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Active Value Investing: Making Money in Range-Bound Markets

ISBN: 978-0-470-05315-7
304 pages
September 2007
Active Value Investing: Making Money in Range-Bound Markets (0470053151) cover image


A strategy to profit when markets are range bound–which is half of the time

One of the most significant challenges facing today’s active investor is how to make money during the times when markets are going nowhere. Bookshelves are groaning under the weight of titles written on investment strategy in bull markets, but there is little guidance on how to invest in range bound markets. In this book, author and respected investment portfolio manager Vitaliy Katsenelson makes a convincing case for range-bound market conditions and offers readers a practical strategy for proactive investing that improves profits. This guide provides investors with the know-how to modify the traditional, fundamentally driven strategies that they have become so accustomed to using in bull markets, so that they can work in range bound markets. It offers new approaches to margin of safety and presents terrific insights into buy and sell disciplines, international investing, "Quality, Valuation, and Growth" framework, and much more.

Vitaliy Katsenelson, CFA (Denver, CO) has been involved with the investment industry since 1994. He is a portfolio manager with Investment Management Associates where he co-manages institutional and personal assets utilizing fundamental analysis. Katsenelson is a member of the CFA Institute, has served on the board of CFA Society of Colorado, and is also on the board of Retirement Investment Institute. Vitaliy is an adjunct faculty member at the University of Colorado at Denver - Graduate School of Business. He is also a regular contributor to the Financial Times, The Motley Fool, and Minyanville.com.

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Table of Contents


PART ONE: What the Future Holds.

Chapter 1: Introduction: Range-Bound Markets Happen.

Fasten Your Seat Belts and Lower Your Expectations.

Let’s Identify the Animal.

Secular versus Cyclical.

Distinction between Secular Bull, Bear, and Range-Bound Markets.

Is 100 Years Long Enough?

Stocks Carried the Torch in the Long-Run Marathon.

International Stocks Were Bright Lights, Too.

Will Gold Shine Again?

Gold’s Recently Emerged Competition.

The Deception of the Long Run (Marathon).

Range-Bound Markets Erode Bull Market Returns.

The Long Run for Us May Be Shorter Than We Think.

Chapter 2: Emotions of Secular Bull, Bear, and Range-Bound Markets.

Bull Market Euphoria.

Bear Market Doldrums.

What Does a Secular Range-Bound Market Feel Like?

Volatility of Bull and Range-Bound Markets.

Chapter 3: Stock Market Math.

Sources of Capital Appreciation: Earnings Growth.

Sources of Capital Appreciation: Price to Earnings.

Sources of Dividend Yield.

Why Range-Bound Markets Follow Bull Markets.

It Is Not Over Until It Is Over.

Chapter 4: Bonds: A Viable Alternative?

Why Not Bonds?

Asset Allocation Role Is Diminished in Range-Bound Markets.

PART TWO: Active Value Investing.

ANALYTICS: Introduction to Analytics: The Quality, Valuation, and Growth Framework.

CHAPTER 5: The "Q"—Quality.

Competitive Advantage.


Predictable Earnings.

Strong Balance Sheet.

Significance of Free Cash Flows.

High Return on Capital.


Chapter 6: The "G"—Growth.

Sources of Growth: Earnings Growth and Dividends.

Past Has Passed.

Future Engines of Growth.


Growth Matters—A Lot!

Chapter 7: The "V"—Valuation.

Tevye the Milkman’s Approach to Valuation.

Review of Relative Valuation Tools.

Absolute Valuation Tools—Discounted Cash Flow Analysis.

Relative versus Absolute Tools.

Absolute Models Overview.

The False Precision of Math.

Absolute P/E Model.

Discount Rate Model.

Margin of Safety Model.

The Marriage of Absolute P/E and Margin of Safety.

Bring Out the Toolbox.

The P/E Compression and How to Deal with It.

Chapter 8: Let's Put It All Together.

The Added Clarity.

One Out of Three Is Not Enough.

Two Out of Three Is Better, But Is It Enough?


STRATEGY: Introduction to Strategy: The Value of Process and Discipline.

Chapter 9: Buy Process—Fine-Tuning.

The Value of the Process and Discipline.

Think Long-Term, Act Short-Term.

Meet Your New Best Friend—Volatility.

Time Stocks, Not the Market.

Cash Is King.

Be Ready to Strike When the Time Comes.

Chapter 10: Buy Process—Contrarian Investing.

Contrarian Is the Name of the Game.

You Don’t Have to Own It.

Be a Myth Buster.

Quantify Everything and Be a Contrarian Headline Investor.

Time Arbitrage.

Finding New Ideas.

Do In-Depth Primary (Your Own) Research and Document It.

Chapter 11: Buy Process—International Investing.

The World Has Flattened: Hola, Bonjour, Guten Tag, Buon Giorno to the Rest of the World.

Same Difference.

Location of Corporate Headquarters Abroad May Not Constitute a Foreign Company.

You Are Exposed to More Foreign Political Risk Than You Realize.

What About the United States?

Pick Your Comfort Zone and Go from There.

Don’t Confuse a Fast-Growing Economy and a Good Investment.

Currency Risk.

How Much Is Too Much?


Chapter 12: Sell Process—Make Darwin Proud.

Selling When Stock Price Has Gone Up.

Selling When Fundamentals Have Deteriorated.


RISK AND DIVERSIFICATION: Introduction to Risk and Diversification.

Chapter 13: A Different View of Risk.

What Is Risk?

Properties of Randomness.

The Crocodile Hunter, Randomness, and Investing.

Understand the Linkage Between and Inside QVG Dimensions.

Identify Impact of Randomness on Value Creators.

The Cost of Being Wrong.


Chapter 14: A Different View of Diversification.

Don’t Bet the Farm!

Too Many Eggs or Too Many Baskets.

Mental Accounting and Diversification.

Mental Accounting and Randomness in a Stock Portfolio.

Randomness Could Be Your Friend.

Chapter 15: Conclusion and Implication.

I Could Be Wrong, But I Doubt It.

Bull Markets.

Bear and Range-Bound Markets.


No, I Am Not Wrong.

Appendix—Years to Bull Market.




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Author Information

VITALIY N. KATSENELSON, CFA, has been involved with the investment industry since 1994. He is a portfolio manager with Investment Management Associates, where he comanages institutional and personal assets utilizing fundamental analysis. He is also an adjunct faculty member at the University of Colorado at Denver, Graduate School of Business. Katsenelson is a regular contributor to the Financial Times, MarketWatch from Dow Jones, and Minyanville.com. He is a CFA charter holder, member of CFA Institute, has served on the boards of the CFA Society of Colorado, and is currently on the board of the Retirement Investment Institute. Katsenelson received both his bachelor of science and his master of science in finance from the University?of Colorado at Denver, where he graduated cum laude. To read articles Katsenelson has written over the years, please visit: ContrarianEdge.com or ActiveValueInvesting.com.

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Katsenelson's is straightforward enough to keep a rookie investor engaged, and in-depth enough to retain the interest of old pros, which makes this a great book for those of all skill levels. He does a comprehensive job of reviewing the market's past, projecting its potential future, and developing a case for why value investing will shine as the market stagnates. He combines historical and financial analysis, along with engaging stories from his experience as a professional investment manager.--Chuck Saletta, Motley Fool

This book should be considered a practical compendium of modern finance, leaving no stones unturned on your way to better investments. Katsenelson’s passionate, witty and accessible writing expertly takes the reader through his original framework for valuing stocks in range-bound markets. A student of history and an overzealous stock picker, the author entertainingly illustrates every concept with a collection of real-world examples, demonstrating an impressive breadth and depth of understanding of what makes stocks move!--J.P. Tremblay, CFA

"How to adapt value investing for "range-bound" markets." (Financial Times, Tues 26th February 2008)

"The new Benjamin Graham is Vitaliy N. Katsenelson. I highly recommend Katsenelson's book, Active Value Investing: Making Money in Range-Bound Markets (Wiley, 2007). I like to think the old Ben Graham would have recommended it, too."--Forbes

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