Active Value Investing


I recently finished the book Active Value Investing: Making Money in Range Bound Markets, by Vitaliy Katsenelson. Before I go into the review, a word of caution… please do not take up value investing, or active value investing because the book sounds interesting. Investing is like a marriage or a career. success comes from finding a match that fits your personality. Many investment styles can work, but you always have to be disciplined, and the best way to be disciplined is to find a style that matches your personality and takes advantage of holding periods, risk levels, and research requirements that you are comfortable with.

The beginning of this book explores the idea of a "range bound market." We often forget that stock markets can go long periods of time without going up. One example of this is the range bound market from January 1966 until October of 1982, a period when the total return of the Dow was 0, despite rising and falling a lot within that period. Range bound markets often happen when, despite earnings growth, there is a P/E contraction. Katsenelson spends the first few chapters explaining range bound markets, and arguing that we are in, or about to enter one.

The second part of the book looks at the QVG – quality, value, growth – framework for analyzing stocks. If you are already a student of value investing, most of this will be review for you. Katsenelson puts more value on growth than the average value investor, but I think that's fine, as it can result in stock picks that have an overall higher quality, instead of the kind Warren Buffett calls "cigarette butts," meaning they just have one good puff left.

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The third part of the book looks at investment strategy and covers the buy process, the sell process, and international investing. The best part about this book, in my opinion, is the chapter on the sell process. When to sell is a problem for many value investors, as so much of the educational material is focused on when to buy. Yet, it a proper decision making process for when to sell is important, because buy and hold can be a lousy strategy in range bound markets.

The fourth and final section of the book has to do with risk and diversification. Like most value investors, Katsenelson is skeptical of beta, pointing out that risk really stems from ignorance. He advocates a small and focused portfolio that is large enough not to kill you if you make a bad decision, but small enough that you can really follow and continually analyze the companies you own.

Overall, I think this book is one of the top 3 books on value investing that I have ever read. It's clear, a little bit humorous, and has excellent examples to reinforce the points made in the text. It will serve well as an intro to value investing, or as a more in-depth study for the experienced value investor. You can follow Vitaliy's regular thoughts at The Contrarian Edge.