Mr. Katsenelson: Investment Management Associates is a pure value investor. Our investment style and principles are described in the book, Active Value Investing: Making Money in Range-Bound Markets. We believe that we're in a very different market than many investors think we're in right now. We're in a range-bound market. In this kind of environment, you need to invest differently. Instead of being a traditional value investor, you need to be an active value investor. Before we go further, I am probably going to say "I" a lot, but it is actually "we", Michael Conn, my partner and I. The traditional buy-and-hold strategy became a sort of religion for many investors during the 1982-2000 bull market. That's not to say that that strategy is dead, but that it's in a coma waiting for the next bull market. In the meantime you have to be more of an active value investor. That means that, though you still buy when stocks are undervalued, you have to sell when they become fairly valued. That's very different from just buying and holding stocks. You need to increase your margin of safety in this environment, and not be afraid to hold onto cash. This means that if you can't find enough good stocks to buy, you are going to have more cash in your portfolio and that's okay. That describes how we manage money and how we adjusted our strategy to this unique environment.
TWST: It has been a very difficult environment over the past year. How has your active value investing approach coped with the situation?
Mr. Katsenelson: What happened in 2008 is that when the market was going up, we were selling stocks and we had a hard time finding new stocks to buy. There simply weren't enough stocks that met our quality, valuation and growth criteria. As a result of this, going into this environment, we had a fairly high cash position. Because we were so selective, our stocks declined less in the markets and our large cash position cushioned us. Regardless I am not sure we can be proud of what we did last year, because we were nearly down at 18.5%, but at the same time, that is largely better than the markets. This year we are basically performing in line with the market, maybe lagging a little. Our portfolio has to lag a little bit as the market goes up, because our cash position is going up again. We're doing more selling than buying, though we are buying too, thus our cash balances are going up.
For more information call (212) 952 7433. The Wall Street Transcript does not endorse any of the comments made by interviewees, and does not make stock recommendations.