Vitaliy Katsenelson (00:02:57):
So, when I look at this market, the market that looks very similar to, is a kind of 1999, 2000, 2001 correction. And if you think about what happened in 1999, you basically had already the technology stocks, the dot-com stocks were already going up for many, many years, maybe three or four years. So, the market was already expensive. On top of that, you had this Y2Ks care where everybody was concerned that if you take mainframes, that the old mainframes, once the clocks switch from 1900 to 2000s they’re going to go back to 1900. So, there was a huge investment, basically in technology, but the problem that the investment did not just apply to mainframes it also applied to all technology. So, Dells, and Ciscos, and Microsofts, the demand for their products was just off the chart.

Vitaliy Katsenelson (00:03:44):
But then 2000 came and the world kept going and these companies discovered, I’m talking about right now, Cisco, Dell, Microsoft, those are very good solid companies. We discovered that the previous year or two, the sales they made pulled future sales forward. Cisco sales declined, Dell sales stagnated, Microsoft sales actually went up and this is very important, but if you look what happened to the stock prices, Cisco today is still below 2000 high. It took Microsoft like 13 or 14 years to get back to 2000 high level. Dell, actually, I’m not sure because it went private, but I think it went private at the price that was far below the 2000 high.

Vitaliy Katsenelson (00:04:27):
So, this is point number one. So, there was a lot of sales that get pulled forward during the pandemic for a lot of high quality digital companies, talking about from Google to many other companies. But what’s also important to understand is that when you look again at the 2000 era, those companies found that when you are growing at very fast rate for a long period of time, you basically making an assumption that you continue to grow revenue at very fast pace. The reason it’s important, because you start hiring people as if you’re going to do this and you have assets base as if you’re going to do this. When growth slows down, you discovered that you have too many people and you have too much assets and therefore was going to happen, you have layoffs.

Vitaliy Katsenelson (00:05:05):
And this is important because I think what happened during pandemic, it was our Y2K moment for a lot of digital companies, because during the pandemic, we didn’t really know how the future’s going to look like post COVID, right? And a lot of these companies were basically assuming that we are in the new normal, digital normal and today, they’re waking up to the fact that I think they pulled a lot of growth from the future.

Vitaliy Katsenelson (00:05:29):
If you look at Zoom, it basically went from a child to maturity in two years, right? And now it’s a mature company and the earnings are over rating it’s cost structure, probably going to have to re-rate and a lot of other things. So the reason it’s important is that because what I learn about the market things go from one extreme to another. And the reason it’s important because when valuation gets very, very high and people get overly excited as sales growth slows down and as earnings collapse because as revenues decline digging at the cost is too high. And companies now taking charges lane of people what’s probably going to happen is that and this is what happened in 2001, 2002, the companies went from beloved to being hated and completely abandoned. And you could have picked up Amazon and some other high quality companies for 90% cheaper than they were at the top.

Vitaliy Katsenelson (00:06:15):
And so when I look at the market today and I look at the darlings of yesterday, that were too expensive for value investors like me, I think we’ll get to the point where they’ll become cheap enough, but we are not there yet. And so, I’m looking through Cathie Woods’s arc and taking mental notes of companies that like you on that are good businesses and trying to figure out how much you want to pay for them. So this is only on the dot-com 2.0 bubble. The other thing that’s going on in the comment today is obviously we have this significant inflation and we already had inflation before the war in Ukraine. And I think the war in Ukraine basically just added a lot more oil to the fire. And I think they basically additional that additional fuel coming from several sources, number one, Russia and Beylarus, BeyloRussia are the second and third largest exporters of potash.

Vitaliy Katsenelson (00:07:06):
And so the fertilizer prices are up significantly and the potash prices are up significantly. Also dinitrogen fertilizer is basically derived from natural gas and natural gas prices are up again because of the war. And so what’s going to happen over the next couple years or next year at least we are going to see most likely the cost of food will go up tremendously, just because fertilizer is the the lowest layer. It’s the most important input into food prices. And so you’re going to have lower yields because farmers will be more stingy with fertilizers. They’re going to have to raise prices for corn, for anything. And so, you’re going to have food inflation. Now you also you going to have oil prices higher on your gas prices higher. Also as interest rates go up and this point is very important. As the housing prices went up tremendously and as interest rates go up, their impact on housing is going to be significant.

Vitaliy Katsenelson (00:07:57):
Let me give you an example. The median housing United States costs about $450,000 as 30 year mortgage goes from 2.8% to 5.2% that difference is about $7,000 more year of interest payments. That is basically if a median income in the United States household income is about $65,000. That’s more than 10% of median income is going to be consumed by basically in other words, think about this, the house you were going to buy hasn’t changed. You just have to pay for that $7,000 more in interest payments. So that’s another source of inflation. And on top of everything else if you were going to buy a car, that car now is going to be… And you were going to finance it, that car now became more expensive. So what we are looking at is consumer has a limited budget and consumer has been attacked from different directions. Now spending more money on food, on gasoline, on heating on basically the cost of financing now is higher.

Vitaliy Katsenelson (00:08:52):
So when we look at the economy today, I think there’s a very good chance that what’s happening. May basically, it’s very stagflationary this inflation to stagflationary, I don’t know if it’s going to send us into a recession or maybe we’re already in a recession, but I know this is not good for the economy. So as a stock picker what my company does, we build the portfolio of individual stocks. We have basically shifted portfolio from discretionary spending. So we have very little exposure to stocks that rely on the discretionary spending from consumers because I think that’s going to be the area that will be attacked the most.

Trey Lockerbie (00:09:29):
It’s certainly interesting times that we’re living in. I mean, you brought up Cathie Wood, she’s now selling Tesla, buying General Motors. We’re shifting into a new era to your point. Those tech stocks are hopefully going to get cheap enough where folks like us can actually come in and do a Bill Miller strategy where he bought up Amazon, right at the trough of 2009, so to speak, but just to add a contrarian or devil’s advocate take to what you just said, especially around housing. Because my concern with housing is that there’s just still a lot of liquidity out there, institutions now entering the market, buying up some hard assets in some regions, major metropolitan areas, for example that could continue to drive this thing higher and higher, higher. I’m seeing it in Los Angeles, so I’m speaking from my relative experience here, but I’m just concerned, even though interest rates are going up for the consumer, it seems these institutions are finding ways to enter this asset class to continue to drive things up because it’s simply a hard asset. And they’re just trying to protect against inflation that way.

Vitaliy Katsenelson (00:10:27):
I think that is actually a very, very good point. So what I described is paid you right, is basically direct impact on the consumer, right? But think about Blackstone buying these houses, right. And they rented them out when they rent them out. Those rents would be higher as well. And also Blackstone the institutional buyers. They are still a small part of the market, not the whole market. And if the housing prices start declined, which by the way, those things do happen, then their interest in buying houses may actually decline as well, right? But anyway, you look at it. If they buy houses and then they rent them out, then they’ll be raised in rents, right? So if you’re a consumer who now renting that still impacts your budget, right? Because you just writing large check the Blackstone, but that’s a very good point.

Trey Lockerbie (00:11:11):
You mentioned Microsoft struggling for about 13, 14 years. There was this lost decade. If you will, around the late nineties to the 2008 timeframe where the market just simply recovered to where it was. And I’m curious, given that you wrote this book, this little book about sideways markets, do you see any prospect of that what we’re entering into, where it’s just going to be a decade or a lost decade period where we won’t recover to where we just were only a few months ago for a significant period of time?

Vitaliy Katsenelson (00:11:41):
No, I think actually if I had an interest in this, I would probably be re-releasing my book again, the little book of sideways markets, because via primed for this environment, Microsoft is a good example. Let’s examine why this stock hasn’t gone anywhere. Okay. I forget the numbers now, but Microsoft valuation was trading 65 or 75 times earnings after that Microsoft and I’m right now doing from memory, but probably grew earnings and revenues might be 15% a year. And it just took 12, 14 years for Microsoft to grow into its valuation of to solvent. So it’s price earnings. When I don’t know, from 65 times earnings to 12, even though while its earnings are growing and this is why the same, the price you pay actually matters is so important because it does let me give you even better example. There is this company who basically is the most important company in the wireless space.

Vitaliy Katsenelson (00:12:32):
Qualcomm, imagine you are in 1999. The Qualcomm basically has a tax on every cell phone sold globally. Okay. Because it basically has a patterns for 3g, 4g, and 5g. So every time you buy a phone, about 3% of the price of the phone goes to Qualcomm. Just imagine how beautiful that business is. If you bought Qualcomm in 1999, think the stock was so expensive that I think it took you like 15 to 18 years to get your money back again. If you only look at the stock price, you would’ve seen this stock declined first and then basically just did nothing for 15 years while it was happening. It’s earnings and revenues were growing very steadily, very, very fast. It just was too expensive. So if you look at the market today, overall, the market last year was very expensive. There were packs of the market were insanely expensive.

Vitaliy Katsenelson (00:13:18):
Like if you basically look at Cathie Wood’s portfolio, that was the insane part of the market. And now what’s tricky about this. I don’t know what the economy is going to do for the next 10 years or 15 years, because today, if you think about where we are today, the government that is incredibly high and our now spending is not declining. So most likely we are going to have higher interest rates going forward. And that’s going to be this table of this economy. What’s important to understand. We haven’t really seen high interest rates since 1980s, since 1980s, interest rates decline. And we haven’t seen much inflation either. So as interest rates go up, it’s a headwind for the economy and it’s a headwind for the economy. They got accustom to very low interest rates. So as they go up, they basically slow down a growth.

Vitaliy Katsenelson (00:14:05):
So now you take this, you have high valuations. And actually instead of having normal growth, the growth going forward is probably going to be slower. So therefore that’s a recipe for very unpleasant markets. So this is why today as an investor, having significant margin of safety, buying companies who can still maintain their earnings power and grow in an fellowship environment. And who’s basically whose earnings are not really or revenues are not tied to the health of consumers health. That’s how you survive in this environment. And I think this is probably the right and the most important time to increase your margin of safety. So if in the past you’re looking to buy stocks as a dollar for 60 cents. Maybe now you want to try to buy it for 40 cents. So that’s basically how I look at the market today.

Trey Lockerbie (00:14:53):
Given that you focus so much on stocks. I’m curious because there’s an adage that the stock market is where you should go during times of inflation. This is kind of you both sides of this argument, but essentially the theory is that these companies can raise prices, which then increases earnings and it washes out through inflation. Is that your approach to maintaining with stocks, are you operating with that philosophy? Meaning if we’re entering the secular timeframe where interest rates will just continue to go up for the foreseeable future, is stocks even better, even though the economy might be suffering, are stocks generally the asset class you want to focus on?

Vitaliy Katsenelson (00:15:26):
So think about stock price, like ignore dividends for a second. Okay. Stock price goes up or down and long term for two reasons. Combination of these two reasons, earnings growth and change in price to earnings. So even if number, we produce stays the same and we have inflation. The GDP will grow in the nominal terms, right? So therefore some companies will be able to grow earnings better than others during the inflationary environment, right? But in general earnings will grow with inflation. So that’s the good news. The bad news is that the price to earnings, which is still very high will contract because when your interest are low, you are discounting the future at low interest rates. When you have high inflation and high interest rates, the future is a lot less exciting. This high interest rates. So it’s a combination of two things.

Vitaliy Katsenelson (00:16:16):
So the inflation is good for nominal. So stocks will benefit because in general companies will be able to raise prices. And it’s going to show up in the nominal earnings, but price earnings will decline, which will wash away some of the gains you get from earnings growth. So this is why it’s a tricky environment. And then you want to own companies that have price and power. As an example, if you are a retailer that has exposed to a lot of discretionary spending, you will be the casualty of inflation because consumers will have less money to spend at your stocks. If you’re a grocery retailer, you’re probably going to be okay. As an example, like Warren Buffet, when somebody asks them, what are the best tax to during the inflation environment, he said, “You want to own a claim on somebody else’s revenues.” Just think about this.

Vitaliy Katsenelson (00:16:59):
I’ll give you a couple examples. And I’m not saying those are good stocks. I’m just giving you examples of businesses. They think of McDonald’s. They collect franchise fees from their franchisees. As franchisees revenues go up. McDonald’s cost don’t change as much, but they do that whatever, 5% or 7%, they charge that nominal number goes up. Another one would be, let’s say MasterCard or visa, right? Again, it’s a claim. They collect 50 base points of 1% of every transaction, right? As the dollar balling goes up, just because of inflation. Even if we don’t produce more widgets, their revenue goes up, even though their costs, don’t go up as much. Let me give you a couple examples of company’s VO so VO own pipelines. Think about a pipeline. You basically have fixed assets that have almost an infinite life. If you just maintaining your pipeline, those assets have a almost infinite life.

Vitaliy Katsenelson (00:17:47):
And when the pipeline build those assets, that’s in the yesterday’s cost. Now they are able to raise prices with inflation. A lot of the contracts allow them to raise prices with CPR, PPI. So the revenues go up where the costs are mostly fixed and don’t change. What’s also important to understand maintenance capital expenditures for pipelines are very, very small. When you look at the business, you want to look how much maintenance capital expenditures they have in relation to the assets. In case of pipelines, those maintenance capital expenditures. I’ll give an example beyond enterprise products which has about $8 billion operating cash flows. They are maintenance capital expenditures, about $500 million and I’m be conservative. So even that maintenance capital experience goes up 30%, the revenue, let’s say we have this runaway inflation, the revenue going up by 10%, that contributes $800 million. If the cost go up by 30% that now their margins too can be much healthier. Anyway, as an example. So that’s how we basically position perform like at a one stock at a time.

Trey Lockerbie (00:18:51):
Given that you’ve seen a couple of these big correction periods, are there any tips or tricks you’ve picked up? Because obviously as things get cheaper, it’s exciting, but there’s always that fear of catching a falling knife, for example. So are there any indicators that let you know, “Okay, we’re nearing the bottom, we’re getting there.” A lot of times there’s X amount of companies hitting their 52 week low or whatever. It might be just general indicators that you are watching closely right now.

Vitaliy Katsenelson (00:19:16):
You usually look for something else you look for when the cloud stocks decline today. And there’s still interest in buying them. That usually tells me that’s too soon. It’s when people start treating them as a radioactive waste. I remember in 99.com companies would rename their name to.com and the stock would go up 30% just on changing its name and then Southern one, Southern two.com. Companies would scrape off the name that come from the name because it became radioactive. So at some point we are going to have this the tech stocks, they are still darlings. At some point, they will become radioactive and nobody wants to write about them. Nobody wants to talk about them. Nobody wants to show them in their portfolio. This is when you want to buy them. That’s number one, number two, what I learned is that we go and I already mentioned it.

Vitaliy Katsenelson (00:20:01):
We go from one extreme to another. We go from love to hate. And so you’re probably going to be able to buy these companies in this environment is very dangerous to look what valuations were over the previous five or 10 years. This point, actually, this is probably the most important point I can make about this in this environment. When we analyze companies, we focus on absolute valuations. In other words, what is this company worth? Just based on its cash flows. It’s very dangerous today. You look at a company let’s say it’s declined 50%. And you say, “It’s only trading at 50 times revenues.”

Vitaliy Katsenelson (00:20:36):
Okay. And now it’s cheap because it used to trade at, I don’t know what 40 times revenues, well, the problem is that 40 numbers is wrong. And so it could be that 50 times revenue number as well. So you really should look at the best job. You can figure out what the earnings power of this company is always going to be and value those cash flows. And that’s how you arrive to the price. What do you think it’s worth? And then you want to still take a haircut and say, “I want margin of safety.” If the future is not as bright as I think it which it may not be.

Trey Lockerbie (00:21:06):
So when we study value investing, we come to this conclusion that we want to buy and hold or at least that’s the often conflation between the strategy and what other value investors are saying. And you take it as gospel. You’ve written a book about active value investing. So I’m curious over the next 10 years, how active is too active and how active is too little active. If we want to see these environments shifting as quickly as they have been when should we just buy and turn the screens off and wait 10 years versus maybe managing actively.

Vitaliy Katsenelson (00:21:38):
I’ll give you a couple answers. Number one, the this continuous boom markets train you to buy and hold, right? Because every single time you sold it in the past price, earnings got higher and higher, right? A lot of times, not because the earnings grew, it just investors were willing to pay more and more. Okay. If we are entering into sideways markets, the opposite happens. The price earnings keeps declining, right? And actually they teach you at the end, you would want to be buying and selling all the time. The truth is somewhere in the middle. So if you want a company that is your next Apple, and when I say next Apple meaning company can compound earnings at 20% a year for next 20 years.

Vitaliy Katsenelson (00:22:17):
Now this earnings grow through overcome almost any PE compression that the market will throw at it. So in that case, when we continue to be buy and hold investor, just because if the company has a very high return capital and has a huge growth runway ahead of it has a mold then be buy and hold investor is a stock. Those exceptions though, right? So during the sideways markets, you want to buy companies when they’re undervalued, when they get to fairly valued level, you want to sell them and it’s not trading. It’s basically just your realization, that extra bonus that you used to receive from price earnings, going from below average, to average to much budget average is that’s kind of the staple of the bull markets, not the sideways markets.

Trey Lockerbie (00:23:00):
Thank you for that. So now I want to transition a little bit into your book because it is a topic that we actually strive to cover on this show while we love the tactical investing things. I think we’re all here to learn more about the philosophies to just live a more meaningful life, because I think there’s a lot of synergies between investing and living a meaningful life that you explore in this new book. And something I actually learned from the book that I didn’t know is that the actual ancient Greek translation of philosophy is quote unquote “Love of wisdom.” And when you study successful people enough, you often find this common denominator that they’re just these voracious learners and you like me, I think were not a great student earlier in life. And so I’m wondering where things kicked into high gear for you when you found your quote unquote, “Love of wisdom.” Enough to you decided to spend your life studying it.

Vitaliy Katsenelson (00:23:48):
Okay. So let’s talk about writing first, because I think that’s part of the answer. So I started writing in 2004. Okay. At that 0.1, I had a child. I had my son Jonah was three or four years old. I completed my graduate degree in finance and I was teaching actually investment class@sudenver and street.com was looking for writers and they were not paying anything, which was great because by not paying me anything they were paying. So I started writing for the street.com and I realized I really liked writing. And I got to admit, I hope they don’t have a archive in my articles because you read my early articles. They were incredibly boring, because I had a very little self conference and I wanted to make sure that all my numbers were right to the decimal. And it were very proper and very boring. And then one day I wrote about this is maybe 2005.

Vitaliy Katsenelson (00:24:37):
My son is four years old. And at the time I had this Tebo device that would sit on top of your cable box and I had issues with box and I called Tevo and remember this is Southern 475 and the voice. So they had a voice recognitions software that ask you question and you have to answer it. And as you can tell, I have an accent. And so I would speak to the recording and it would like to the phone, it would not understand me. And then my four or five year old son here is playing and what I had to do, I gave him the phone and I basically would tell him what to say into the phone. And Jonah spoke with this perfect Disney accent. And this is how I could communicate with Steve customer support. Why it’s important? What I just told you, I wrote a small article about this 500 words.

Vitaliy Katsenelson (00:25:22):
And on this response to this article was so great. Okay or it was like I got more emails and feedback than I on anything else I written before. And this is what I realized that being myself is very important. And I think that article was probably instrumental to shaping me as a writer. So point number one in life, we have this little moment and that was a little moment. I call it TiVo moment, but we need to pay attention to that. And luckily I did and that changed the way I write. But I still continue to write about investing and would write me about investing in my articles. We published in Financial Times institutional investor and I would send them to my friends. And when I was sending to my friends, I would also write something about my personal life. And then as my email scrubs grew, it wasn’t just my friends who were receiving my articles and my personal notes.

Vitaliy Katsenelson (00:26:12):
And people start to tell me that they came to me for the investment articles, but they stayed for the personal stories. And what changed with me is this writing basically forces you to think a lot more because it’s a focused thinking. Think about it. I wake up every day at five o’clock for 35 o’clock and are ride for two hours. That is a two hours of concentrated thinking. And a lot of people don’t have that luxury and therefore they just don’t get to spend as much time thinking about things. So that basically turned me into a thinker. And over time I started to write about and I also love classical music and you and I share interest in music. And what I learned is this. If I write about this gives me an opportunity to learn more.

Vitaliy Katsenelson (00:26:57):
And this is another thing to understand. When you write daily, you become a writer. So somebody says what you do for a living. If I don’t want to tell, them talk about stock market. I tell them I’m a writer, but my daily job is not a writer. I’m an investor. However, since I write daily, part of me is a writer and why it’s important because as a writer, you always look for stories as a writer, you look at life differently. So my father paints and you can see the paintings behind me. Those are my father’s paintings. And whenever we would travel on vacation, my father would always put his hands up like this and always look for something to paint. This is what painters do they look for? What they want to paint, as a writer you always look for stories. So I wrote about first about investing that about life, learn about classical music. And when I start to write more about classical music, they changed what I read and I start to read more about classical music. I think writing basically turned me into what I am today.

Trey Lockerbie (00:27:50):
Let me ask you a tactical question about that. So you mentioned you write for two hours a day. Is there a hard stop at that two hours? Meaning if you’re on a roll and you’re like really cranking and you have this idea you want to get out, are you disciplined enough to say up two hours are up, go save some more for tomorrow.

Vitaliy Katsenelson (00:28:05):
All right. Let’s get into inside baseball a little bit. Okay. So there two type of writers. Okay. There are two philosophists when it comes to writing. And there are professional writers who basically says, I’m going to write 1500 words a day. Those are people who Michael Bryce and Jean Grins and others who basically would write a novel or two a year, right? I look at writing a little bit different. Basically. I create a space two hours and from 5:00 to 7:00 I write. And that’s a space that basically where I show up and I have no idea if I do use or my subconscious will show up as well and what I’ll produce. And so a lot of times I would show up and I would sit in a stare at the computer and produce nothing or produce complete junk. In the beginning, I would get upset that my wife would say, “How much did you write today?”

Vitaliy Katsenelson (00:28:52):
And I would say, “Eh, the paragraph.” She said, so you spent two hours in the basement or that’s what you did. And at first I was upset with myself for how ineffective I was. But then I realized that actually, when I leave my chair, I wrote for two hours, even though I have nothing to show for this, I implanted seeds in my subconscious. And then while I’m taking a shower, going for a walk, this is where ideas will come. And next morning, when I show up, I’m going to have something to say. So most of the time I’m constrained by seven o’clock because I have to drive my kids to school in the Summertime when I don’t have to drive my kids to school, if they sense is just flowing, I might stay later. But a lot of times it just life comes in and by the way I have three kids and my youngest one is eight years old and my oldest one is 21.

Vitaliy Katsenelson (00:29:40):
And I still remember the days when I was driving my one year, who is now 21 to school and now he doesn’t need me to drive him to school anymore, right? And so therefore, when I drive my eight year old to school, I realize that I only have now that nine years or eight or nine years. So when I drive her to school, I try to be present. And I look at it as such a huge privilege that I get to drive my daughter to school. And so this is why, so I don’t look at seven o’clock as, “Oh, I have to drive my daughter to school.” And therefore I can’t try it, actually look at it as a good thing. I look at it as I get to spend the 20 minutes in a car is my world

Trey Lockerbie (00:30:16):
Reframing. Well, we’re going to talk about that as well. So the reason I asked about the two hours was I remember I heard Seinfeld talking about his process and he had a hard stop. And he said it because what you highlighted earlier that it’s hard work. He compared it to going to see a trainer and saying, how long is the session? And the trainer being like, “It’s undefined.” No, he’s like, “No, you have to have a 30 minute time limit on it to get through it.” You almost have this positive thing to look forward to at the end of it, which is interesting.

Vitaliy Katsenelson (00:30:42):
It is. And it’s also writing is not always fun. It’s a lot of times it’s freshers. I think Jerry is absolutely right. Having a defined two hours is very important because I know it’s a commitment and Seinfeld has another trick where he tries not to break a trick. So he shows up, he wants to write a joke every day. So I write this few exceptions every single day, when I go on vacation and I travel, things get complicated. But when I’m in Denver, I write every single day without exception, even on Saturday and Sunday.

Trey Lockerbie (00:31:12):
Yeah. I think Seinfeld Xes out calendar squares on his wall. So he actually visually sees the breaks in his. It was just so interesting. And this applies to so many things. We’re going to talk a little bit about having a process and systematizing things for investing. And it’s funny to see the synergies across multiple interests. So that’s a good habit to develop and I want to talk about good and bad habits. So if anyone is familiar with coding, you understand that an algorithm for example, is just essentially, if this then.

Vitaliy Katsenelson (00:31:39):
Yes.

Trey Lockerbie (00:31:40):
And we can use this framework for developing good and bad habits. So I’m curious for you, what are some examples where you’ve used, if this then to either enforce a good habit or even replace a bad habit.

Vitaliy Katsenelson (00:31:52):
I give you two for the price of one. So it’s not in the book, so this is going to be interesting. So I found that I drink a lot of coffee and I like coffee. As silly as it sounds, I like the taste. So at some point I found that I drink literally maybe six, seven cups a day, which is too much. So I created this if this dawnn habit. So for every cup of coffee, I do 30 pushups. So if I’m at the office or at home before I can have a sip of coffee for every cup, I do 30 pushups. So the number of cups declined to two or three and I do now 60 to 90 pushups a day. So think about this. The bed habit declined. And I’m also doing extra exercises.

Vitaliy Katsenelson (00:32:32):
So James clear this phenomenon book, Atomic Habits. And he basically says, when you’re trying to create a habit, the whole idea is that you want to make it as easy as possible to create this habit. So if you want to run in the morning, put your running shoes. So it’s easy to see them and prepare your running clothes. So it’s easy to see them. For us, the issue was, I live in Denver. So we go skiing in the Wintertime. And the issue is skiing is actually, we have to recreate a habit every single year because we don’t ski. We only ski four months a year, right? So for eight months I don’t ski. So that habit gets interrupted. So what we did as kids. We actually have ski bags that are packed the night before and all the boots are there and our hours keep clothes are prepared.

Vitaliy Katsenelson (00:33:17):
So when we wake up in the morning, we don’t have to put a lot of effort to go ski because we still have to drive for two hours to go skiing. And then the first day of the season is the most difficult one. The third one is much easier. So when you try to create a habit, let’s come back to your writing, okay, don’t focus on how well you write. Don’t even all focus on how long you write, focus on showing up and start with five minutes. And for five minutes, all you do is write, okay, and do this for 20 days and then raise it up to 20 minutes. And just the whole idea of creating habits is just persistency.

Trey Lockerbie (00:33:51):
Touching on that consistency or persistency of showing up to write every day. It reminds me of actually one of my favorite poems of all time. It’s by Charles Bukowski, it’s called Between Races. And the poem basically goes through this where he’s at the horse races, where he is every day basically. And a guy comes up and wants to interview him. And he just says, no, no, no, I don’t do interviews. I don’t want to do anything. And then the guy finally breaks down. He says, look, it’s not really an interview. I just want to know what it takes to write. He says, basically talking to the young man made me feel bad. They thought that writing had something to do with the politics of the thing. They were simply not crazy enough in the head to sit down to a typer and let the words bang out.

Trey Lockerbie (00:34:27):
They didn’t want to write, they wanted to succeed at writing. So when you talk about the persistency of being a writer, is that something that can be learned? Meaning it just takes showing up every day and doing it and eventually you become a good writer or do you have to have something in you that’s crazy enough to sit down the type every day and get better at it.

Vitaliy Katsenelson (00:34:46):
Number one it takes has a saying, if you want to be a writer, right? So showing up is very, very important. A lot of times we think that waiting for the muse okay. In other words, we think when the muse comes to me, when inspiration comes, then I’ll write, well, that’s not how it works. You show up and then you try to write and then inspiration comes the actor showing up is what’s great inspiration. I really love writing. I don’t love it every day. And some days I love it more than others, but I’m willing to suffer for writing. I love music. And I would like to play piano for instance, but I’m not willing. And actually I try it and I failed miserably. More importantly, I was not willing to suffer to play piano. So this arrange thing, Trey, after the book came out, I wrote four new chapters that was not in the book.

Vitaliy Katsenelson (00:35:35):
And by the way and you can get your listeners and viewers can actually get the chapters if they order the book and they send from soandgame.net and send a receipt that they bought the book, they’ll get those chapters in this chapter. I talk about a conversation I had of as a friend who said Vitaliy, I would like to write. And I went through my routine of writing. And then he said, you know what? Maybe I should hire a writer to write for me. And after a very long conversation, I realized he doesn’t want to write. He’d like to have written that’s different. And so he was not willing to suffer for writing. And therefore that was not a good problem for him. It’s a problem, but it was not a good problem for him. So, and again, happiness in life comes from having good problems. So you really have to be passionate about something. Then it’s going to become a good problem.

Trey Lockerbie (00:36:24):
Talking about suffering a little bit. That might be a good segue to lead into stoicism in a sense, because that is the idea of reframing, suffering to a degree. I actually had this idea, reading your book. I was thinking stoicism is downside protection. If you compare to investing, right? You’re just trying to eliminate the downside protection. So there’s an entire section in the book dedicated to stoicism. So walk us through your discovery of stoicism and why you’re so drawn to the philosophy.

Vitaliy Katsenelson (00:36:52):
Yeah. I’ve been stumbling on a lot of quotes by Epics Theater and Marcos or Seneca, and they always sounded very, very smart. And then I read this book called the Art of Good Life by William Irvin. And by the way, it’s a phenomenal book. And if you pick up this book and you need to story, it says, skip the first three chapters because it’s about history of different philosophies and go to chapter four. I think this is where he starts talking about stoic philosophy. You can come back to the first three chapters later, but I think if you start with chapter four, I think it’s going to make sure that you’re going to complete the book. But what really got me into stoicism is one quote by BTS and which sounds so banal and so plain, but it was an aha moment for me. And the quote is very simple.

Vitaliy Katsenelson (00:37:33):
So some things are up to us. They’re internal. Some things are not up to us. They’re external. And that is such a simple quote. And I’m shrinking the quote a little bit, but if you look at your life and realize that you have so little control, what’s internal to you, basically you have control about what you think and how you look at the situation. And you have very little control about anything else. You go into the airport to rent a car and the car is not available. That’s external. That’s not up to you. You’re taking a test. The only thing you have control over is how you prepare for the test. You had to control how you showed up every day and studied for this test. But even when you’re taking the test, there’s so many random factors. When I visualized the test, I think about my CFA exam, where I brought two calculators to the exam, because what if the battery died in one.

Vitaliy Katsenelson (00:38:23):
So, but while I was taking a test, there were so many things that I could not control if they see was working. How well I slept last night, all the different things. So that was external to me when somebody is rude to me, it’s external to me. Now, this is very important. Even what I just said, “Somebody’s rude to me.” That’s my interpretation. Okay. This is another part of search philosophy. I can look at what they said and I can perceive it as rude and therefore it’s going to impact me. Or I can basically look at what they said and not phrase it as rude, but basically say just being different to what they said. And therefore, as you mentioned stoic philosophy allows you to reduce the downside volatility. So I reframed what the person said as basically been neutral in not taking it personally, whoever is rude to you, whatever.

Vitaliy Katsenelson (00:39:09):
But if having a bad day or whatever, you don’t know what’s happened in the person’s life. Therefore if you take it as rude and that upsets you allowed yourself to be upset. That’s internal again. See what they do is external. How you perceive it is internal to you. This is where you talk about reframing. That’s what reframing comes in, right? You basically look what happens to you. And then you re reframe it in a way that it doesn’t hurt you.

Trey Lockerbie (00:39:33):
Yeah. There’s this quote, actually by Mike Tyson, I came across once where he basically said, “I once used to get mad at people until I figured out that if I get mad at them, then they own me.” And I just thought that was like, so encompassing of this philosophy in particular.

Vitaliy Katsenelson (00:39:47):
Yeah, I think I forget one of the either se said or something along the lines that you would not allow a person to come to house and trash it, but by reacting what the person says, you basically allow them to get into your mind and do whatever they want in your mind. So that’s same concept. Yes.

Trey Lockerbie (00:40:06):
You mentioned this idea of with externals and internals. You reference the Buffet, quote about a scorecard. I think a lot of our listeners will be familiar with that, but I also came across this quote recently. I just overheard someone say it they’re like, “You have to control the controllables.” And I just thought that was almost bumper sticker ask but simple enough for me to remember it. And I thought that was really cool.

Trey Lockerbie (00:40:27):
You do touch on Seneca. And I came across Seneca really in my early twenties, I think during my search for enlightenment that I think a lot of young guys have that certain experience in your early twenties. And I’ve come to think that the word enlightenment can be defined by this idea, which is essentially you can’t believe everything you think. So you almost have to get this out of body, look at yourself and your thoughts and analyze them objectively. And everyone experiences imposter syndrome, for example, and maybe artists more than others. How does learning about an artist’s life as you’ve dissected multiple artists in the book? How does it help you manage your own imposter syndrome and not believe everything you think.

Vitaliy Katsenelson (00:41:07):
Oh my God, there are so many ways I can answer this question. I think one of the most important things I did is I meditate I have on and off moments, but I mostly meditate. So I should say it’s that I meditate. I mostly meditate and meditation people usually misunderstand what it does, meditation they think it calm you down. So it does that, but there’s this very important benefit of meditation. It allows you to look at yourself as an now, at your thoughts as an outside observer. So in other words, when a thought comes to you actually be able to look outside this thought and observe that you have this thought there reason it’s important because that gives you self-awareness and mindfulness. Because a lot of times we go through life mindless.

Vitaliy Katsenelson (00:41:49):
We have this conversation in our head all the time, and we are not even aware of this because it’s been there all life, right? But once you start noticing this conversation, first of all, allows you to get treat of negative emotions because a lot of the conversation is negative by observing that you have a negative thought it actually neutralizes that. So that sounds part of your question, but let’s talk about what we can learn from other creators. Well, number one, I write about Charles Bukowski for instance, right? He listens to Charles Bukowski music today, and we hear this absolutely unbelievable music. And we don’t think about how much struggle and effort Charles Bukowski went to write this music. And every creative person struggles to become good or to create something that’s worth listening to, worth looking at. And in the beginning they were not good and they kept doing it and kept failing, getting better and better and better.

Vitaliy Katsenelson (00:42:43):
You mentioned the imposter syndrome. Let me paint this picture to you. I started to write for the street.com in Southern four and I was 31 years old. And a year later after being running for the street.com for a year, I decided I want to write for Financial Times, it’s like going to high school baseball to playing for Yankees. And luckily I had so little self-awareness in the time because I did not deserve to write for Financial Times, but I behaved if I did. And after reading a few articles that gave me confidence to keep doing this. So the imposter syndrome is basically is the difference from where we think we are today. There is a saying, “Fake it till you make it.”

Vitaliy Katsenelson (00:43:24):
And it’s not really about deceiving others. It’s about deceiving yourself. It’s actually creating self confidence for yourself to doing what you think you don’t deserve to be doing and think about just to make things even more interesting. I wrote my first book, Active Value Investing. I started working it in Southern five, again, maybe three or four months after started writing for Financial Times. Again, I’m looking backwards and I’m so thankful that I was clueless because today probably most of a world person and myself probably would not be able to do this.

Trey Lockerbie (00:43:55):
I’m going to stick on that topic of deceiving yourself. Because when you think about stoicism, often, people just think that these are like emotionless people that have something some maybe neurological difference in their brain and they just can’t feel emotions. And that’s maybe what makes them a great investor, for example, because you have to weather all of these different environments where things might be going against you. And the way you describe it in the book is really this beautiful way of reframing it as we’ve talked about. So you need a little bit of stoicism to whether these different environments, but you can potentially overdo it. You mentioned the snowball and the book and how he’s described. And that to some degree feels like stoicism at its absolute maximum or the farthest end of the spectrum. Why would investors maybe on this topic in particular, not want to be Warren Buffet.

Vitaliy Katsenelson (00:44:41):
Okay. So two answers number one, just because the thought entered your mind doesn’t mean it’s the right thought. Okay. So framing it the right way is extremely important. Here’s an example. When the stock price declines 30%, you can frame it differently. You can frame it as, “Oh my God, my portfolio over the stock price declined by 30%.” Or you can look at it as that at this point in time, the market’s opinion on this stock, it’s an opinion that took it down 30%. So the question you should really ask yourself, what is the fair value of the company? The stock is down 30%. So what that’s an opinion that’s will change the question you should really ask. Has anything happened to companies, earnings, cash flows has the value changed? So that’s point number one, another thing about Warren buffet, whenever it’s Snowball, which is a great book about Warren Buffet, I read it when my kids were still very young and I’m so lucky that I did, because what I saw there is the Buffet I don’t want to become.

Vitaliy Katsenelson (00:45:37):
Because Warren Buffet basically had such a great dedication to invest in that it took over his whole life, his whole personal life. He spent very little time with his kids. He neglects his wife and I’m not judging it. That was the interpretation. That’s what I learned from the book because nobody’s perfect. Warren Buffet had such a great positive impact on me as a hero, but this part of his life, he was my hero. Okay. And what I realized that I may be able to be more successful than Buffet because I’m going to have a better relationship with my kids. I’m going to spend more time with them. And that book was probably one of the most important books I read at that point in time, because I actually realized that time is fleeing. So what happens to investors? Not just buffet to everybody investing is almost like a drug.

Vitaliy Katsenelson (00:46:24):
And if you have a passion and you love doing this, if you don’t put guard rails, you only I’ll be spending 24 hours a day doing investing. And by doing this, I will neglect people I love my kids, my wife, my relatives. So I always have it on the back of my mind that my kids will not be young forever, that if I don’t spend time with them now, when I wake up, do much older, they’ll be different people. And I can’t go back and redo it because again, my kids they’ll grow up. And it’s interesting. I look at the videos of my daughter when my middle daughter, when she was six or eight years old. And part of me vaguely remembers who been that age because they grow up slowly and then you remember them when they were now maybe a year ago.

Vitaliy Katsenelson (00:47:09):
But I also have a good feeling that they know that I’ve spent time with them. And that’s very important to me. It’s very important for my kids. So I wrote on the subject before, even before the book and my son knew about this. And when he was going to college when he was going to college, he was going to go on a trip to Israel in his gap year. And before he left for Israel, he wanted us to exchange notes thus he write us a note and we would write him a note and we would read it after he gets on a plane. And I remember the note he wrote to me and he said that after red Buffet’s book, I was always concerned that I’m not spending enough time with him. And he said, “Dad, don’t worry. You’ve been a great father. And you always spend enough time as me. I never felt neglected by you.” Those probably the most important note I’ve got in my life. So that’s what I learned from Snowball, I guess. Yeah.

Trey Lockerbie (00:47:59):
You touched on Buffet and his craft, right? He’s sitting at his office studying, investing, focused on his craft. And that is very admirable to your point. And even though we might be able to overdo it, there’s a lot in your book about art meets craft, having soul in the game, all these things calculate to having a meaningful life. You mentioned Euro from the sushi restaurant in Japan, spending 80 plus years perfecting sushi. And I’ve seen the documentary actually. And there’s a part where the understudies have to make rice for 20 years before you do anything else. It’s that extreme. And I’m curious while there’s a lot of things that admire about someone who is so focused on their craft, those guardrails, you mentioned, I’m curious how you go about implementing those so that you know where the boundaries are, where you’re focusing enough time here or there.

Vitaliy Katsenelson (00:48:49):
So a couple things I drive my kids to school. Most of the time being in the same room with kids doesn’t necessarily mean that you are being with your kids. You just been physically there, not mentally by focusing and spending time as I talking to them, that’s what the intentions and by the way, just the last thing I want to do is to create an image that I’m a perfect parent. I’m not, I’m struggling through parenting life like everybody else, but I am constantly thinking, am I spending enough time as my kids? And when I feel that the work takes over my life and it’s just pushes out everything else, I stop. I consciously make a decision to spend time with my kids. And it’s just something it’s like a muscle you train. It’s just something that you have to be aware of this, because if you’re mindless about it especially listeners to this podcast, because if you’re passionate about investing, it’s just takes over your life. And so I constantly remind myself that there won’t be beyond forever.

Trey Lockerbie (00:49:45):
Yeah. That’s actually the exact reason I switched careers away from music to be present. I read the same book that this had the exact same impact on me actually in the same way. And now I am a father and you’re a father and parenting. You write a lot about in the book and I want to go to your father who you seem to have a hybrid guard for. And he was also a very accomplished painter so much so that you actually feature his work in the book. So I want to know a little bit what you’ve learned from his craft and his creative process and what you’ve taken away from seeing him work, that you either apply to your investing or to your writing.

Vitaliy Katsenelson (00:50:18):
What I learned from my father is this constant curiosity to learn. There was another title that was competing for the [inaudible 00:50:26] it’s called Soul in the Game. Original. I was going to name it Student of Life. And because to me, that is such an important concept. When you are a student of life, then you are open to learning all the time. I’ll give you an example. If you play chess and you lose, you can get upset about it or you can reframe it as again, coming back to reframing is that part of learning is losing. And so my father, he painted since he was seven years old and he’s incredibly accomplished artist when he was 60 something years old, he discovered that in Denver, there’s this very accomplished terrific artist. His name is Kim English who did this wonderful pastels.

Vitaliy Katsenelson (00:51:04):
My father is 65. I don’t know, maybe 65 years old, this very accomplished artist enrolls in the master class of Kim English to learn about pastels. He had zero ego because he finds joy in learning. If you feel that you finally arrived and you learned and you know everything, you are so dangerous because right now your ego you have this God complex and your ego is makes you very, very dangerous. That means you’re going to lose a lot of money at some point, if you are a student of life and you constantly willing to learn and change your mind because being a student of life allows you also to change your mind because you’re still learning. That is incredibly important. So anyway, so what I learned from my father is kind of being a student of life.

Trey Lockerbie (00:51:48):
So that kind of takes me to the next part of the book, which is around classical composers. So you actually are a big fan of classical music. And I really enjoyed this part of the book, particularly, probably for obvious reasons, but I’ve never been a classical music fan. I mean, I appreciate it, but I wouldn’t say it’s like what I go to listen to. Mainly because as you put in the book, it quote unquote takes work much like writing as we talked about earlier. But what are some of reasons our listeners should invest in learning about classical music and specifically the composers behind the work?

Vitaliy Katsenelson (00:52:20):
Well, I think first of all, they should listen to classical music because its so beautiful. I have this website, my favorite classical.com where I actually share my favorite classical music clips and writings about classical music. And I think if they source a website, I think I created a playlist call it Gateway Dragged Classical Music. So I found the record the pieces that there, the most easiest they acquired list matter of work for you to listen to and to fall in love is classical music. But I think the reason you want to read about them, because like as I mentioned Charles Bukowski. Just anything creative comes with own sense of difficulties. I’ll give you a couple stories. In early 18 hundreds, Beethoven was the biggest composer of the West, like bigger than any other composer. And in fact, when he wrote his nine symphony, somebody said, “This is the day the music died because you can’t write anything better than this.”

Vitaliy Katsenelson (00:53:13):
This is the type of music. So in Beethoven had a very interesting impact on other composers. I would argue that he actually set music back many years because everybody looked at him everything there was so many composers in his shadows that a lot of them stopped composing other ones composed, but never published it. Like there was a composer that lived in Vienna, probably not that far away from Beethoven at the time Franz Schubert. And he wrote 6,000 pieces of music throughout his life. And he died when he was very young, I think in his early thirties and most of which will never get published because he was in a Beethoven shadow because how he was like, “How could I possibly publish this?” When I just heard Beethoven seven symphony and the irony of this today, we listen to Schubert and Beethoven at the same time. And we don’t say this one is Beethoven is better than Schubert.

Vitaliy Katsenelson (00:54:02):
Both beautiful, just differently. Music it’s not math. Some people love Beethoven, personally I like Schubert’s music more than Beethoven’s music. This is me personally. Let’s apply this to invested who is the Beethoven of investing Warren Buffet? I’ll give you an example. So for a long time, I remember Buffet used to say that he doesn’t invest in technology stocks because he doesn’t understand technology. I remember so many value investors who said I don’t buy technology because I don’t spend technology. Well, the Buffet was at the time was 85 years old and they were 25 years old. Maybe they shouldn’t understand technology. So what Buffet was saying, technology was what they should have learned from Buffet is the technology was outside of his circle of competence. That’s why he did not invest that’s the less they should have taken out is that’s Buffet circle of competence.

Vitaliy Katsenelson (00:54:48):
When you’re 25 years old, your circle of competence is different. So therefore, maybe you should have invested technology because it’s easier for you to understand it for the 40, 85 year old. Let me give you another example. There was this, another composer Buros who never got classical training in as a composer. He started studying music when he was 12 or 13 years old, because he did not know the classical rules of how to compose music. He like Picasa has a saying you learned the rules so you can break him. Well, he never learned the rules. So when he was breaking him, it was much easier for him. So a lot of times we get exposed to dogma that actually reduces our creativity. A lot of there is some value in arriving to your knowledge through first principles, perspective, not adapting, somebody else’s beliefs. There is a terrific investor in Switzerland, Robert vinyl.

Vitaliy Katsenelson (00:55:40):
And we had a dinner with him and I told him he knew because Rob never got a classical education value investing. So I told him, you’re like, Berlins you did not know the rules or you were breaking when you started investing. So another thing you can learn from classical music composers, if you’re a creative person, is that to create anything worth listening or watching or hearing to do this, you need to go through sermon of suffering because creativity suffering is almost like as a part of anything creative. When you work in a construction site and you are there with a stop sign when it stop and go, that there is very little creativity in this very little suffering. Okay. When you write in the book, when you write in an article, when you write music, that process is never linear and never pain free.

Vitaliy Katsenelson (00:56:25):
And all those composers went through their own version of suffering to create this music. You cannot be in a stock market and not expect that you’re going to have positive years all the time that you’re going to go through investing without experiencing any kind of pain. That is a good problem. If you love investing, that is part of the course. There’ll be time when you’ll be very upset. By the way, in the chapter, there was in the book there was a chapter going, “Paying Opera and invested.” Where I discussed basically very painful period of 2015. And as an investor, I wrote this chapter in 2016 and it was so painful and it was so embarrasing at the time for me that I just wrote it and never published it.

Vitaliy Katsenelson (00:57:06):
And I finally six or seven years later, it was easier for me to publish it in the book as you and I talking a lot of Nasdaq stocks are down a bunch. And I have a lot of friends who are terrific investors who are struggling right now. And I would really encourage them to read this chapter because I try to explain what I went through and how you could apply stoic philosophy to this experience and how it could actually reduce your pain.

Trey Lockerbie (00:57:31):
What you just said reminded me of this quote. Is attributed to William Faulkner a lot. I think it’s older actually, but it’s this idea of killing your darlings. It’s a literary term. And I’m curious to know if you’ve experienced this as a writer, because what you were saying about Buffet, not understanding technology. Well, he then went on to buy Apple was one of the greatest trades of all time. This is someone killing their darlings, so to speak. So it’s something that was this idea. That’s precious to them. Ultimately breaking that rule. It’s aligned with strong opinions, loosely held or something if you will just expanding your learning things that you hold precious, just understanding when it makes sense to disregard that.

Trey Lockerbie (00:58:08):
And I’m curious if this ties into another point you were making where the best I can describe it as I was at the Van Gogh Museum in Amsterdam once and you see his early works of landscapes and they’re like, “Some of the most incredible landscape paintings you’ve ever seen.” And they’re by the book in a way, I think technique wise, I’m not an artist, so I can’t speak like you can’t, but they’re just unbelievable. And then you go look at his later work and it looks nothing remotely. It’s like he learned the rules and then decided to break them. He killed his darlings. If you will. Do you feel like this is a theme that can be applied to investing in the same way?

Vitaliy Katsenelson (00:58:44):
Well, first of all, that Van Gogh Museum is my favorite museum in the world. I’ve been there, I think two or three times. And I absolutely love that museum. You see it Van Gogh early paintings and they’re absolutely phenomenal. They’re very traditional but they’re phenomenal. If that’s all he ever painted, we probably would never know about him, right? Because they’re very, very good, but they’re very similar to everybody else. And through iteration and discovered Van Gogh probably discovered his style. That’s when you see Van Gogh painting today you know it’s Van Gogh right? His later paintings. So I think the mistake people make is that when we look at other people, we should learn not what they think, but how they think, see, in a sense, when we talk about Apple, right, we should learn from Buffet. Not that you should not buy technology, not what he thinks, but how he thinks that I’m not going to buy technology because at this point in time, it’s outside of my core competence.

Vitaliy Katsenelson (00:59:40):
But Buffet had… there is this terrific writer, Ben Thompson, who writes statutory and I read him daily. And once Ben has this unique ability to go back and criticize himself all the time where he says, “I wrote this, I was wrong. There is why.” Because that is the only way to learn. Seneca has this quote, which basically sums it up, “Time discovers truth.” You can apply it to anything and you can apply it to invest it. Because think about it as an investors, we want to discover what the company’s worth before time discovers it, right? Therefore it’s not about us trying to reinforce our ego. That I’m always right. And I never make no mistakes. Investing is really a quest for truth in that quest, when I guess, have strategies lose health. In other words, if you had a belief and that it was wrong, well, you done the belief and you have a new one.

Trey Lockerbie (01:00:34):
So that sums up my interpretation of this equation you have in the book, which is essentially Art plus Soul in the Game equals Meaningful Life. So the Art piece for me, what I’m taking away is discover your own style. And use these creative processes to inform different ways to approach both life and investing plus Soul in the Game. So before we take off, what I certainly make sure we cover what Soul in the Game means. How do you define Soul in the Game and putting those two together to get to a meaningful life?

Vitaliy Katsenelson (01:01:08):
So, first of all, what is soul? What is game, right? But game is something that you’re truly passionate about. Something where it’s a good problem for you. Something you’re willing to suffer for. And when I say suffer, it sounds almost like, I feel like Jesus dying on the cross. That’s not what I mean. It just, when you’ll be doing this that there’ll be times they can love it. There’ll be times where it’s going to be difficult and painful and you are fine going through these painful times. So that’s the point I want to make there.

Vitaliy Katsenelson (01:01:35):
So what is soul? That is something that is so important and dear to you and it’s part of you. So when we talk about Jiro, the guy who makes sushi, making sushi was so important for him, the movies called Jiro’s Dream of Sushi, because he thought so much about sushi, how to make the best sushi he can possibly make that he even dreamt about, by the way, in the book I have this concept that I’m very proud of because that’s probably the most original thought of the book, this idea discussion of art and craft. Okay?

Vitaliy Katsenelson (01:02:06):
So this story goes like this, “My brother and my son, Jon and I wore in Venice. And we went to Murano Factory and there was this guy who was making a horse out of glass. And you have this bulb of glass and he takes this triceps and puts them into this bulb. And suddenly in matter of 30 seconds, there is a horse out of nothing out of glass. We were so shocked by that. And you were walking on the street and discussing is said art craft. And then we realized when we look at the stores, they all have this horse. So I would think it was, maybe it’s a craft. Maybe it’s not an art, but what I realized, we are looking at that the wrong way in any creative activity when you start doing it in the beginning, it’s mostly art for you because when you repeat something for a long period of time, that it turns into craft.

Vitaliy Katsenelson (01:02:54):
So when this guy was creating a horse and for us because he makes probably 50 of those horses a day for him, it’s all craft. There’s very little risk in it. He knows exactly how it’s going to look. When he sits down to make this horse. When he started making it in the beginning for him, the ratio of art and craft was very different. It was mostly art and a little bit of craft. So in any activity, if we do it long enough it’s and we do keep doing the same way over time. It serve as being an art and becomes more and more craft. So it’s up to us to change the activity a little bit. So let’s apply to invest in if all you do, just imagine this is I’m going to describe a very pathetic existence. If all you do invest in utility stocks, that’s all you do.

Vitaliy Katsenelson (01:03:39):
There’s 1050. I don’t know, 20 companies in the United States, whatever. That’s all you do invest in those companies and you do it for 20 years is going to be all craft, no art. Okay. So if you grow your circle of competence over time, then you introduce more and more art to it because there’s more uncertainty. There’s more things you don’t know. And in life you want to maintain this very nice balance, especially in investing between this. You want to have a circle of competence. So you know that you won’t make mistakes, but if you stay in this circle of competence all the time, if you don’t grow it, you’re going to be very little art left in your life. So again, we keep coming back to Buffet, but Buffet buying an Apple was him basically expanding his circle of competence. So coming back to Soul in a Game.

Vitaliy Katsenelson (01:04:23):
So what is Soul in a Game? I got the idea from the Nassim Taleb in his book, Skin and the Game. He talk about Skin in the Game and Soul in the Game is next iteration of that Skin in the Game. Basically, if I could put it simply is that when you associate with people, you want to basically deal with people that not only have offsite in your relationship with them, but also have a downside. So in other words, when somebody invests with the same rate, if this relationship is limited to the fact that I just charge fees, I have no skin in the game. The way I get Skin in the Game is that I own all my liquid net worth is basically invested in the same company as my clients do. So I have Skin in the Game because if I do research and I buy companies stock A for them, and I own the same stock, then I experience the same on same dollars that they do.

Vitaliy Katsenelson (01:05:08):
Again all my liquid net worth is in the same stocks. So that’s Skin in the Game. Soul the Game is next elevation of this, where what you do is so dear to you, where money becomes secondary, where money is just a byproduct. It’s a second derive of what you do when you have. Soul in the Game, you would never do anything to unethical. You would never do anything that would violate your principles. So when you have Soul in a Game, you are very focused on what you do. You try to be a net positive to the society. In other words, think about it. Imagine you’re making sushi, but you wouldn’t want to eat it because it makes you sick or you think you give it to people and it poisons them.

Vitaliy Katsenelson (01:05:48):
So it’s very difficult to maintain Soul in a Game if it’s not net positive for society. So that’s and I’m missing a few points, but that’s what basically having Soul in the Game means to me, something that is very dear to your heart, that you do this with passion and it’s meaningful. So to me, investing is meaningful because especially in environment where today, I feel like if investors buy index funds, then for the next 10, 15 years, they’re going to have a very miserable existence and having creativity in my life. That’s what recharges my batteries.

Trey Lockerbie (01:06:20):
It gives you a lot of pleasure. And also a lot of pain. I imagined the struggle suffering element is important. And this was such a great refresher for me in particular, reading this book on especially stoicism part where this idea that you can’t avoid pain in your life, that in order to live a good life, it actually requires something painful or suffering that these dramatic words we’re using. But to your point, it has to be this good problem to solve that you have to want to get up and go do every day.

Trey Lockerbie (01:06:48):
So this putting all these pieces together, basically having the creative element, looking for that inspiration and not being dissuaded by people like Buffet and Druck and Miller or whoever who has gone on to be these Titans of industry. There’s still opportunity to break some rules and create craft your own voice and create your own style, looking for things that are worthy of your time worthy of the suffering that might go into it, knowing that what’s required to have pleasure. I don’t have a meaningful life at the end of the day, Vitaliy. This was so insightful. I really love this book. I love the way you inject all this humor along the way. I highly recommend people go pick up this book. It’s called Soul in the Game. Where can people find the book? Find you, find your writings, find your fund, any other resources you want to share?

Vitaliy Katsenelson (01:07:34):
Sure. So they can find the book on Amazon or wherever the books are sold. However, if they go to soulinthegame.net and there’s a instructions there and they send us receipt of their purchase in the book, we’ll send them bonus chapters. So that’s a soulinthegame.net. They can find my writings on contrarian, edge, edg.com, and they can subscribe to my articles. Also, unlike you guys, we have a poor man’s podcast, meaning that it just basically my articles read to you by another fellow. So it’s not a true podcast. So investor.fm then you can subscribe to a podcast. And just again, just my articles read to you by professional reader. So

Trey Lockerbie (01:08:13):
Vitaliy, congratulations on the book really loved it. Really loved our conversation and I appreciate it. Let’s do it again.

Vitaliy Katsenelson (01:08:20):
That’s right. Thanks so much. It’s a lot of fun. And you guys, you do a phenomenal job.

Trey Lockerbie (01:08:25):
All right, everybody. That’s all we had for you this week. If you’re loving the show, don’t forget to follow us on your favorite podcast app. And please leave us a review. If you want to get in touch another way you can find me on Twitter at Trey Lockerbie. And if you really want to up your investing game, I highly recommend you check out theinvestorspodcast.com or simply Google TIP finance. And with that, we’ll see you again. Next time.

Outro (01:08:44):
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