IMA provides personal investment management services to individual and institutional clients through separately managed accounts consisting of individual securities (stocks, bonds and money market). Our sole purpose is to preserve and grow our clients’ wealth through a disciplined active value investing approach. IMA is a state registered investment adviser, we are registered with our home state of Colorado and other states.
The following excerpt from Vitaliy Katsenelson’s The Little Book of Sideways Markets sheds some light one how IMA’s current investment process came to life.
IMA had been around since 1979 and had a solid investment record. Since its founding, it had owned high-quality companies that consistently grew earnings and traded at reasonable valuations. On my very first day at work Michael Conn, IMA’s founder, now my partner proudly showed me his positions in Walgreens and MBNA and a few other stocks that he had bought more than a decade earlier. His cost basis was a fraction of their current prices, and many stocks were up 10- and 20-fold since he bought them. Buy and hold worked!
The years 1997 and 1998 were great for IMA; its stocks went up as much as the market, which was plenty—the market was up around 30 percent each year. But 1999 was a different story. The “reasonable valuation” requirement kept the firm away from the dot-coms and the majority of high-tech companies, as their business models made no sense. In 1999 the bubbly stocks were doubling every other month, while our stodgy, high-quality companies lagged. The Standard & Poor’s (S&P) 500 index was up over 20 percent in 1999, and our stocks were barely up. Our clients were grouchy, but our past success sustained their goodwill. The next year our patience was rewarded—our stocks went up, while the market, especially the dot-coms and tech, went crashing. We felt vindicated, but vindication was short-lived.
That was the last year when the time-honored strategy of buying and holding great companies at reasonable valuations worked. In the next few years market either declined or stagnated. We were stagnating, too. We had a few years of frustration to ride out. At first, I thought it was a 1999-like phenomenon: Our stocks were temporarily out of favor; but after all, we owned great companies, so how could we go wrong?
The “Aha!” moment came when a speaker at an investment conference I attended put up a Dow Jones chart in logarithmic scale and pointed out that every time the Dow got to a handle of 1 with zeros behind it (e.g., 100, 1,000) it stagnated for more than a decade. This was early 2004, and Dow was bouncing around 10,000, so the speaker thought it was an appropriate time for the market to stagnate. He did not provide much of an explanation as to why this should happen—and I was not really very impressed with his “every time we hit 1 with zeros” logic. Still, he got me thinking about whether there might be a rational explanation to the pattern he described.
I began a quest to find out. I chewed through a century of stock market and economic data, and discovered that there was indeed a very reasonable explanation as to why there are times when the market goes nowhere for decades. You’ll have to read the book to find out what I learned, but I’ll tell you this much right off the top: It has very little to do with a 1 with zeros attached to it.
The same way that most people are born into their religion, as an investor I was born into my investment strategy, the IMA strategy, the day I came to work for the firm. I was weaned on owning high-quality companies that grow earnings at reasonable prices, and naturally I believed that our investment strategy was superior to all others. However, a few years of frustration are a good catalyst for reassessing one’s belief system. After careful examination I found how our strategy could be improved.
Our stocks were reasonably priced—we expected to make money on them, because their earnings would rise over time, and that would pull the stock prices up. But they were not cheap; thus they could not afford to disappoint Wall Street. If their earnings came out just a few percentage points short, they were taken out back and shot. These flaws were varnished over by the bull market of the 1980s and 1990s, when all stocks rose; but a stagnating market is like a giant magnifying glass that shows all flaws in high relief. The valuations of our stocks were reasonable only if the overall valuations of the past bull market were to persist into the future, but my research led me to believe that this would not happen for a long, long time. We had bought and rarely sold; in fact, we prided ourselves on having low turnover in our portfolios. The painful realization we came to was that buy and hold was not really dead but in a long-term coma, awaiting the next secular bull market, which was far, far away.
It was clear to me that we had to change the way we invested.
I took our existing process, modified it for sideways markets, added tools and a framework I developed, and supersized it with a margin of safety. We did not want to own stocks that were reasonably priced; we wanted them to be unreasonably cheap. Value investment principles were at the core of our strategy, so there was no reason to reinvent the wheel; but we put away our buy-and-hold shingle to become buy-and-sell investors. Michael Conn, who is 30 years my senior and has been investing for over three decades, was willing to change how we invested when presented with new evidence—I deeply respect and admire that. This is the story of how we became active value investors.
Mr. Conn earned his B.A. from the University of Colorado at Boulder and his M.B.A. from the Harvard University Graduate School of Business Administration. Michael has more than 40 years of investment experience.
Prior to Investment Management Associates, Mr. Conn was a vice-president and a portfolio manager for Founders Capital Management and Founders Mutual Depositor Corporation. Earlier in his career Michael was a securities analyst with Financial Programs, Inc. and Wellington Management Company.
Mr. Conn is a CFA Charter Holder and has served as president and director of the CFA Society of Colorado.
Mr. Katsenelson joined IMA in 1997. He received both his bachelor of science and master of science degrees in finance from the University of Colorado at Denver.
He is the author of two books, and his articles have appeared in Barron’s, The Financial Times, and Business Week, among others. Vitaliy has been a guest on CNBC, Fox Business, BNN and Yahoo! Finance.
He also writes a monthly column for Institutional Investor magazine and speaks to investor organizations in the U.S. and abroad. Vitaliy has close to 20 years of investment experience and has taught a graduate investment class at the University of Colorado at Denver.
Mr. Katsenelson is a CFA Charter Holder and has served on the board of the CFA Society of Colorado. Forbes Magazine called him “The new Benjamin Graham“
Ms. Lewingdon joined IMA in 1997 after serving the U.S. Army as a civilian in administrative and regulatory control. She received her bachelor in Finance from the Metropolitan State University of Denver.
Ms. Lewingdon is responsible for all operational, client services, compliance and administrative functions at IMA.
Ms. Katsenelson worked in investment industry since 2006. Until 2009 she worked as director of operations at PVG Asset Management. She received her bachelor degree in marketing from University of Colorado at Denver.
Mr. Goldstein has worked in the investment industry since he graduated Emory University in Atlanta in 2009 with Bachelor of Science in Financial Economics.
Prior to joining IMA, he ran his own portfolio as a trader at First New York Securities. Mr. Goldstein is in charge of all future client relations.
David Nafus is currently attending the University of Denver and pursuing an MBA with a Finance concentration. He also holds a Bachelor of Science in Finance from Santa Clara University.
Nick Coffman received his bachelor of science in finance at the University of Denver and is currently attending the University of Denver pursuing a masters of science in finance. Nick will be graduating in November 2016 and is a CFA Level I Candidate
Kenny Ackerman is currently attending the University of Denver and pursuing a bachelor in finance with minors in accounting and economics. Kenny will be graduating in November 2016 and is a CFA Level I Candidate”.
Received his bachelor degree in Finance and Philosophy from Boston College in 2011. After working as an accountant for 4 years, James decided to make a career change and pursue his passion in equity analysis. He is currently a 2016 Level II Candidate in the CFA Program.”
Kidoong Kim received his bachelor of science degree in business administration from Inha University in South Korea and his master of science degree in finance from University of Colorado Denver.
Jingyu Wang holds degrees of BA, Accounting from Northwestern Polytechnic University in China and MS, Finance from University of Colorado, Denver.
Holds an Investment Advisory Credential from the Mexican authority AMIB and studies BA in Financial Management by the Monterrey Institute of Technology and Higher Education.
Peng Jia received his bachelor of science degree in computer science from University of Minnesota – Twin Cities and his master of science degree in finance from University of Denver.