The Little Book of Sideways Markets: How to Make Money in Markets that Go Nowhere (Little Books. Big Profits)
The Small Book of Sideways Markets: How to Make Cash in Markets that Go Nowhere (Small Books. Massive Profits)
- ISBN13: 9780470932933
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"It's challenging to talk clearly about investing and make sense to ordinary readers at the identical time. Katsenelson offers a lucid explanation of today's markets with sound assistance about how to make funds even though avoiding the traps that the market place sets for exuberant bulls and frightened bears alike." -- Thomas G. Donlan, Barron's
"A completely pleasant study. Supplies a clear framework for equity investing in today’s ‘sideways’ and volatile markets beneficial to every person. Clear pondering and cl
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What Does a Farmer and Cow Have To Do With Speculation?,
I had the pleasure of listening to Vitaliy Katsenelson speak about his investing ideology at Agora Financial this summer in Vancouver, who when introduced was described as the "quintessential value based stock picker." Vitaliy took the stage and clarified himself as a "value investor who likes to communicate." I concur after reading his newest book, The Little Book of Sideways Markets: How to Make Money in Markets That Go Nowhere (Wiley, 2011). Vitaliy does a great job at telling simple stories that teach complicated lessons within the financial markets, while embedding value investing wisdom within those stories, so that we may capitalize when the markets are caught in a range, which he calculates to be 50% of the time.
From a trader's perspective "Sideways Markets" also provides real world advice for active traders that I can utilize within my trading plan tomorrow, while filling in any gaps that technicians may lack in the fundamental analysis department. As an active trader my biggest concern when reading an investing book is what can I take away from this book and use right now. Whether Vitaliy wants to admit he has a little active trader in him or not, it's quite apparent when you analyze the markets in hopes of gaining an edge from future direction, while adjusting your strategy along the way...that is described as trading. It's really just a question of time frame at this point.
My two favorite lessons for short-term traders in this book are brilliant in their simplicity. Vitaly tells a story about a farmer named Tevye and his cow Golde, that anybody can understand, illustrating the concepts of value investing, margin of safety, and the pitfalls of speculation. At the end of this fable was a very insightful concept that is more applicable to momentum investing than he probably realizes. "That's why I stopped bidding on sunny days when everybody's got a smile on their face." We all know about over exuberance and how it suckers most traders in at the exact wrong time.
The other lesson comes in the chapter Vitaliy recalls an experience he had at a casino. It's been well documented by many the similarities of professional gamblers to that of traders and the need to "spend more time focusing on the process, not on the outcome." Both need to protect their bankroll and they do that through a rigid system, and the personal discipline to follow that system no matter what their emotions are telling them. Traders and Gamblers both know when to follow through with the big bet while keeping their losses small to fight another day. If you allow your system to play out over the course of many trades and you have a profitable edge, you put the odds in your favor and you become the house, as long as your emotions are kept in check.
To better illustrate how accurately titled this book is, I've included a chart(see [...]for chart) The Little Book of Sideways Markets: How to Make Money in Markets that Go Nowhere (Little Books. Big Profits)of the S&P since 1997 showing how there has been a whole lot of up and down action, but essentially we've ended up right where we started. While markets, sectors, and stocks will continue to go up and down, Vitaliy points out that "the easiest way to combat p/e erosion is to increase the required margin of safety for stocks in your portfolio." And to do that you must become a stock-picker and analyze each individual stock with the components of quality, evaluation, and growth as the basis of your purchases. Only then will you put the odds in your favor to combat the roller coaster that has become the stock market.
If I had to disagree with any one thing within the book it's when the author states to sell a stock. When a stock reaches fair value, Vitaliy preaches that the stock should be sold, instantly. This goes against my trend trading rules because as long as the stock is moving higher, it would be in a trader's best interest to enter trailing stop to give one the potential to capitalize on more upside potential should the stock continue higher. I agree with the author that one needs to have zero emotions around your stocks, but it also is in your trading performance's best interest to stay invested when stocks are moving higher, as long as your trailing stops are in place.
Vitaliy's lastest book is thoroughly enjoyable, easy to read, and covers many different topics that your sure to learn something new as you make your way though it. I can say that after seeing him in person and reading this book, Vitaliy has a great understanding in what it takes to outwit the sideways markets that we find ourselves in.
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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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