Book Summary: Active Value Investing

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
  • Inflation
  • final P/E
  • starting P/E

 

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