Active Value Investing: Making Money in Range-Bound Markets (Wiley Finance) (Hardcover)

~ Vitaliy N. Katsenelson (Author)
Key Phrases: annual total return, value quintile, relative valuation tools, United States, Wall Street, Poor's Compustat (more...)

Editorial Reviews

Review

Katsenelson's is straightforward enough to keep a rookie investor engaged, and in-depth enough to retain the interest of old pros, which makes this a great book for those of all skill levels. He does a comprehensive job of reviewing the market's past, projecting its potential future, and developing a case for why value investing will shine as the market stagnates. He combines historical and financial analysis, along with engaging stories from his experience as a professional investment manager.--Chuck Saletta, Motley Fool

This book should be considered a practical compendium of modern finance, leaving no stones unturned on your way to better investments. Katsenelson’s passionate, witty and accessible writing expertly takes the reader through his original framework for valuing stocks in range-bound markets. A student of history and an overzealous stock picker, the author entertainingly illustrates every concept with a collection of real-world examples, demonstrating an impressive breadth and depth of understanding of what makes stocks move!--J.P. Tremblay, CFA

"How to adapt value investing for "range-bound" markets." (Financial Times, Tues 26th February 2008)

"The new Benjamin Graham is Vitaliy N. Katsenelson. I highly recommend Katsenelson's book, Active Value Investing: Making Money in Range-Bound Markets (Wiley, 2007). I like to think the old Ben Graham would have recommended it, too."--Forbes

Product Description

A strategy to profit when markets are range bound–which is half of the time

One of the most significant challenges facing today’s active investor is how to make money during the times when markets are going nowhere. Bookshelves are groaning under the weight of titles written on investment strategy in bull markets, but there is little guidance on how to invest in range bound markets. In this book, author and respected investment portfolio manager Vitaliy Katsenelson makes a convincing case for range-bound market conditions and offers readers a practical strategy for proactive investing that improves profits. This guide provides investors with the know-how to modify the traditional, fundamentally driven strategies that they have become so accustomed to using in bull markets, so that they can work in range bound markets. It offers new approaches to margin of safety and presents terrific insights into buy and sell disciplines, international investing, "Quality, Valuation, and Growth" framework, and much more.

Vitaliy Katsenelson, CFA (Denver, CO) has been involved with the investment industry since 1994. He is a portfolio manager with Investment Management Associates where he co-manages institutional and personal assets utilizing fundamental analysis. Katsenelson is a member of the CFA Institute, has served on the board of CFA Society of Colorado, and is also on the board of Retirement Investment Institute. Vitaliy is an adjunct faculty member at the University of Colorado at Denver - Graduate School of Business. He is also a regular contributor to the Financial Times, The Motley Fool, and Minyanville.com.

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Product Details

• Hardcover: 304 pages
• Publisher: Wiley; illustrated edition edition (September 28, 2007)
• Language: English
• ISBN-10: 0470053151
• ISBN-13: 978-0470053157
• Product Dimensions: 9.1 x 6 x 1 inches
• Shipping Weight: 1.2 pounds (View shipping rates and policies)
• Average Customer Review: 4.5 out of 5 stars  See all reviews (40 customer reviews)
• Amazon.com Sales Rank: #223,964 in Books (See Bestsellers in Books)

Customer Reviews

Most Helpful Customer Reviews

17 of 18 people found the following review helpful:

4.0 out of 5 stars An Insightful Perspective to Investing, November 4, 2007

By	Hesham Gad (Athens, GA) - See all my reviews (REAL NAME)

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.

96 of 119 people found the following review helpful:

1.0 out of 5 stars A complete waste of time..., January 23, 2008

By	Christopher Jackson - See all my reviews (REAL NAME)

One of my only posts because few are so bad that they compel me to write a review.

This is easily the worst book on investing I've ever read. I actually experienced a sense of agony in reading this book knowing I could be reading something better. It should not even be called a value investing book.
The author suggests finding companies that have low P/E's, that are fundamentally sound. He gives a very brief, useless description of what soundness is and is not. In fact his method for determining a stock's value as a whole is very shallow. I felt like he is just a journalist describing the surface of things. He mentions nothing of where to find a companies fundamentals, but briefly describes how they should look "strong, good, upward-trending", etc.

The worst of all is that I have a firm suspicion the he had his close friends and colleagues give him such high reviews. For example take a look at all the reviews. Most read just like the editors review of the book. Very long and touting promise. Next he gave the book to several of the reviewers and asked them to review it. They actually mention that in their reviews. The result being that all the longer reviews sound the same as if he gave them some press release to put their own spin on without reading the book. And lastly, a good number of reviewers come from the city where he teaches at, Denver. Most likely associates of some sort just doing him a favor.
If you think that unlikely, Google the book. You'll find the same reviews of the book from Amazon on other investors websites.

Bottom line. Don't buy this book. I'll be putting mine on here for .01 cent if you really must have it.

25 of 32 people found the following review helpful:

4.0 out of 5 stars Fat Pitch Financials take on Active Value Investing, October 30, 2007

By	George "FatPitch" (FatPitchFinancials.com) - See all my reviews

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.