Open your eyes to ‘myopic circles’ – with Vitaliy Katsenelson

Vitaliy Katsenelson – value investor, prolific blogger and a 2022 guest on The Value Perspective podcast –outlines two mental models he created to help ‘dumbify’ complex ideas



Juan Torres Rodriguez
Fund Manager, Equity Value

Over the many millennia of human prehistory, there would have been times when it was generally beneficial to forego an in-depth analysis of a situation in favour of a quicker response – for example: “I’m not certain that’s a sabre-toothed tiger heading in my direction, but I’ll start running anyway, just in case.” These instinctive shortcuts our brains use when trying to process information are known as ‘heuristics’.

One snag for investors is the responses that are hotwired into our thinking because they helped keep our ancestors alive during the Ice Age, say, are not necessarily so helpful when it comes to judging when to buy and sell shares. That is why, here on The Value Perspective, we like to highlight structured approaches, such as base rates and probabilistic thinking, that can improve decision-making, particularly in uncertain times.

For his part, Vitaliy Katsenelson, a 2022 guest on The Value Perspective podcast, goes further and creates ‘mental models’ of his own. Given he is an author, podcaster and prolific blogger, in addition to being CEO of Denver-based value investment firm IMA, Katsenelson is presumably being modest when he tells us: “My brain operates with a very low-powered CPU so I find I need to ‘dumbify’ things down to my level.

“I am constantly looking for mental models – in investing, in life, in anything – because they often help me simplify complex idea and one of these I call ‘Myopic Circles’. We all live in our bubbles – for example, I do not have a single friend who smokes. It is not a conscious decision – my social and demographic circles just happen to be somewhat higher-income and more health-conscious and those people rarely smoke, right?

“And since, wherever I look, I do not see a single smoker, it would be very easy for me to assume that nobody smokes. On the other hand, a relative of mine does smoke and, if he looks around him, he finds most people smoke. As a result, there will be very little overlap between our respective social circles – and the reason it is important to understand that is, a lot of the time, our views as investors are skewed by our surroundings.

Skewed view

“As an example, I might own tobacco stocks but it would be easy to assume, because I do not come across anybody who smokes, that nobody smokes any more – except something like 14% of Americans smoke while, in Europe, I believe that number is probably even higher. So, when you look at the world, you constantly have to mentally adjust – is my view skewed by my surroundings?”

In other words, says Katsenelson, just because we do things in a certain way, it does not mean everybody does. “Translating that idea into an investment context, we were recently looking at a company that does money transfers between the US and Central America,” he continues. “I won’t mention its name – it is very small – but, when you and I think about money transfers, we might think about a business like PayPal.

“That is because we have checking accounts and are mostly going to transfer money from within our country and to another person who has a mobile device or whatever. But there are a huge amount of money transfers happening between the US and Mexico and the US and Guatemala – and suddenly you discover facts like only 35% of Mexicans have checking accounts.

“What is more, you have two or three million Mexicans who are in the US illegally – some would argue the number is even higher – and when we were doing our research, we would go to the kiosks where these people do money transfers. It is a world I had never been exposed to. I do not carry cash but this demographic operate on cash – they usually get paid in cash and they will transfer cash.

“Exposing myself to this world I was not familiar with was incredibly important for me, therefore, because I came to understand there is actually a huge amount of cash – I cannot remember the exact number but something like $100bn – transferred between the US and Mexico every year and mostly going from the US to Mexico. And, as an investor, it is a market I had not known existed.”

Davids and Goliaths

A second mental model of Katsenelson’s references not only the Old Testament tale of David and Goliath – where, armed only with a slingshot, the shepherd boy and future king of Israel defeats the huge and heavily armed champion of the opposing Philistine forces – but also Malcolm Gladwell’s very different take on this classic underdog story in David and Goliath: Underdogs, Misfits, and the Art of Battling Giants.

“Gladwell spoke to some physicists and figured out what Goliath hadn’t realised – that David was so good with a slingshot the rock would come out of the sling at the speed of a bullet,” he continues. “So you had one guy coming to the fight with a sword and the other bringing a gun – and here is the key: if David had chosen to fight Goliath on Goliath’s terms, he would have lost, but he fought him on David’s terms.

“To put it another way, a perceived advantage can often be turned into a disadvantage. Goliath’s advantage in battle was his armour but it also made him a lot less mobile and, since David was so much more powerful at a distance because he had a ‘gun’, that turned into a disadvantage. We know how the story ends – David throws the rock, hits Goliath in the temple, Goliath falls down and David walks over and cuts off his head.

“Let’s now apply this framework to the little money-transfer company I mentioned. All it focuses on is money transfers with Mexico and Guatemala and, because of that, it can compete with giants, such as Western Union, which are maybe10 times its size. Its laser focus means it can provide much better service, with agents in Mexico who speak Spanish and who will pick up the phone in a matter of seconds.

“This ‘David’ of a company has realised that, if it is focused, it can actually give Goliath a fight – and, in fact, Goliath might actually work against himself.  I combined these two frameworks – ‘Myopic Circles’ and ‘David versus Goliath’ – to describe how we were analysing this business. All investors have these biases on how we think about things and we need to be aware of that.”


Juan Torres Rodriguez
Fund Manager, Equity Value


The Value Perspective
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