The Small Book of Sideways Markets: How to Make Dollars in Markets that Go Nowhere (Little Books. Huge Profits)
- ISBN13: 9780470932933
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“It’s challenging to talk clearly about investing and make sense to ordinary readers at the exact same time. Katsenelson gives a lucid explanation of today’s markets with sound guidance about how to make funds even though avoiding the traps that the market sets for exuberant bulls and frightened bears alike.” — Thomas G. Donlan, Barron’s
“A thoroughly enjoyable read. Offers a clear framework for equity investing in today’s ‘sideways’ and volatile markets useful to everyone. Clear thinking and clear writing are not usually paired – well carried out!” — Dick Weil, CEO, Janus Capital Group
“The bible for how to invest in the most tumultuous financial market environment since the Excellent Depression. A accurate guidebook for how to construct wealth prudently.” — David Rosenberg, Chief Economist & Strategist, Gluskin Sheff + Associates Inc.
“A great, grounded read for new and seasoned investors alike, Katsenelson explains in plain English why volatility and sideways markets are a stock picker’s finest friend.” — The Motley Fool, www.Fool.com
Praise for Active Value Investing
“This book reads like a conversation with Vitaliy: deep, insightful, inquisitive, and civilized.” — Nassim Nicholas Taleb, author of The Black Swan
Q&A with Author Vitaliy N. Katsenelson 
What approach do you recommend taking in sideways markets?
What I propose in the book (and practice in life) is active value investing. Instead of being a marketplace timer, I’m a acquire-and-sell investor, with a focus on valuing individual stocks.
Find stocks that lie within your circle of competence, analyze them as to regardless of whether they meet your qualitative criteria (such as competitive benefit, strong balance sheet, high return on capital, shareholder-friendly management. etc.), value them, figure out an appropriate margin of safety (discount to fair value, which ought to be increased in range-bound markets), and you’ll thereby arrive at a price at which you’d want to acquire them.
If a stock trades at or below your get price, get it; if not, put it on your watch list. When the stock reaches your fair-value level, you don’t hold it, you sell it. Repeat this procedure over and over once more.
What is one piece of advice you’d give to readers about investing in sideways markets?
An investor makes dollars from stock appreciation and dividends. Stock appreciation is driven by P/E expansion and earnings/money flows growth. If you see an apparent catalyst (news or event) that will force P/E to go up – wonderful! But in my experience I discovered that it is the apparent absence of a catalyst that creates an undervaluation. Wall Street is fairly short-term oriented, consequently if the stock is undervalued but there is no reason or a catalyst to support it go up in the next quarter or two, it gets dumped.
Here is what I propose. Get stocks that grow earnings and pay dividends, this will put time on your side — you are obtaining paid to wait.
Earnings growth is compressing P/E under the stock and dividends are a real time payment for your patience. If a organization doesn’t grow earnings and pays little dividend, make certain undervaluation (possible P/E expansion) is substantial, or there is a clear catalyst, as time is not on your side in this case. For instance, if you locate a stock that is 20 percent undervalued, there is no catalyst, no dividend or earnings growth it is almost certainly not worth purchasing.
What is a “don’t” when it comes to investing in sideways markets?
We require to shield ourselves from the outside world. I am not advocating moving into a cave with no electricity. But we really should not permit the outside into our lives unchecked. If we do, the marketplace will become our master, dictating what we do – which is the opposite of what we need to be doing. I actively try to isolate myself from influences of the marketplace. I discovered the most productive time I have is on airplanes, since I can write and think for hours; there is small interference by the outside world. I truly try difficult to only check the costs of my stocks a couple of times a day. I have not perfected this yet — we all have poor habits that it takes time to break. But if we are conscious of the negative influences the outside world can have on us, there may possibly be hope for changing our behavior.
I normally try to read newspapers and otherwise keep up with the news just before I get to the office. Then I try (this is still an effort) to turn off the Wi-Fi switch on my laptop — this kills the world wide web, such as email, Skype, IM, and RSS feeds. I try to recreate a plane-like environment at work. I don’t turn on the TV during the day. And when I do tune back in, I try to listen to far more podcasts, and watch PBS a lot more and company TV much less. So to answer your question, I think we ought to produce an environment where the outside world doesn’t change (shrink) our time horizon.
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My senior year of high school I joined the broadcast journalism class – which creates pieces for the video announcements each and every friday. Here is a EXCERPT of one of the videos my partner and I did for KCHS-TV on How Kids Make Dollars.
Video Rating: / 5
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- The Little Book That Still Beats the Market (Little Books Big Profits)
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Aleichem reincarnated as a value investor,
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.
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|A Summary of Active Value Investing,
Vitaliy Katsenelson’s new book can, in my mind, be broken up into three parts. He begins with his argument that we are in a sideways market. He follows that up with a bit of a tutorial on value investing, and finishes with a few miscellaneous observations.
His sideways market thesis is that following a secular bull market, such as we had in the 90s, we are doomed to spend a number of years in a sideways market. It wiggles around, but ends up roughly where it started. He does some calculating, not to predict the precise length of the sideways market, but to give the reader an idea of the factors involved. (If his assumptions are correct, the current sideways market has another 11, or maybe14 years to go. I don’t have a lot of faith in the precise numbers he uses, but neither does he, so that’s no criticism.) The central reason for making the sideways market argument isn’t to pinpoint the length of the market move, but to convince the reader that, in such a market, it’s tough to make money just by being in the broad market, or by being a buy-and-hold investor. We can however, make money by opportunistically buying individual stocks when they are cheap, and selling them when they are fully valued. Don’t time the market, but do time individual stocks.
The middle of the book (chapters 4-12) is a tutorial on value investing. I don’t think it contains anything that well-read investors won’t have come across elsewhere, but it is put together nicely, and pays attention to a few ideas that are often ignored or underplayed in the value investing literature. Specifically, there is a nice piece on the importance of focusing on process, rather than outcome (an idea popularized, though by no means discovered, by Nassim Taleb) and a chapter on ways that poor management can destroy free cash flow. Value investors sometimes treat free cash flow as the holy grail of investing and valuation, ignoring the ways management has historically handled the cash, either creating or destroying value.
The book concludes with a group of largely unrelated chapters ranging from a mildly behavioral-finance influenced pep-talk to a critique of the Chinese economic model. A few of these are interesting, a few are a waste of paper and ink (chapter 13, I’m looking at you).
My biggest criticism of the book is that I’m not quite sure what the target audience is. The first few chapters are a bit on the technical / numerical side for a rank beginner, and don’t contain enough data or a strong enough argument to really convince a more experienced investor who doesn’t already agree with the thesis. Yes, the pattern of bull market followed by a range-bound market has occurred a few times over the last 100 years, but the ranges and lengths have varied a lot, and I saw no compelling reason to think that a bull market couldn’t start from a higher level than Katsenelson thinks it could, that we couldn’t have another bear market (such as the one post-1929), or any of a number of other possible scenarios. Investors often make the mistake of thinking that this time is different, but they also make the mistake of thinking that the future will be just like the past. In the end though, I don’t think that the sideways market thesis is important, beyond the idea that we can make money when the overall market isn’t moving strongly up or down. I’ve been following a method similar to the one he advocates here since the late 90s, and have experienced success with it personally, so I didn’t need much convincing.
The value investing tutorial portion of the book appears to be written for the true beginner, using very simple and non-technical examples, but I don’t believe it goes quite far enough to be the sole resource of a new investor. Where should an investor go to get the sort of information on a company that Katsenelson recommends using? How do you read a cash flow statement, or a balance sheet? How do you read a 10-q, or a 10-k, or a proxy statement? Should you be reading these at all? I think it’s a rare investor who knows these things, but still needs Katsenelson’s farmer-buying-cows example to figure out why free cash flow is important.
My primary question before buying the book (which I could not, at the time, answer) was what this book would offer to someone like myself, who had already read Katsenelson’s previous book, Active Value Investing. The answer is “very little.” I loved Active Value Investing. I wasn’t entirely convinced by his range-bound-markets hypothesis, which has been re-named “sideways markets” in the current book, but thought that the meat of the book, on value investing techniques, was great. Most of the current book is an abbreviated version of Active Value Investing, with liberal use of the cut and paste function. Large chunks of the books are identical. Many chapter headings are the same. The last few chapters are new, but not particularly useful, and…
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