artist, you could be a painter, you could be a litigator, and if you absolutely have soul in the game, if you have soul in the game and you're obsessed about it, then it just – you get sucked in and it occupies kind of all the real estate in your mind. And even though – and I'm speaking for myself. Even though being with my kids is kind of important to me, it just kind of gets pushed out by inertia.
So, knowing that, I created these guardrails in my life. So – and those guardrails kind of helped me to make sure that when my obsession takes over, kind of my addiction to investing takes over, there are certain things that I still have – it doesn't take over my life completely. So, there are certain things I do and I – OK, I – my two older kids are out of the house, but my youngest one is still – she's 11. So, I drive her to school every single day I'm in Denver. When I travel for business, I always try to take a member of my family with me, a lot of times my kids. So, we just went to Omaha. I took both of my older kids with me. I, on Friday night – and this is not my achievement, this is my wife's achievement – we have a family dinner and everybody gets together. So, I also – and Friday, Saturday we try to spend with kids together and not – I don't do any meetings really on Friday and Saturday.
And so, these things on the – like – yeah, before we go to sleep, I usually play chess with my daughter or we do puzzles or something. So, I try – and by the way, what it did over time, it created relationships with my kids where my oldest son, who is 24, he doesn't live at home but I talk to him three times, two or three times a day on the phone, sometimes more than that. And so, it created this connection I have with my kids, which is incredibly important to me. If I didn't have this connection, again, there would be this giant hole in it – in my life.
So, I think the – so, the most important insight is to know that if you have an obsessive personality, if you really love what you do, then you have to put guardrails where it's something you do automatic. Even though – it sounds kind of horrible – it's not like I dread driving my daughter to school. It's the opposite, actually. I want to drive her to school. But a lot of times kind of your obsession takes over and pushes it away. So, anyways, that's how I do that.
Dan Ferris: Yeah, that sounds good. That reminds me of Aaron Edelheit, our mutual friend Aaron Edelheit, both about the hard break and just saying, "I'm going to do this. I'm going to take this kind of break once a week regardless, no matter what." And you make it automatic. It's very much like when you told me – you just said, "I don't eat dessert." And you explained to me that you're just going to keep saying, "I don't eat dessert," and that's going to be your thing. You don't eat dessert. And even if you cheat a little bit now and then, "I don't need dessert." And when you have this constant thing, it becomes a – it goes from being an automatic sort of mantra to being a reality.
Vitaliy Katsenelson: It's like a non-decision decision. Right?
Dan Ferris: Yeah, right, a non-decision.
Vitaliy Katsenelson: You make decisions every day. Like, you – I'll give an example. You put a pack of cigarettes on the table next to me today. I don't smoke. So, it requires zero energy for me not to smoke. So, that's like a decision I would make today. If I say, "I smoke sometimes," then now it's a decision. Even if it's 1% of the time, that 1% of the time is not worth it.
Dan Ferris: Right. And if you say "sometimes," you're giving yourself permission that you don't want to give yourself because then 1% becomes 2%, 4%, 6%, 8%, 10%, and you're smoking. So –
Vitaliy Katsenelson: Exactly.
Dan Ferris: No, it's a good point. And I – when you told me that, I thought "Yeah, that's right." Now, I got lucky because I stopped drinking soda and I stopped drinking orange juice, both of which have sugar in them, and I lost 30 pounds like that because I just – I lost the taste for them because I had had surgery on my throat and it changed the nerves in my tongue, and when I got my taste back, these things that I drank every day didn't taste good. So, I got really lucky that way. But at around the same time, you had told me about the non-decision decision and I thought, "Oh, that's just brilliant." And I stopped eating dessert for quite a while, actually, after that.
Vitaliy Katsenelson: Oh, you look good. So, that really worked for you.
Dan Ferris: Right. So, another thing, one of my non-decision decisions is I exercise regularly. Period.
Vitaliy Katsenelson: Oh, so let me tell you what I do. I find – I've found personally that I have a willpower not to do things. So, in other words, doing all that stuff, drinking Coke and these kinds of things. But I don't have that much willpower to do things. So, here's what I did. And I've been doing this now for seven years. I – for a long, long time, I tried to exercise and I failed miserably. I joined – I would go to a gym for a month and then… you know? And then seven years ago, I hired a trainer. He shows up at this office twice a week, Monday and Friday. And for me, it's an appointment on my calendar. It's a nonnegotiable. And I've been – that ensured that I work out twice a week. And that has been absolutely incredible.
So, that basically – it's not that – now, he probably helped me to make sure that the dumbbell does not fall on my head or something, whatever. But that's not why he's there. He's there to – his job is actually just show up and basically kind of tell me, "Do this."
Corey McLaughlin: Yeah. He keeps you accountable. Right?
Vitaliy Katsenelson: Exactly. Yeah. Well, it's kind of like the way WeightWatchers works, because you get accountability.
Dan Ferris: I've heard that from absolutely every single person who has ever told me that they have a personal trainer. Every single one of them says the same thing: "Well, he's really there just to tell me to do it." Every single one of them.
Vitaliy Katsenelson: It's not a – it's the kind of thing – the thing is, it's not a logical thing. It's psychological.
Dan Ferris: Right. That's right.
Vitaliy Katsenelson: It's really – yeah.
Dan Ferris: Yeah. And it's funny. It's just a typical sort of human thing. They need – it's like admitting you need adult supervision and hiring an adult.
Vitaliy Katsenelson: It's funny. So, the – if you think about it, investing is a lot more about psychology than anything else.
Dan Ferris: Yeah, I was going there, too. Yep.
Vitaliy Katsenelson: Yeah, no. And I remember reading books on behavioral finance and I remember having this attitude that those are books about other people, not me. And then it took me a while to realize, "Oh, no, no, no, no. Those books are about me." And so, I'm probably almost, like – I'm self-diagnosing myself all the time, self-analyzing. And I think what's – if you're an investor and if you're self-analyzing yourself, it probably spills over into other parts of your life as well.
Dan Ferris: Right. You remind me of a book called Predictably Irrational by Dan Ariely. And someone was commenting on this book and he was sort of making fun of it because you can know all these things about yourself and they don't change. And the guy said, "Well, I'm not predictably irrational because I read the book." But you still are. You'll always be predictably irrational, which is – it's a very odd thing. And you mentioned the guardrails and the boundaries and your circle of competence. These are all the things that we need to do, aren't they?
Vitaliy Katsenelson: My favorite saying is: "Knowing and not doing is not knowing." And I tell this to myself all the time. Just because I read the book, if I don't apply it, what difference does it make?
Dan Ferris: Yep. Yep. Absolutely. "Knowing and not doing is not knowing." That is – that's brilliant. I feel like I heard that from someone recently but I can't place it. Do you know who said that originally?
Vitaliy Katsenelson: You know what? Here's the thing. Here's what I discovered in this new book I'm writing, that all quotes attributed to Mark Twain, Confucius, or some other ones, they didn't say any of those things. So, if you want to say Confucius said a thing, fine. Really, it says when we find – a lot of times it's just I don't know where they come from. We can't really force ourselves to say it's anonymous or something. And we just started to attribute it to people –
Dan Ferris: Confucius, yeah.
Corey McLaughlin: As far as I'm concerned, you said it first. That's the first I've heard it. So, that's who I'm going to go with. And it is amazing how many Mark Twain quotes I've come across in the last couple of years that are just not – you've got to fact-check them pretty hard.
Vitaliy Katsenelson: Yogi Berra had this perfect quote where he said, "I did not say everything I said."
Corey McLaughlin: That's a good one.
Vitaliy Katsenelson: No, because the same thing happened to him because he would – anytime something sounds wacky, they say, "Oh, it was Yogi Berra – Yogi Berra said it."
Dan Ferris: Yeah, that self-contradictory style of his. Yeah. "Nobody goes there anymore. It's too crowded."
Vitaliy Katsenelson: Exactly. Exactly.
Dan Ferris: All right, well, I think my listeners will think poorly of me if I don't ask you if you have a particular publicly traded stock that you're excited about these days.
Vitaliy Katsenelson: Wow. This is a tough one. And I really mean it because it has been very difficult to find something I'm excited. Let me tell you our second-largest position today is – and this is going to show you the evolution of Vitaliy over the years – is Uber [Technologies]. And so, we – Uber is about, I don't know, $80, $85 today. We see that the earnings in about four or five years, without really a lot of heavy lifting, are going to be around somewhere between – and I don't know, between $8 and $13 or so. And this is a company that's – so, I live in Colorado. And Colorado passed some kind of silly legislation that puts certain constraints on Uber. And I was – when I took Uber to the airport, this thing comes up and says, "Keep Uber in Colorado. Vote for this," or something. And I was thinking about this. If Uber was taken away from me today, my life would actually get a lot worse.
And this is – that's why this company is so – they're in a market where the winner gets the most. Not everything. And I look at them and I say, "Yeah, they'll be around in five years and 10 years and 15 years." Some of – not all the rides are going to be provided by drivers. There will be a lot of self-driving companies on the app. And it's an incredible company that basically can probably run for a long, long time. And yeah, it is not cheap statistically but it is undervalued in my mind. So –
Dan Ferris: Interesting.
Vitaliy Katsenelson: And full disclosure, we owned it for five years, four or five years. So – but so, we were buying it a month ago also.
Dan Ferris: Oh, OK. Interesting. Uber. I wouldn't have guessed that one.
Vitaliy Katsenelson: Well, I figured I'd make it interesting for your people, for your listeners.
Dan Ferris: Right. Can you – do you feel like talking about the business model a little bit or no?
Vitaliy Katsenelson: Yeah, sure. So, the – what's interesting about the business model, is it's a – it took them a long time to get – to become profitable. Why? Because it's a both digital and analog company. Let me give you an example of a digital company, like Facebook or Google. For them, going from the United States, for Facebook, going from the United States to France required very little incremental cost because all they had to do was translate the website from English to French. For Uber to go into every single new market, it required huge analog costs. They had to fight local taxi commissions. They had to set up – hire drivers on all these different things. So, it took them a long time to get profitability because their fixed costs were higher.
In addition to that, for a long time, they had to fight for market share because at the time, when interest rates were very low, there was a lot of crazy money, a lot of crazy capital going into this market, and you had to do seemingly irrational things to maintain your market share. Because at some point, when the interest rates – when the capital – goes away, whoever has the highest market share will keep their market share. So, they had to do this. So, when they bought it originally in January 2020, which is a great time except it's right before the pandemic – though, in my defense I did not know I was buying it before the pandemic. So – OK.
So, they basically turned the corner in the sense where the VC [venture-capital] world blew up. And so, the venture-capital money that kind of funded the competitors went away. And I could see how every – and this is, this key is very, very important. Every incremental dollar of revenue, 60% of that just went to the bottom line. So, in other words, the cost was fixed – and every – and we modeled it out and I realized that over time, as the revenues continue to grow, the earnings will skyrocket. And that's exactly what happened. I mean, obviously, it was interrupted by the pandemic.
And you could argue the pandemic actually helped them in two ways. No. 1, it has allowed the company to change its cost structure. It's very difficult to cut costs and rationalize things when things are doing OK. The pandemic gave them an excuse to really cut costs tremendously because it's one of the few kinds of digital companies that really did not benefit from the pandemic, based on the taxi side, on the Uber side. Now, they have benefited from Uber Eats. Uber Eats was basically – that market basically became significant overnight. And to my surprise, somewhat, now it's actually profitable for them.
Dan Ferris: Wow.
Vitaliy Katsenelson: What's also interesting – yeah.
Dan Ferris: That's surprising to me, too.
Vitaliy Katsenelson: Yeah, because they've got density. Because now, when you go to Chipotle to pick up a burrito, you may pick up three burritos and drop them off along the route. But what's also underappreciated about them is that they have a fairly significant – I forget the number, maybe a few billion dollars, and it's growing very fast – advertising business. Remember that Amazon, one of the most profitable businesses, as you know, probably on par with the AWS [Amazon Web Services], is advertising, because as long as you have eyeballs, you're going to serve them – you're going to serve them ads. So, when you are on the Uber app, they can serve you ads from Home Depot or whatever. Also, when you go to Uber Eats, now restaurants are competing for the placement on Uber Eats. So, advertising comes with extremely high margins. It's probably a 90% contribution margin, and overall, I think the margin may be close to 70% or so. So, that's very profitable for them.
And what was – if you look at Uber's financials for the last couple of years, as the revenues have been growing, their fixed core, their costs kind of flattened out. And now that's why their earnings are growing at a much faster rate than revenues. Now, what's also – so now there's a potential threat from self-driving. And so, I have to address this. And this is a very nuanced point. There are several futures out there, different versions of futures. You may have only – let's say there's only Waymo and nobody else. That's one future. Or there could be multiple Waymo-like companies. The ultimate – the best outcome for Uber would be if there are multiple Waymos, because it's not just – Waymo is not the only company that ever figured out full self-driving.
But let me give you the scenario why Waymo needs Uber, even if it's the only company out there. Here's why. Think about it. Waymo basically right now, they're buying cars. They're putting very – they're putting very expensive equipment on these cars. And so, for them, asset utilization is very, very important. So, in – let's say they come to Denver. Waymo comes to Denver. In Denver, just to make things awful simple, you have two types of demands. You have a peak time demand at let's say 5:00 in the afternoon, and you have a 2:00 demand. At the peak, the demand is for 100 cars and the low time demand is for 30 cars. So, 100 cars, 30 cars.
So, Waymo now has a choice. If it has 30 cars, it's going to have 100% utilization throughout the day. At 2:00, it can provide 30 cars and at 5:00 it can provide 30 cars. Except at 5:00, 70% of people will not be able to get a car, which would make the experience horrible. So, this is high utilization but horrible experience. So, high returns in the short term, but not the long term, because people will just stop using the app.
The other experience – the other extreme – would be they say, "You know what? We want to make everybody happy. We're going to have 100 cars." So, at the peak time, everybody's happy. Everybody gets a car. Everybody's happy. But at 2:00, 70 of the cars, 70% of the cars are sitting and doing nothing. So, they made a huge investment and the return investment is actually low. So, they are – maybe in the long term they'll be fine. Long term, they will – the customer experience is good, but the profitability of the company is actually not very good.
So, this is where Uber comes in. Waymo can put itself on Uber's platform. And today, when you go on Uber's platform today, you know how you have [UberX Priority], UberX, Comfort, XL? There could be another one called self-driving. And self-driving is probably going to be cheaper. So, whenever you go there and you see "self-driving" – and let's say you go at 5:00 and you see self-driving, and the wait is 40 minutes – you say, "You know what? I'll just get UberX." And at 2:00, you can say, "Oh, I can get a self-driving car in five minutes? I will order self-driving."
So, Uber provides this platform where it's going to be hybrid for a little period of time. Now, if you get – let's say we're going – let's say you're going to have multiple Waymo-like companies there. Then Uber – it's better for Uber because if Waymo is the only self-driving company, they arguably may have larger bargaining power against Uber. But also, what happens during that time is that number – because the price is lower, that creates a larger market. More people use it because now, instead of it being $25, it's $15 or whatever. So, Uber benefits. Whatever they lose in the dollar per transaction, they make up by number of transactions.
Anyway, so this is kind of how I'm looking at this. So, it's not a typical company for me to own. Sometimes, if I have an insight where I can look at the business and say, "Yes, I can see how this business is going to become even stronger five years from now," and I can see how the revenues change, the contribution margin changes, and the profitability changes, I can see, yes, it may look expensive on today's earnings, but earnings five or 10 years out actually look very – it looks undervalued based on those earnings. That's what I bought – that basically was the thinking when we bought it five years ago.
Dan Ferris: All right, that sounds great. Thanks for that.
Corey McLaughlin: Lot of interesting stuff there that I never thought about with Uber. Yeah, it's cool.
Dan Ferris: Yeah, it is. It's good to hear the way you're thinking about things. It's time for our final question. Same question for every guest, no matter what the topic, even if it's a non-financial topic. If you've already said the answer, feel free to repeat it. And the question is simply: For our listeners, if you could give them just one takeaway, just one thought today, what would it be?
Vitaliy Katsenelson: That is a such a good question because that assumes I have a menu of answers. And I think I maybe have one. So, let me see. I might have given you this answer before, but I think as I get older I appreciate it more and more.
Dan Ferris: That's fine.
Vitaliy Katsenelson: And it's just kind of – and it's going to sound very banal, but for me, it was life-changing because it just changed, kind of rewired, who I am. It's kind of, "Always be kind to everybody." And I'm – and one thing I've found, if I do this enough, I actually – what I think about myself, it actually changes. It's like – so you do it – now it's kind of funny. You do it for selfish reasons. You do it because, at the end of the day, it comes back to you. And it comes back to you not because you've been kind to somebody and somebody will be kind back to you – and that as well – but I think it actually changes what you think of yourself.
And to me, I am paranoid of trying to be kind all the time. I get a telemarketer who calls me at 8:00 at night, I'm kind to this person and I – just because what it does is consistency of behavior. Our programming, it's kind of a subconscious programming, is basically we are what we do all the time. It's very difficult for us being inconsistent, being kind to this person and not being kind to this person. And therefore, I aim to be kind to everybody all the time. By the way, I – just to be fair, I don't always succeed. But I try every day.
Dan Ferris: Right. Excellent. Yeah, "We are what we repeatedly do." Aristotle. That's very wise.
Vitaliy Katsenelson: Are you sure it's not Yogi Berra or –?
Dan Ferris: No, I'm sure. I've read it in the book myself.
Corey McLaughlin: Or Mark Twain?
Vitaliy Katsenelson: All right.
Dan Ferris: All right. Well, listen, man, it's always great to talk with you and I look forward to seeing you at this year's VALUEx [Intellectual Investor conference] in Vail.
Vitaliy Katsenelson: Absolutely. I'm looking forward to seeing you.
Dan Ferris: All right. Thanks a lot.
Vitaliy Katsenelson: Thank you very much, guys.
Dan Ferris: Well, it's always good to talk with Vitaliy. At this point, it's just kind of old friends talking about whatever we feel like. But I like the fact that when we talk with him the topics go back and forth between kind of life and investing. And it all seems to make a bit more sense.
Corey McLaughlin: Yeah, it's nice to get into a little bit about the personal side of it, too. I mean, I have his book right in front of me, the other – the last one he did, Soul in the Game, which kind of reflects that conversation we just had a bit. And it was cool. He was almost there for Buffett's announcement in Omaha, which I'm sure he'll be kicking himself for for a bit. But that was interesting to hear. And then some of that about Uber was things I hadn't thought of about it. You just – I think a lot of people think about Uber as what it was when it came out 10 years ago, not what it – what it could be. So…
Dan Ferris: Yeah, what it has become and what it could be. And I didn't know that Uber Eats was a really good business too. So, that was – because I haven't looked at Uber in a long time, which obviously has proven to be a mistake, it sounds like. But I'm glad he gave us that to chew on. And also, I'm glad that we got to hear him sort of think through the impact of self-driving, just the way he thinks about things. He's like that with everything. He's like that with all his ideas. It's great to just hear it, just to sit back and listen to him talk and let him spell out how he sees it because he may start out sounding like everybody else but by the time he gets to the end of his presentation or his thoughts it's usually at least a bit different, if not quite different, from what you hear from anybody else. So, we'll keep having him back on again and again for years and years to come, I hope. He's really great.
Corey McLaughlin: Yeah, that would be great.
Dan Ferris: Yeah. All right, well, that's another interview and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we really, truly did. We do provide a transcript for every episode. Just go to www.InvestorHour.com, click on the episode you want, scroll all the way down, click on the word "Transcript," and enjoy. If you liked this episode and know anybody else who might like it, tell them to check it out on their podcast app or at InvestorHour.com, please. And also, do me a favor, subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rating and a review. Follow us on Facebook and Instagram. Our handle is @InvestorHour. On Twitter, our handle is @Investor_Hour. Have a guest you want us to interview? Drop us a note at Feedback@InvestorHour.com or call our listener feedback line, 800-381-2357. Tell us what's on your mind and hear your voice on the show. For my co-host, Corey McLaughlin, until next week, I'm Dan Ferris. Thanks for listening.
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