Active Value Investing - Making money in range-bound markets, Vitaliy N. Katsenelson

For the same reasons that I read my first technical analysis book, I read this book on active value investing to build up my knowledge about the tools that investors use to, well, invest. The reviews for this book were wide ranging, with many feeling that this book does not add much value to the reader.

I personally think that this may not be the best book on investing, as it does not highlight in great detail how to actually ascertain say the growth potential of a company, but only say that it is an important aspect that we need to take note off. However, it has given me some good insights nonetheless that I will incorporate into my meager well of knowledge on investing.

One of the key themes at the start of the book is that we are currently in a range-bound market, which often occurs right after a long and steady bull run. In fact, the market generally alternates between a range-bound and a bull market, having done so for much of the last hundred years. In a range-bound market, stock prices are not significantly higher at the end of the period (which can be more than 10 yrs) than at the start. As such, a buy and hold strategy doesn't work. One will have to actively manage one's portfolio, hence the name. The learning point here is that we will need to know when to sell, as the market will just keep yo-yoing between the upper and lower bounds.

The book recommends that we use traditional value investing strategies to evaluate the right company (e.g. using DCF) invest in. However, another point of departure is that the P/E for the entire stock market will be overpriced at the end of a bull run (and we are now at one of the most overpriced points in history) and the range-bound market corrects this by slowly eroding away the P/Es until it reaches a reasonable level for the next bull run to start. As such, it is all the more critical that we focus on companies with low P/Es. This is the second learning point.

I think that there is some truth to these analysis. Ever since I entered the stock market 1-2 years ago, it has been yo-yoing quite a bit, and there were multiple entry and exit points, which if I had capitalised on, would have earned me much more. However, the book made me realise that there is actually still much that I do not know and I need to learn. (Mainly cos the book mentions many terms but does not really explain how to use them.)