Vitaliy Katsenelson: Great Value Investing Requires Thoughtful Arrogance

Johnny HopkinsVitaliy KatsenelsonLeave a Comment

In his recent article Vitaliy Katsenelson explains why great value investing requires thoughtful arrogance. Here’s an excerpt from the article:

As the great American philosopher Mike Tyson said, “Everyone has a plan until they get punched in the mouth.” Theory gives you the game plan (buy more when the stock is down), but then the market punches you in the mouth.

Our ultimate goal is to narrow the gap between theory and practice and take advantage of volatility. We do this through thoughtful arrogance.

Let me explain.

Investing is an act of arrogance. You are basically saying, “I am right and the person on the other side of the transaction, who is buying a stock from me or selling it to me, is wrong.” Value investing takes that arrogance to an even greater extreme, as you are often buying unloved, if not hated, stocks.

However, arrogance comes in different forms. Plain vanilla arrogance is very dangerous in investing. Softbank CEO Masayoshi Son built Softbank out of nothing. He is one of the richest people in Japan, he is a visionary, and he has had one of the best multi-decade investment track records. (I wrote about him when we bought Softbank a long time ago.)

However, today his Vision Funds are at the tip of the spear of dotcom 2.0 as it shatters against the rock-hard wall of economic reality, losing his investors tens of billions of dollars this year. Mr. Son is solely responsible for it. He recently admitted, “When we were turning out big profits, I become somewhat delirious.” Success went to his head. He started thinking that he had the Midas touch. This is why temperament is so important in investing: We are our own biggest enemy.

And then there is thoughtful arrogance.

This arrogance requires amnesia of your past successes and failures; it is earned with your current sweat, through thorough research. Your research leads you to conclusions that often disagree but sometimes agree with the prevailing trends in the market. Arrogance – belief in your process and research – allows you to follow through on your conclusions, even if the market scorns them.

This is how we try to close the gap between theory and practice created by volatility. We continuously build and update our financial models, talk to companies and their competitors and to industry insiders, do a lot of reading, and debate companies with our peers. We have to keep earning the right to be thoughtfully arrogant through our hard work. When time passes, facts change, and new information comes out, we have to have the flexibility to change our minds. (I did this with Softbank when we sold it a few years ago.)

When you are making thoughtfully arrogant decisions, you are ignoring both what the crowd thinks and, just as important, your past successes. You are arrogant (I am paraphrasing Seneca here) because through your research you have discovered the truth (what the company is worth) before time did.

For example, our Uber investment required a lot of thoughtful arrogance. We endeavor to practice it daily, in every investment decision made.

I plead with you again: Earn thoughtful arrogance through your own sweat and research. It cannot be acquired through reading my articles. I am sharing this with you not to provide you with fish but to teach you how to fish.

You can read the entire article here:

Vitaliy Katsenelson – Why Value Investing Requires Thoughtful Arrogance

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