![[Front cover of Active Value Investing]](http://www.canadiancapitalist.com/images/books/active_value_investing.jpg)
In his book, Active Value Investing, Vitaliy Katsenelson makes a compelling argument that equity markets are now trapped in a range-bound market that he estimates will last until 2020 or so. In the first part of the book, he makes the case that secular bull markets are usually followed by secular range-bound markets, in which the drop in P/E ratios negate earnings growth. Keeping with the bull and bear imagery, he suggests calling a range-bound market cowardly lion, whose “bursts of occasional bravery lead to stock appreciation, but are ultimately overrun by fear that leads to a subsequent descent”.
If the markets are treading water for as long as a decade, how do you invest profitably? Even traditional value investors, who buy low-priced stocks and hold forever, cannot earn satisfactory returns. Vitaliy suggests that investors should profit in range-bound markets by buying value-priced stocks with an adequate margin-of-safety and selling them when they are fairly priced (hence the “Active” in the title). The rest of the book focuses on providing investors with the tools to help them do just.
I found Vitaliy’s book to be an impressive, scholarly piece of work. The author is a money manager and teacher and it shows in the book. Investment concepts are clearly explained and heavy-duty valuation concepts are liberally illustrated with examples. The Quality, Valuation, Growth (QVG) model and valuation tools discussed in-depth will be invaluable for picking stocks for the active portion of your portfolio. Anyone with even a slight interest in picking stocks will find something useful in this book.
Published by Wiley Finance, the book is listed for $59.99 and is available for $37.79 from Amazon.ca (affiliate link). The Table of Contents, Overview and Preface of the book can be found on the book’s website.
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8 responses so far ↓
1 Alex // Oct 15, 2007 at 3:07 am
I just have a question, why did you move to ETF from owning individual stocks?
2 Phil S // Oct 15, 2007 at 7:57 am
If the broader market truly does remain range bound as this author seems to suggest - then the simple answer is to invest for yield on investments that pay some kind of a distribution.
I personally don’t agree with that basic premise, however. I think the TSX is overbought and earnings growth expectations are too high. At the first hint of any disappointing economic or earnings news, the TSX will take it on the chin. Hence, all my “new” money is going into cashable GICs for now. In case I’m wrong, I haven’t sold any of my existing equities, though.
3 Canadian Capitalist // Oct 15, 2007 at 9:24 am
Alex: I owned around 20 individual stocks and I was finding that I was barely beating the markets before taxes and it was sucking up a lot of my time. So, I questioned myself if picking stocks for the entire equity portion was worth my time. I still love to pick stocks but I restrict myself to the Canadian equity portion.
Phil: Vitaliy points out that in range-bound markets most of the returns are in the form of dividends. The book mostly talks about the U.S. equity market, but he does note that the market will yo-yo but remain range bound.
4 Jon D. // Oct 15, 2007 at 10:24 am
Does the author quantify what “satisfactory returns” are? Ie, average returns, 5 or 10 year CAGR returns?
Anytime I hear “active” I think of tax implications for non-sheltered investors. Is this addressed at all in the book?
5 pessimist // Oct 15, 2007 at 12:45 pm
I’m wondering about putting money in GICs, even assuming range bound markets. After the tax we pay in Canada on income, how badly would the market have to do to make GICs palatable?
Also, does he discuss emerging markets at all? I have a hard time believing they’re going to be range bound.
6 Canadian Capitalist // Oct 15, 2007 at 2:23 pm
Jon: No, taxes are not addressed. I’m guessing that the author would contend that paying taxes ain’t so bad considering that capital gains from passive investing is close to 0% and most of the gains come from dividends. Still, I am not willing to give up on passive investing because I’m not sure average investors can successfully beat the markets.
pessimist: Vitaliy suggests investors look into foreign stocks but to stay within the developed markets. You’re right about fixed income investing in taxable accounts may not be very appealing.
Tomorrow’s post “Passive Investing in Range-Bound Markets” tackles some of the points raised in your two comments.
7 Passive Investing in a Range-Bound Market // Oct 15, 2007 at 7:31 pm
[...] Contact ← Book Review: Active Value Investing [...]
8 active value investing — award tour // Oct 18, 2007 at 12:00 pm
[...] Book Review: Active Value Investing. book claims that equity markets will remain “range bound” for the next decade. and a follow-up post on passive investing in a range-bound market. [...]
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