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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: $29.89
You Save: $25.11 (46%)
Buy New/Used from $29.59
Avg. Customer Rating:  (37 reviews)
Sales Rank: 54690
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:
 Fat Pitch Financials take on Active Value Investing October 30, 2007
23 out of 28 found this review helpful
As you may have noticed, there is a new value investing book out. It's called Active Value Investing: Making Money in Range-Bound Markets by Vitaliy N. Katsenelson. In the spirit of full disclosure, I want to mention that Vitaliy is sponsoring this month's contest at ValueInvestingNews.com, where we are giving away three free signed copies of his book. Acknowledging this potential bias, I've tried to be extra critical in my review of this book.
Who is Vitaliy Katsenelson?
Vitaliy is a CFA charter holder and a portfolio manager with Investment Management Associates. He has been involved with the investment industry since 1994. Vitaliy is also a fellow value investing blogger at the site, ContrarianEdge.com. I give authors more credibility when they are willing to expose themselves to public comments and debate by having a blog.
In addition to his portfolio management work and writing, Vitaliy also teaches at the University of Colorado at Denver. He teaches an interesting sounding class called Practical Equity Analysis and Portfolio Management. You can tell that Vitaliy has teaching experience from his clear writing style and good use of examples in Active Value Investing.
Vitaliy's life is another example of the American dream come true. He grew up in the Russian city of Murmansk during the Cold War, overcame his bias against the United States, immigrated with his family to the U.S., earned bachelor's and master's degrees from the University of Colorado at Denver, and now has a successful financial career. It is a very impressive story that I'm sure gives Vitaliy a unique perspective on life. I enjoyed reading Vitaliy's story in the Acknowledgements section of Active Value Investing. It's at the last few pages of the book, so be sure not to miss it.
Why you should read this book?
First off, Vitaliy is keenly aware of the audience for his book. Value investors are a skeptical lot, and Vitaliy immediately sets about mentally disarming this tough audience. I chuckled when I read the imagined Q&A session with the "Skeptical Reader". I was more than willing to step into the role of the skeptical reader. The Q&A session did a good job of answering my questions about what is active investing, what is a range-bound market, and what I can do to address this market challenge. After this short section, I was motivated to read more.
Are we in a "range-bound" market?
Part I of Active Value Investing examines whether we are in a "range-bound" market. Vitaliy starts this section with a warning, "Fasten your seat belts and lower your expectations," and sure enough my expectations did drop a bit. Not to worry though, my expectations rose again after page 72 of this 282 page book and it definitely became a worthwile read.
The first 72 pages of the book takes you through a detailed statistical history of the market to support Vitaliy's thesis that we are in a range bound market. Like many other recent pieces on historical market performance, this part of the book relies heavily on Yale University professor, Robert Shiller's data. I must admit that I'm not much of a fan of historical market analysis and I've seen similar research elsewhere, so it was hard for this section to keep my interest. However, the paragraphs on the Japanese bear market (pg. 27-29) did pique my interest, and this discussion helped explain the difference to me between bear and range-bound markets.
Even though I struggled a bit to get through this part of the book, I definitely came away believing that there is a lot of evidence to support the possibility that we are in a range-bound market. My problem might have been that I was convinced too quickly. If you are anything like me, I recommend that you skim through this Part I of Active Value Investing once you are convinced that we are in a range-bound market.
How do I become an active value investor?
Part II of Active Value Investing was much more to my liking. It sets out to teach you how to be an "active" value investor. Vitaliy does this by detailing his quality, valuation, and growth framework. I found this to be an excellent approach to analyzing stocks.
In Chapter 5 on quality, I was especially excited to see a section on competitive advantage. I found it interesting that Vitaliy focuses on the importance of sustainable competitive advantage similar to the way I do, and uses the same term for it that I use. I know that Buffett uses the term "durable competitive advantage", and I've seen a few other variations elsewhere, but I prefer focusing on "sustainable" competitive advantage. To further illustrate what sustainable competitive advantage is, Vitaliy provides a great discussion on brands using several good examples to make his point. I had a similar discussion on brands back in October of 2005 in a post about brands versus franchises.
I also found the discussion on debt to be very enlightening. Vitaliy notes how stock buybacks distort the apprearance of the balance sheet and can result in debt-to-asset or debt-to-equity ratios that are misleading. I had never thought about this issue before, and I have been primarily using debt-to-equity ratios in my analysis, so I found this discussion to be extremely valuable. Instead of using the debt-to-equity ratio, Active Value Investing recommends we utilize the debt/EBITDA, debt/operating cash flows, EBITDA/interest expense, and operating cash flows/interest expense. I'll be definitely relying on some of these other ratios a bit more in the future. Vitaliy followed up this discussion on debt with an illustrative case study of Colgate-Palmolive's capital structure. This is one of the strong points of Active Value Investing, the book includes many good examples to help the reader understand what a concept really means. Vitaliy fully explains how sustainable competitive advantage, high-quality management, predictable earnings, significant free cash flows, strong balance sheet, and high returns on capital are some of the main elements that help determine quality.
Growth is also an important element of active value investing. Vitaliy uses a flipped growth pyramid to explain the drivers of growth. He lays out the primary strategies companies use to grow revenue and then goes on to talk about growth from margin improvements from operating efficiency, economies of scale, and stock buybacks. Vitaliy includes a good case study of Westwood One's share buyback, which illustrates how share buybacks can destroy shareholder value if done improperly. This section on growth concludes with the topic of dividends and their relative importance in a range-bound market.
Valuation is at the hear of active value investing. Vitaliy does an excellent job explaining the concept of discounted cash flow analysis using the story of Tevye the Milkman. Tevye's cow, Golde, and her various cash flows are cleverly illustrated. I know I will be using this graphic in the future when I'm asked to explain discounted cash flow analysis. One unique concept introduced, was the absolute P/E model. The absolute P/E valuation method uses a schedule of expected EPS growth rates and, dividend yields to adjust a base P/E value level. This multifactor P/E model seems practical but relatively untested in my mind. I'd be interested in talking to Vitaliy in ten years to see if he still uses it. Regardless, it still might be interesting to compare the results you get with more traditional discounted cash flow models with this absolute P/E method of valuation to see how close your results come out.
I highly recommend that you read Chapter 12: Sell Process - Make Darwin Proud, if you read anything in this book. This chapter was a wake-up call to me. I don't have a really good sell process and the one Vitaliy presents is very logical and seems to be the key to acheiving good investment performance in a range-bound market. Vitaliy recommends setting a P/E target level right away to determine when to sell a stock. He even suggests using a stop-loss strategy after a stock reaches its fair valuation. I've started using this particular strategy.
Finally, I also recommend reading chapter 13 on risk. If you are new to the topic of risk and randomness, this chapter will be a great introduction for you on the topic. He breaks the concept of randomness into two components: the level of uncertainty and the significance of impact. I am a big fan of Steve Irwin, the Crocodile Hunter, and I think Vitaliy did a great job discussing the role of randomness on Steve Irwin's life.
In summary, I think there is a lot of substance to Active Value Investing. The first few chapters might turn off some (market history buffs might love it), but the second half of the book is a real gem. If you are new to the concept of value investing, you will learn a tremendous amount from the clear and instructive writing. Even if you are a seasoned value investor, you will find several unique concepts and new ways of looking at value investing.
 Read It and Refer To It Often October 30, 2007
6 out of 12 found this review helpful
Vitaliy Katsenelson has written a classic among investment books. His style is highly personal and conversational. Katsenelson has shown the rare ability to synthesize large amounts of information, gleaned from years of passionate study, into a book that is intelligent and fun to read! The chapters on Sell Process and Risk are worth the price of the entire book. Investors interested in profiting from market moves, be they bull, bear or range-bound, will be rewarded by adding this book to their reference library and returning to it over and over again. One reading is definitely not enough, as the wisdom and knowledge contained in Active Value Investing are timeless.
Janice Dorn, M.D., Ph.D.
Chief Global Risk Strategist
Ingenieux Wealth Management, Sydney
www.thetradingdoctor.com
Good for value-minded folks managing their own portfolios. October 27, 2007
4 out of 7 found this review helpful
From InvestorGeeks.com:
Question: are we in a bull market or bear market? What if there was a third option? In Active Value Investing: Making Money in Range-bound Markets, Vitaliy Katsenelson makes a case that the current market is actually a "range-bound market" and then gives you the tools to take full advantage of the fact.
What is a Range Bound Market?
Range-bound markets are characterized by their roller-coaster-like volatility and the fact that despite this volatility, money invested in the beginning of the cycle will have close to 0% gains by the end of the cycle. In fact, range-bound markets are more common than bear markets. Katsenelson says:
"...if you look at the U.S. stock market during the entire twentieth century, most of the prolonged (greater than five years) markets were actually bull or range-bound markets. Prolonged bear (declining) markets happened in the past only when high market valuation was coupled with significant economic deterioration, similar to what was going on in Japan from the late 1980s through 2003 or so."
This chart from the book shows the past 107 years bull, bear, and range-bound markets as labeled by Kevin A. Turtle.
[Bull, Bear, and Range-bound Markets from 1900-2007]
Chart by Kevin A. Turtle
You'll notice that each of the big bull markets was followed by a dip into a prolonged range-bound market. Our current market looks like it is trading in a range (with us on the upswing right now). And though we're at an all-time high, the market-wide average P/E is still way below it's pre-2001 levels.
The past shows us that we are due for a range-bound market. I'm not a huge fan of the "since this is how it worked in the past century, this is how things will work now" argument. Many authors stop at just that. Luckily for Katsenelson, he kept my interest by going deeper into things and explaining WHY he thinks the cycle will continue.
This was huge for me. Instead of using faith in history to predict the market, VK discusses human psychology and how the act of going through a long-term bull market (where you never lose going long and your biggest weakness is taking things too slow) affects your investment decisions going forward. What follows is a market of investors who are just more conservative than they were in the bull run, and the end result is a long period of "PE contraction". VK explains this in easy-to-read, convincing language.
Another great summary of why range-bound markets exists comes on page 168:
"If we can agree that the difference between low- and high-P/E stocks is the expectation of growth, this means that in the beginning of a range-bound market investors are willing to pay 200 percent premium for growth, whereas at the end of a range-bound market investors are willing to pay only a 40 percent premium."
Why do I care? What should I do?
Learning about range-bound markets will give you several "aha" moments that will help you think of the current market environment in new ways. But, understanding range-bound markets is just the first part of the book. The more applicable lessons come in the later sections.
The "analytics" section introduces the QVG framework (for quality, valuation, and growth). The basic gist is that because market-wide P/E depreciation is going to eat into profits, you need to be more diligent across these three "vectors" to choose outstanding stocks that will provide greater returns.
Some of the material in the QVG section may be familiar to those of you have read a few investment books. But I think it is still valuable to read these sections closely as there are a lot of good gems in the details. I found VK's treatment of stock buy backs especially pertinent to some of the tech stocks I trade.
I also appreciated the discussion on sources of growth. We all know to look for Google-like stocks with high earnings and return on investment capital (ROIC) growth rates, but it is also important to know where a company's growth is coming from so we know how long the growth will last or if something material might happen to affect that growth.
These are the types of details you'll get out of the book. And even if you've been exposed to this stuff before, it is always great to be reminded of it. Additionally, thinking of things from the range-bound angle will bring new meaning to old concepts.
Putting the Value in Active Value Investing
The chapter on value has a cute story about "Tevye the Milkman" and his cow "Golde", which does a great job of explaining how stock evaluation work. It's a bit elementary, but a fun read anyway. Later in the chapter VK gets into a discussion of "Relative" vs. "Absolute" valuation tools. An example of a relative valuation tool would be the P/E, which is a measure of price relative to earnings. Absolute valuation models are great because they ground your observation in the real world. This is similar to Peter's Main Street vs. Wall Street analysis or my balking on my GOOG analysis (though I still went long GOOG then and am long now).
If you are a numbers geek (like me), you'll really like Katsenelson's treatment of "Absolute P/E". We always say stuff like "I am willing to pay more for the quality of stock x". VK puts specific values on statements like these. What is quality management worth? What is best of breed worth? All of these impact V's "absolute P/E" calculation, which is very much like calculating the base P/E that we are used to and then adding or docking points based on how the company stands up across a number of factors.
I also like some of the additions VK makes to the typical margin of safety (MOS) discussion. In general stocks with higher growth and dividends can be invested in with lower MOS because less of the gain in stock price will be due to MOS. whereas a stock with 0 growth will gain ALL of its price from MOS.
The typical Graham/Buffet/Town rule-of-thumb is to shoot for a 50% MOS. Katsenelson gives a method for adjusting the required MOS (based on a number of risk factors) before jumping into a stock. This is great because in bull runs, it can be very hard to find solid companies with 50% MOS. Phil Town will tell you that "if you are more familiar with a company, you can lower your required MOS". Vitaliy Katsenelson gives you mathematical way to figure out the exact MOS you can buy at.
Math!?
Again, the math in the book isn't too complicated, but it's there. It shouldn't scare anyone away from reading the book, but it may get those of you who thrive on quantitative frameworks excited. One of the reasons folks like me like bringing math into investing and other activities like playing poker, is that it allows us to remove our emotions from the game. The goal is to find a formula that makes money that you can replicate over and over. If your formula loses money on a trade (because we'll all lose money on trades some of the time) it's easier to handle than if you make the decision based on "feeling" or other less concrete methods.
The Formula. The Strategy.
The strategy section of the book puts forth a pretty simple three-part strategy and then dives further into each part.
1. Assemble a portfolio of the right companies.
2. Buy them at the right prices.
3. Sell them at the right prices.
By the time you get to this section, you'll have all of the tools (based on the QVG framework) to achieve each of these objectives. The remaining pages include a number of anecdotes and examples that will help you execute the strategy. You'll see headings like "Think Long Term, Act Short Term", "Decide How the Game Will End Before It Starts", and "Location of Corporate Headquarters Abroad May Not Constitute a Foreign Company". Again, these are anecdotes you may be familiar with. Chances are there are a few in there, you're not. I enjoyed VK's fresh view on these concepts and came away with a greater understanding than I had before.
Overall, Active Value Investing is a good read. The concept of a range-bound market is one that you may not have been exposed to yet. Understanding how the range-bound market comes to be and the properties it has will help you understand the current market.
Additionally, while the active value investing model is presented as the best strategy to use in a range-bound market, it's also not too shabby in a bull (or even bear) market. You'll have to dig into the book to learn why, but the system VK describes will earn you the most money in a highly volatile market like we are in and save you the most money in a full on bear market. In bull markets, you might be giving up a few % points of return, but this may be worth it for the extra sleep you'll be getting. And it will defiantly benefit you when the market eventually falls.
This book was a risky one for Katsenelson to write. As he admits in the introduction, books about bull markets sure do sell better... they're just more exciting. Also, if the market continue to shoot up, VK runs the risk of having a book on the market with a failed prediction at the core. I admire and appreciate VK for writing this book. I think it's an especially good read in today's market environment but also a book that you could learn from no matter what.
Buy It
At $50 for the hard cover, you might want to go-in on this with a buddy or spend a couple days at your local bookstore. If you're rich, you can buy it now from Amazon and support our site a bit. Link below.
Active Value Investing by Vitaliy Katsenelson
(update: Amazon is selling the book in the low $30s, which is a good deal)
Rating: 4 out of 5 stars
Best Suited For: Value-minded folks managing their own portfolios.
A modern day approach to a classic style of investing October 26, 2007
2 out of 3 found this review helpful
This book is gives the investor all the tools and insight into what happens during range bound markets (which we are in) and how to manage money most effectively during these periods. Considering the numerous negaative catalyst on the horizon (tax increases, social security shortfalls, and healthcare reform), it's imperative that investors ready themselves with as many different investment strategies as possible to navigate these volatile times. This book helps you do that.
 Very High P/E ratio October 23, 2007
9 out of 30 found this review helpful
I bought this book as part of the "best value" package that Amazon offered, while trying to buy "The Intelligent Investor". It was a misleading offer.
I think the P/E ratio of this book is 1000. Still wonder how can Amazon link this book with the classic " Intelligent Investor" ?; because of the title ?
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