Why Do I Write a 27-page Letter To Clients

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Four times a year I write letters to IMA clients. In these letters I diligently walk clients through our research on stocks we own, including those we have recently bought and sold. I cover how we value them, why we own them, etc. I update clients on our thoughts on the economy and the market. I call these musings “seasonal,” not quarterly, letters. There is a good reason for that. Quarters follow a discrete calendar, while my writing muse has a mind of her own and keeps her own schedule. Also, I like to wait until our companies report their quarterly results before I write about their progress. I usually wait a month after the quarter ends before I start working on the letter. These letters are very in-depth and lengthy – some run as long as 30 pages.

It takes me two to three weeks, two hours a day, to write a seasonal letter.

Why do I write them?

I spoke to my friends in the investment industry who write letters to clients, and they told me that their clients rarely read their letters. Though there is no reading or speed-reading exam to become an IMA client, and these letters are not followed up by a written exam, I have found that the majority of IMA clients do read these letters. Just as companies get the shareholders they deserve, investment firms attract clients who are like-minded. IMA clients tend to be readers, and they have the intellectual curiosity to learn what is happening in their portfolios and why.

Let me tell you a story. I have a client who is a retired airline pilot. As we sat together in my office, I mentioned to him that I was afraid of flying. I fly a lot (pre-COVID), but every time I am on a plane and it starts shaking and chattering due to turbulence, I become a little bit more religious. I tell myself that these things happen all the time and that most plane crashes happen on the takeoff or landing. There is a turf war inside me between rationality and fear.

My client (the airline pilot) told me that when he’s in the pilot’s chair in the cabin, he’s not nervous. But when he flies as a passenger and the plane goes through a rough patch, he gets nervous, too. At first, I was a bit surprised by that.

Then I realized that the difference between being in the pilot’s chair and in the passenger cabin comes down to control and information. When you are the pilot you have control and information about what is happening.

When you’re a passenger, you find solace in the fact that Boeing engineers don’t just take trains but frequent these planes, too, and that the pilot doesn’t have his own parachute and thus has skin in the game. Also, that dying in a plane crash carries roughly the same probability as winning the lottery. (This is why I don’t play the lottery; I don’t want to irritate the probability gods). Also, this is why my family and I own the same stocks as our clients.

Much the same applies to IMA’s clients and their portfolios. We spend hundreds of hours analyzing each company in our portfolios. For IMA clients, without my letters these companies are just ticker symbols – clients are not even in the passenger cabin; they are down in a dark corner of the cargo bay. With my letters I try to bring them into the cockpit (though I still have control of the levers). I want them to understand what we see in each company, how we value it, and what our strategy is in with dealing with the uncertainties of the global economy. Arguably, when there is no turbulence these letters bring little value; but when there is turbulence, and there nearly always is, our clients (hopefully) won’t be nervous. Their portfolios will deliver them returns while helping them keep the volatility of their blood pressure to a minimum.

And there are other reasons to write these letters.

The letters allow me to scale my writing, while time doesn’t scale as well. (I wrote about this before). After IMA clients read a letter, very few have any questions for me. The few that do get me on the phone or send me questions that I answer in the Q&A section of the next letter (their choice). I guesstimate that I spent about thirty hours on the phone last year talking to clients (less than 30 minutes a week). IMA has about two hundred clients. If I spent 30 minutes on the phone with each of them four times a year, I’d be spending at least 400 hours a year or 8 hours per week on the phone with them. That is time I couldn’t spend on research.

I used to think that the difference between introverts and extraverts was their enjoyment of in-person interactions with others. Recently I’ve discovered that there is another important difference between them: Extraverts get recharged from interactions, while for introverts these interactions drain energy. Though I do enjoy social interactions, one hour on the phone consumes three hours of my energy (or the equivalent of six hours of writing, which is a relaxing, meditative experience for me).

Finally, I am so much smarter on paper than on the phone.

See, everyone wins!

The Winter 2020/21 letter that we just sent out to IMA clients was 27 pages long. Over the next few weeks I’ll share excerpts from the letter with you. These excerpts will not focus as much on fish (stocks) as they do on the subject of fishing. In the past I’d rewrite excerpts from these letters as articles, but I feel that the relationship with my readers has evolved to a level where I don’t need to do that.

Vitaliy Katsenelson

I am the CEO at IMA, which is anything but your average investment firm. (Why? Get our company brochure here, or simply visit our website).

In a brief moment of senility, Forbes magazine called me “the new Benjamin Graham.”

I’ve written two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. (I’m working on a third - you can read a chapter from it, titled “The 6 Commandments of Value Investing” here).

And if you prefer listening, audio versions of my articles are published weekly at investor.fm.

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