Best Investment Books

Active Value Investing by Vitaliy Katsenelson


In his book Active Value Investing: Making money in range-bound markets, Vitaliy Katsenelson discusses how to achieve success in long-term sideways moving markets.


He believes that the U.S. stock market commenced a 'range-bound' flat trajectory in the year 2000. He argues that this trajectory will be characterized by "high volatility that is evenly distributed to the upside and downside".

To justify his claim he discusses the historical performance of the U.S. market over the last two centuries and what caused prolonged bull markets, bear markets and range-bound markets.

He investigates the emotions that characterized these markets and uses this information to argue why there is a high probability that the U.S. market is now range-bound.

A Quality, Valuation and Growth (QVG) framework is then introduced in the second part of the book which is the basis for his approach.


Buying and Selling

To summarize his approach to buying and selling in range bound markets, the author uses some what traditional value investing approach to the buying process and discusses both absolute and relative valuation approaches.

To help with the more emotionally loaded selling approach, he prefers recording at the point of purchase, the buying P/E, what he considers the fair value P/E, and the selling P/E.

Using the P/E ratio he argues takes into account that earnings may improve over time and that overvaluation of the stock requires the price to get ahead of the earnings. This is reflected in the P/E ratio.

As the approach suggests, he asserts that to make money in this type of market, investors need to be more proactive in their buying and selling, while not violating fundamental value investing principles.

Compared to using buy-and-hold, passive indexing, high beta or bond-only strategies, the cost of being wrong using his suggested strategy in a range-bound market is, he argues, much lower.

I found the historical stock market data he presents to describe the three types of markets, bull, bear and range-bound convincing.


To Conclude

If the current range-bound market stays with us for quite a while, and this could be for a decade or more if the historical data is any guide, then his active value investing strategy may well be a winner.


The fact that a number of developed countries currently have extremely high debt levels certainly suggests to me that a new bull market is unlikely to kick off any time soon.

So in my view, Vitaliy Katsenelson's book is a very worthwhile read given the likely 2012-2014 market conditions.

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