How Constraints Drive Success in Value Investing

Episode #315 | June 20, 2023

Episode #315 | June 20, 2023

How Constraints Drive Success in Value Investing

In This Episode

On this week's Stansberry Investor Hour, Dan and Corey are joined by frequent guest Vitaliy Katsenelson. He's the CEO and chief investment officer at portfolio-management company Investment Management Associates, or IMA. In his fourth appearance on the Investor Hour podcast, Vitaliy returns to discuss his approach to being a constraint investor and discovering undervalued companies for all his clients.

But first, Dan and Corey talk about the recent Federal Reserve meeting, the implications of the central bank's words and actions, and where they think the Fed will go from here. Dan runs through his grading system for evaluating the statements that come from Fed Chairman Jerome Powell. The system assesses the degree of hawkishness, dovishness, or neutrality. While the Fed projects two more rate hikes by year-end, Corey expresses concern about persistent inflation. He highlights Powell's reluctance to cut rates in the near future and says...

The higher-for-longer era will be most likely higher and most likely longer than a lot of people think.

Dan and Corey both believe that in the near term, the market is telling us that we're coming to the end of the rate-hike cycle but "people just aren't buying it" yet. Since the stock market has been doing well these past couple of weeks, Dan thinks the Fed probably won't start cutting rates anytime soon. And because the unemployment rate is still near a record low, Dan and Corey argue that it's the only logical place to look when making a case for rate cuts.

Vitaliy then joins the conversation to share the origin of his vacation-style conference, VALUEx Vail... the screening process for attendees... and what Dan should expect while attending this week in Vail, Colorado. He explains that he wanted to create an annual tradition among die-hard investors...

It's not just about the presentations but what happens in between. [And] when you come back to the conference, you continue the conversation you started a year ago.

Afterward, they discuss the importance of constraints in life and how that relates to investing. Dan says...

People are really creative when they are backed into a corner and they have a lot of constraints on them. Investing is about choosing the right constraints and adhering to them rather religiously.

The conversation then shifts to pipeline master limited partnerships ("MLPs"). Vitaliy notes that most pipelines operate as monopolies. They benefit from long-term contracts structured to adjust prices in response to inflation while remaining stable during deflationary periods. However, Vitaliy emphasizes the need for disciplined capital allocation within these MLPs. The ones that practice this generate significant cash flows, exceed their dividend requirements, and yield fruitful returns on investments.