In his book, Active Value Investing, Vitaliy Katsenelson makes a compelling argument that equity markets are now trapped in a range-bound market that he estimates will last until 2020 or so. In the first part of the book, he makes the case that secular bull markets are usually followed by secular range-bound markets, in which the drop in P/E ratios negate earnings growth. Keeping with the bull and bear imagery, he suggests calling a range-bound market cowardly lion, whose “bursts of occasional bravery lead to stock appreciation, but are ultimately overrun by fear that leads to a subsequent descent”.
If the markets are treading water for as long as a decade, how do you invest profitably? Even traditional value investors, who buy low-priced stocks and hold forever, cannot earn satisfactory returns. Vitaliy suggests that investors should profit in range-bound markets by buying value-priced stocks with an adequate margin-of-safety and selling them when they are fairly priced (hence the “Active” in the title). The rest of the book focuses on providing investors with the tools to help them do just.
I found Vitaliy’s book to be an impressive, scholarly piece of work. The author is a money manager and teacher and it shows in the book. Investment concepts are clearly explained and heavy-duty valuation concepts are liberally illustrated with examples. The Quality, Valuation, Growth (QVG) model and valuation tools discussed in-depth will be invaluable for picking stocks for the active portion of your portfolio. Anyone with even a slight interest in picking stocks will find something useful in this book.
Published by Wiley Finance, the book is listed for $59.99 and is available for $37.79 from Amazon.ca (affiliate link). The Table of Contents, Overview and Preface of the book can be found on the book’s website.