Chris Lau - Seeking Alpha

Saturday, April 24, 2010

Book Review: Active Value Investing: Making Money in Range-Bound Markets (Hardcover)

Active Value Investing: Making Money in Range-Bound Markets (Hardcover)

By: Vitaliy Katsenelson


If you are told to invest in mutual funds because you are told these funds would rise, would you blindly take this advice and expect funds to rise? The vast majority would do so.

If you started playing in the stock market, would you consider only price (Google is $600) and not value (Google has an intrinsic value of... Google has a quality value of... Google has a growth rate of...)? You are not alone. Most do so.

In the first case, investors are led to believe that stocks must rise, because they have always done so historically. Yet, there are exceptions: Japan.

Japan has been in a trendless market for 20 years. 20 years of net zero returns is a long time of nothing, to exasperate the idea of non-performance.

In Active Value investing, the author discusses the approach to take in earning a return in an environment where stocks trend up and down.

The viewpoint that North America is currently range-bound is not common.

You would be almost alone (along with the author) on this call.

This book compliments my need to approach in a market that is range-bound. For example, many countries (with some exception ie China and Brazil) are facing a balance sheet recession. This will mean that the government has limited capacity in taking a Keynesian approach to stimulate the economy.

Any strength by sector will be met with resistance and counter forces that pull that sector back down.

As a side note, in my analysis of companies such as Netflix, Cree, and Riverbed Technology, all three companies exceeded my price targets. These companies (in a virtual portfolio) were sold after the target was reached, upon which, the shares kept rising (Netflix rose from a target price of $62 to $100, Cree is $79.22 and Riverbed, with a target price of of $27, is now $33).

The author’s quantitative approach to analyzing the market is simple: QVG – Quality, Valuation, and Growth. This approach is consistent with the teachings of Graham (Margin of Safety).

It is also consistent with my own approach to valuation analysis using ranges of value. I first learned about this approach from my readings of and online lecture review from Seth Klarman.

The author encourages discipline in buying and selling securities. The author accomplishes this by teaching the reader to strip out the emotional aspect attached to investing.

This is a worthwhile read for any investor who does not want to be a fool, by being a mere member of the herd. Expressed another way, the author teaches the reader to avoid belonging among the vast majority of participants who invest in the stock market.

Active Value investing is available on Amazon.
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