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Vitaliy Katsenelson
Vitaliy Katsenelson
Articles (126)  | Author's Website |

The Little Book of Sideways Markets is Out!

December 15, 2010

The Little Book of Sideways Markets is officially out. It was a fun and interesting project. I took Active Value Investing (my first book), completely rewrote the first half of the book, added three new chapters (“Born Again Value Investor” is my favorite one), updated it to reflect the post-Great Recession economic environment, added new examples, explained some things differently (hopefully better), distilled it, and made it an easier read for a much wider audience. This book is not just written for professionals and serious investors but for “civilians” as well. I hope you enjoy it. Here is the book’s website and Amazon’s page

If your friends (or enemies) want to subscribe to my completely free articles, they just need to click here.

I did a short segment on CNBC’s Fast Money (it was cut short due to breaking news). I briefly discussed Medtronic (MDT) and L3 Communications (LLL) and did a lengthy segment with the very witty Josh Lipton of Minyanville fame.

The Little Book of Sideways Markets Makes Value Investing Come Alive

(Little Book was reviewed by Brenda Jubin on Seeking Alpha. Disclosure: I’ve never met Brenda, nor did I kidnap her kids in return for this very kind review.)

Vitaliy N. Katsenelson’s The Little Book of Sideways Markets: How to Make Money in Markets That Go Nowhere (Wiley, 2011) is thoroughly enjoyable, not so much for the message as for the thoughtful and often entertaining way in which it is delivered. It is part of the “Little Book Big Profits” series that began with Joel Greenblatt’s The Little Book That Beats the Market in 2005 (recently updated) and now includes fifteen titles.

Katsenelson’s hypothesis is that we will likely be in a sideways market, personified by the cowardly lion, “whose bursts of occasional bravery lead to stock appreciation but are ultimately overrun by fear that leads to a descent,” until about 2020. (p. 3) His reasoning is that we are experiencing earnings growth but continuing P/E compression: the gains we get from earnings growth are wiped out by a decline in P/E ratios. Even though there can be a lot of cyclical volatility, over the long haul stock prices will stagnate. Until the 12-month trailing P/E falls “significantly below the historical average of 15” (by mid-2010 stocks were trading at more than 19 times 2010 earnings) the sideways market will continue. (p. 27)

If this hypothesis is borne out, buy and hold (never a great idea in any environment) absolutely must be replaced with buy and sell. “A disciplined sell process injects a healthy dose of Darwinism … into the portfolio, weeding out the weakest stocks—the ones that have deteriorated fundamentals or diminished margin of safety—in favor of stronger ones.” (p. 164) That is, once the reasons you bought the stock (valuation, quality, and growth) have disappeared, sell and move on.

Katsenelson takes his reader step by step into the mind of the value investor by relating, in a fictional addendum to Fiddler on the Roof, the story of Tevye’s purchase of Golde, the cow. He also describes his own big-time gambling evening (he was willing to lose a maximum of $40) and that of a half-drunken, rowdy fellow blackjack player to stress the importance of process. He then moves on to the fundamental principles of active value investing.

What differentiates this book from so many others on value investing is that it describes, sometimes through the use of case studies, the thinking of a value investor. Not just his models or his metrics but his assessments. Katsenelson is an empiricist who weighs facts, looks for contraindications, and makes decisions. He makes value investing come alive.

This may be a little book, but it’s packed with insights for both novices and experienced investors. And it is a delight to read.

Vitaliy N. Katsenelsonhttp://contrarianedge.com/

About the author:

Vitaliy Katsenelson

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo. He is the author of The Little Book of Sideways Markets (Wiley, December 2010). To receive Vitaliy’s future articles by email or read his articles click here.
Investment Management Associates Inc. is a value investing firm based in Denver, Colorado. Its main focus is on growing and preserving wealth for private investors and institutions while adhering to a disciplined value investment process, as detailed in Vitaliy’s book Active Value Investing (Wiley, 2007).

Visit Vitaliy Katsenelson's Website

Rating: 2.7/5 (7 votes)


Batbeer2 premium member - 6 years ago
Katsenelson’s hypothesis is that we will likely be in a sideways market, personified by the cowardly lion, “whose bursts of occasional bravery lead to stock appreciation but are ultimately overrun by fear that leads to a descent,” until about 2020...

Well..... that's all I read.
Superguru - 6 years ago    Report SPAM
Japan's Nikkei has been range bound too between the range of 8000 - 20,000.

Halis - 6 years ago    Report SPAM
There was another book about value investing where they use case studies, it's called Security Analysis...
LwC - 6 years ago    Report SPAM
I've noticed that the "Little Book of …" series books have been getting bigger since the first one was published, and this one may set a new standard. Maybe this one should have been called the "Big Little Book of …"

My favorite quote from the book review included in this self promotional "article" is:

"If this hypothesis is borne out, buy and hold (never a great idea in any environment)…"

IMO while it may be fair to assert that a buy and hold strategy might not be as successful in the coming decade or so as it has been in some past periods, by no means is it possible to know that for sure and IMO it is utterly ridiculous to assert that a buy and hold strategy is "never a great idea in any environment." The facts of history has shown that idea to be ridiculous. Almost certainly there will be opportunities in the future to successfully execute a "buy and hold" strategy. Often that time will be heralded by the headline news that "buy and hold" is dead.

Considering that it appears today most equity investments are turned over something like every 90 days or so on average, a buy and hold strategy might look like one in which equity investments are held for 3 - 5 years or so. That kind of buy and hold strategy might work even in today's investment environment, especially if one focuses on only buying equities that provide an adequate margin of safety.

Oh well, some people like vanilla, others prefer chocolate.

Halis - 6 years ago    Report SPAM
I'm a buy and hold investor, but to me that doesn't mean hold forever. If an investment rises to the intrinsic value that I estimate, then I might sell it. I will definitely sell it if there are still other investments with a margin of safety that are available. If there are none available, then I might sell and hold cash. If the investment has a good record of long-term returns then I might hold it even though it's at intrinsic value. It just depends.

But what buy and hold DOES NOT mean is, "I think XYZ is worth $100 and I bought it at $50. Now that it's at $60 I'm going to sell and wait for the pull back to $55, buy it again, sell it at $70, wait for the pull back to $65, sell it again....."

That's just speculating, trading and I know of no way to do that successfully. You have to be patient and wait to sell, until you've made ALL your gains. Then it's just a matter of assessing your investment vs. what's available in the various markets.
Puff6962 - 6 years ago    Report SPAM
The Japanese have been locked into a flat market for so long because their companies seek market share over profits. ROE's in Japan lag the world and, since none of the companies in question have taken over the world, that ultimate ability to decide the price of a commodity product has never emerged.

In our case, particularly for those with a high international exposure, ROE is the key measure of performance. Those companies that can keep it high in a recession (usu. those with low cap ex needs) will deserve higher PE multiples and can emerge explosively from a bear or lackluster market.

I agree that PE compression may occur, but it will be spotty. There is so much that separates us from the bear markets of the 1970's. I will be looking at those stocks that are already "compressed" all the while asking the questions regarding the company's prospects and has it been unfairly punished. Chasing "growth" stocks with high PE multiples is usually folly in any market condition.

By the way, Buy and Hold is the best of all strategies if you buy the right stock at the right time.

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