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| Active Value Investing: Making Money in Range-Bound Markets (Wiley Finance) | 
 enlarge | Author: Vitaliy N. Katsenelson
Publisher: Wiley
Category: Book
List Price: $55.00
Buy New: $30.49
You Save: $24.51 (45%)
Buy New/Used from $30.25
Avg. Customer Rating:  (37 reviews)
Sales Rank: 12681
Languages: English (Original Language), English (Unknown), English (Published)
Media: Hardcover
Number Of Items: 1
Pages: 304
Shipping Weight (lbs): 1.1
Dimensions (in): 9.1 x 6.2 x 1.2
ISBN: 0470053151
Dewey Decimal Number: 332.6
EAN: 9780470053157
ASIN: 0470053151
Publication Date: September 28, 2007
Availability: Usually ships in 1-2 business days
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| Customer Reviews:
 FUTURE CLASSIC January 16, 2008
0 out of 2 found this review helpful
As time goes on this book will be recognized as a Classic especially the first part.
A Must Read for Anyone Without Investment Experience During the 1960s and 1970s' December 30, 2007
0 out of 1 found this review helpful
A must read for any investor who didn't experience the volatile, no-return period from 1966 through 1982. Many investors must learn the hard way that the future is rarely different from the past for very logical reasons. Learn those reasons with Katsenelson's book and prosper.
Active Value Investing is a BUY December 18, 2007
2 out of 6 found this review helpful
This is a generally well-written, clear, easy-to-understand guide to valuing stocks in a "range-bound" market (volatile, trading-range markets such as the one we are experiencing in 2007). Yes, the author suggests, the careful investor can consistently make money in this kind of market but as most investors realize, it is about correctly valuing stocks AND buying and selling stocks based upon this information in a disciplined way. The "disciplined way" is the hard part, not getting caught up in herd-think.
The author rigorously examines and compares the many ratios traditionally used to value stocks (and proffers his preferences). There is some light math in a couple of chapters, but a non-math geek can still profit from this book. It is especially timely given current market conditions.
An excellent gift for yourself or favorite investor (other than yourself!).
 Valuable data and ideas November 14, 2007
7 out of 8 found this review helpful
2007 Wiley Finance, 295 pages (of which 256 pages form the main body of the book).
Before I start this review, you should know that I didn't just buy a copy of this book, read and then review it (as I've done with all my other reviews). The author (who I'd not come across before) contacted me, asked if I would review his book and supplied me with a copy. As it was endorsed by Nassim Taleb and James Montier, I thought it might be worth reading.
I was a bit sceptical of the book's title: surely value investing is value investing and the 'active' bit must be a gimmick? After reading the book I've come around, mainly won over by the extensive and very interesting statistics. Apart from the book's value in providing revision and reinforcement of the key value investing principles, it presents two particularly useful ideas. The first is that average stock market returns don't happen very often and the second is Katsenelson's multi-input PER (price/earnings ratio) model.
The first of these points is Katsenelson's main thesis: very long term (100 years+) average stock market returns (in the US) comprised protracted periods of above average returns (bull markets) followed by similarly long periods of below average returns (what Katsenelson calls 'range-bound' markets). I like the way the author puts it:
"...investors expecting the average returns observed over the past century are likely to be disappointed, as average happens a lot less frequently than we've been told."
This brings us to the most useful part of Katsenelson's book. His examination of data going back through several of these long-term cycles shows that economic growth, interest rates and inflation didn't explain the different returns in the periods of above average vs. below average returns. It was the starting valuation (PER) that mattered. The expansion or contraction of the market PER was responsible for virtually all of the difference in returns (with the exception of the Great Crash of 1929-1932) in the different market phases over the past century. I found this extremely interesting: I knew valuation mattered a lot, but I didn't know it was likely the only thing that matters (short of utter disaster).
Following on from this, Katsenelson attempts to show where we are in the cycles of above vs. below average returns (fortunately he understands that the most one can say at any point in time is that a certain outcome has a higher probability than other outcomes). I liked the way he approached this. Rather than using only, say, the one year historic PER, he presents the data in different ways: using the one year trailing PER and then also using the three, five and ten year average trailing PERs. This provides a useful sensitivity analysis to adjust for the current extremely high return on equity in the US and also allows us to draw our own conclusions if our opinion differs from that of the author (I think this is a great idea).
His analysis shows that we are very likely within a range-bound market that started in 2000, leading to two important practical investment considerations. The first is that dividends are critically important: they accounted for 90% of the average 5.9% nominal annual return during the range-bound markets Katsenelson has identified over the past century! The second is that being fully invested is much less important than in bull markets because, though the market fluctuates significantly in range-bound markets, the fluctuations cancel out.
Mohnish Pabrai comes to the same rejection of the long-term buy and hold approach in The Dhandho Investor from the perspective of seeking the highest possible returns (without reference to the market). Katsenelson, however, believes that only substantial outperformance will produce satisfactory returns owing to the overall market's likely poor returns. Thus they both agree that an investor has to learn to sell (which many super-investors, including Marty Whitman and Joel Greenblatt consider very difficult or impossible to do well). Interestingly, Pabrai and Katsenelson both agree on the general principle: that you should have your exit plan in place before you invest.
This brings us on to Katsenelson's multi-input PER model, where he suggests using a simple PER model that adjusts an 'average' PER for such factors as growth, business quality, financial risk and dividend yield. I think this is a very good idea and is something I intend to try out.
I didn't like all of Katsenelson's book. For example, I found his effort to explain discounted cash flow analysis, using Tevye the milkman and his cow, somewhat confusing and I spotted a higher number of errors than normal (though I'm not sure if I was emailed the final version of the book).
The author's general conclusions about future US stock market returns have also already been presented by Warren Buffett in two articles published in Fortune magazine in 1999 and 2001 entitled "Warren Buffett on the stock market", both by Carol Loomis.
Buffett and Katsenelson differ in their view of the importance of interest rates in affecting historical returns and Katsenelson (necessarily, as his is a book) presents considerably more detailed statistics. I'm also not sure that Buffett would believe that most investors would obtain any benefit from efforts to turn over their portfolios faster (the vast majority of investors have the opposite problem - as Katsenelson himself shows when he quotes a study showing the absurdly awful returns mutual fund investors actually achieved compared to the overall market in the 19 years to 2002).
So, where does that leave us? With a book containing some good ideas and excellent data and statistics but with a central conclusion (do more selling) that I suspect most investors will simply find too difficult to do well (notwithstanding Katsenelson's advice on how we might do so). Problems that originate from our psychological biases are very difficult to deal with satisfactorily: sometimes our efforts to improve (returns) can have the opposite effect.
An Insightful Perspective to Investing November 4, 2007
8 out of 8 found this review helpful
Anyone fortunate enough to have invested during the bull market that began in 1982 will find easy to say "buy and hold forever." Indeed, for almost twenty years, the market had one general direction - up, and anyone who bought and forgot did well for nearly 18 years. Warren Buffett has described the bull market that began in 1982 as a period unlike any other for the markets and that it is highly unlikely or quite some time before the U.S. markets experience that again. And although Buffett is famous for his "our favorite holding period is forever" line, it wasn't until later in his investing career - when Berkshire's capital was enormous - that this approach really made the most sense for him and Berkshire Hathaway.
Consider that from 1983 until 1999, the average annual return on the S&P 500 was 15.7%, assuming the reinvestment of dividends. A similar return like this for the Dow Jones beginning in 2008 would mean that the Dow would be trading over 139,000 in 2024!
It is in this context that I found Active Value Investing: Making Money in Range Bound Markets by author and portfolio manager Vitaliy Katsenelson an interesting and insightful read on understanding the long mood swings of Mr. Market. One should not assume that the word "Active" in the title to suggest market timing - this is the last thing Vitaliy is concerned with. In fact he readily admits that trying to time the market is a fools game. Instead his focus on using fundamental valuation techniques - discounted cash flow analysis, price to earnings models, and margin of safety - to take advantage of range bound markets.
Any serious participant in the stock markets is well aware that markets trade in in ranges some periods longer than others. During the 16 year period beginning 1966 and ending in 1982, an investment in the Dow Jones index in 1966 would have been worth about the same sixteen years later. Hovering around 1000, the Dow remained around 1000 in 1982. Whatever dividends you earned were wiped out by inflation during that time. A simple buy and hold approach during that time would have produced an annual rate of return of zero percent. Yet during that sixteen year period occurred one of the most opportunistic buying opportunities in the U.S. Beginning in 1974, as Buffett so famously quipped, "I was selling at 3 times earnings to buy stocks at two times earnings."
Active Value Investing discusses how the prudent use of fundamental analysis allows to take advantage of such opportunistic times in the market. Focusing on the only three variables that really matter in a business - value, quality, and growth - investors can learn how intelligently exploit Mr. Market's mood swings. Unlike most great investing books that are focused on the buying process, Active Value Investing takes a very close examination of the selling process, something I find to be the most misunderstood area of investing. Make no mistake, if you can't buy at the right time, knowing when to sell won't mean much. Not only does Vitaliy walk you through his framework of knowing when to buy stocks, but he also takes a deep look at selling stocks, a topic not given enough discussion among value investors. Active Value Investing looks to change all of that.
We all realize that the markets are never a smooth ride and that market timing is mere folly. The key to taking advantage of the market's swings - buying on the stalls and selling on the surges - is to focus on valuation of individual securities. Indeed it is the price in which you buy that ultimately determines your return when you sell. Understanding what to look for in businesses and how to value them is an absolute must if you hope on succeeding in the markets for a meaningful period of time. Active Value Investing helps steer you in the right direction.
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