Book: Active Value Investing – How to Make Money in Range-bound Markets.
Author: Vitaliy Katsenelson
Key takeaways: Range-bound markets are the bear-markets of P/E ratios, whereas bear markets are bear markets of P/Es and earnings. Range-bound markets are called payback markets. P/Es get very high over time not because investors’ risk tolerance truly changes, but because perception of risk becomes duller as investment success continues, turning even the most risk-averse investors into risk-seekers. Investors also become more confident over time, which tragically is very logical–if the strategy has worked up until a point, why wouldn’t you get more confident of the strategy? There’s the usual adage that 90% of returns come from asset allocation, but this doesn’t hold true in range-bound markets.
To make money in range-bound markets stay with quality companies that have a lower valuation multiple as compared to the market.
A way to visualize how long a market will remain a bull market is to compute the time using the following variables (assuming, not realistically, that the market will move slowly toward the new P/E over time) –
- Real economic growth
- final P/E
- starting P/E