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The Little Book of Sideways Markets: How to Make Money in Markets that Go Nowhere

ISBN: 978-0-470-93293-3
226 pages
December 2010
The Little Book of Sideways Markets: How to Make Money in Markets that Go Nowhere (0470932937) cover image
"It's hard to talk clearly about investing and make sense to ordinary readers at the same time. Katsenelson gives a lucid explanation of today's markets with sound advice about how to make money while avoiding the traps that the market sets for exuberant bulls and frightened bears alike."
Thomas G. Donlan, Barron's

"A thoroughly enjoyable read. Provides a clear framework for equity investing in today's ‘sideways' and volatile markets useful to everyone. Clear thinking and clear writing are not often paired - well done!"
Dick Weil, CEO, Janus Capital Group

"The bible for how to invest in the most tumultuous financial market environment since the Great Depression. A true guidebook for how to build wealth prudently."
David Rosenberg, Chief Economist & Strategist, Gluskin Sheff + Associates Inc.

"A wonderful, grounded read for new and seasoned investors alike, Katsenelson explains in plain English why volatility and sideways markets are a stock picker's best 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

"Thoroughly enjoyable . . for the thoughtful and often entertaining way in which it is delivered. . . 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."
Seeking Alpha

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Foreword.

Acknowledgments. 

Introduction.

Chapter One Fasten Your Seat Belt.

Chapter Two A Sideways View of the World.

Chapter Three Don't Shoot the Messenger.

Chapter Four Tevye Was a Rich Man.

Chapter Five What We Can Learn from Gamblers.

Chapter Six Brought to You by the Letter “Q” (for Quality).

Chapter Seven Brought to You by the Letter “G” (for Growth).

Chapter Eight Brought to You by the Letter “V” (For Valuation).

Chapter Nine Add it Up.

Chapter Ten Nip/Tuck.

Chapter Eleven The Born-Again Value Investor.

Chapter Twelve Applying Darwinism to the Sales Process.

Chapter Thirteen You Are Not As Dumb – or Smart – As You Think.

Chapter Fourteen On a Scavenger Hunt for Stocks.

Chapter Fifteen Farewell, Blissful Ignorance.

Chapter Sixteen Think Different.

Chapter Seventeen I Could Be Wrong, but I Doubt It.

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VITALIY N. KATSENELSON, CFA, is Chief Investment Officer at Investment Management Associates. Whilehis primary focus is on discovering under-valued companies for his clients, he is also known for his uncommon common sense, which he has regularly expressed in articles in the Financial Times, Barron's, Bloomberg Businessweek, the Christian Science Monitor, Institutional Investor, and the New York Post, among other outlets. He speaks frequently to investment groups around the world, and was most recently profiled in Barron's in September 2009. Previously, he was an adjunct faculty member at the University of Colorado Graduate School of Business, and he is also the author of Active Value Investing.
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“This is a book you can understand and have fun with no matter what level of experience you have.  Even advanced investors have to refresh themselves in the basics once in awhile. Read it . . “ (Financial Tides and Seeking Alpha)

“This book isn’t about market timing. It’s about winning in a flat market — the sort of knowledge that can make you a lot of money. In his book, Katsenelson reminds us that investing returns come in three ways: more earnings, more dividends, or a higher price-to-earnings ratio. I’m a dividend guy, so Katsenelson had me when he declared that ‘the importance of dividends quadruples in sideways markets, where they historically represent more than 90% of total return.’ Amen, brother! There are a lot of ‘little books’ out there, but The Little Book of Sideways Markets offers excellent advice, reads easily, and will help you sidestep a potentially frustrating market.”(Motley Fool)

“Offers guidance on the discipline of selecting stocks, as well as wisdom on the challenges of knowing when to sell.  Does a masterful job of taking a highly technical subject and explaining it in easily understood terms.  His explanation of discounted cash flow analysis to determine the right price for buying an asset is the best, and the most entertaining.” (NAPFA Advisor)

“Thoroughly enjoyable . . for the thoughtful and often entertaining way in which it is delivered. . . 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.” (Seeking Alpha)

 

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December 06, 2010
Little Book of Sideways Markets

In THE LITTLE BOOK OF SIDEWAYS MARKETS, respected value investor Vitaliy Katsenelson explains how to survive a stagnant market that’s neither bull nor bear but instead what he calls a cowardly lion—it displays occasional bursts of bravado but is ultimately overcome by fear. For the next decade or so, the Dow Jones Industrial Average and the S&P 500 index will likely do what they did over the preceding decade: go up and down, setting all-time highs and multiyear lows along the way. But at the end of the ride, index and buy-and-hold stock investors, having experienced ups and down and swings akin to those on an amusement park ride, will find themselves pretty much back where they started in 2000. This is all well and fine for visitors to Six Flags, but not for investors.

According to Katsenelson, every long-lasting bull market of the past two centuries was followed by a sideways market that lasted about 15 years. The Great Depression was the only exception. Despite common perception, secular markets spend a lot of time in bull or sideways phases, and roughly an equal amount in each. They visit the bear cage only on very rare occasions. This doesn’t happen because the market gods want to play a practical joke but because stock prices are driven in the long run by two factors: earnings growth (or decline) and price-earnings expansion (or contraction). Prolonged bull markets start with below-average P/Es and end with above-average ones, but sideways markets rid us of the high P/Es caused by the bulls, taking them down to and actually below the mean. P/E compression—a staple of sideways markets—and earnings growth work against each other, resulting in zero (or near-zero) price appreciation plus dividends.

So how does one survive in a sideways market? Katsenelson suggests becoming a born-again value investor. “Traditional buy-and-forget-to-sell investing is not dead but is in a coma waiting for the next secular bull market to return—and it’s still far, far away.”

Katsenelson argues that investors must adjust their strategies and offers this advice:

  • Increase the margin of safety. Value investors seek a margin of safety by buying stocks at a significant discount to protect them from overestimating the “E.” In this environment, that margin needs to be even more beefed up to account for the impact of constantly declining P/Es. 
  • Don’t fall into the relative valuation trap. Many stocks will appear cheap based on historical valuations, but past bull market valuations will not be helpful again for a long time. Absolute valuation tools such as discounted cash flow analysis should carry more weight. 
  • Don’t time the market. Though market timing is alluring, it is very difficult to do well. Instead, value individual stocks, buying them when they are cheap and selling them when they become fairly valued.
  • Don’t be afraid of cash. Secular bull markets taught investors not to hold cash, as the opportunity cost of doing so was very high. The opportunity cost of cash is a lot lower during a sideways market. And staying fully invested will force investors to own stocks of marginal quality or ones that don’t meet your heightened margin of safety. 

THE LITTLE BOOK OF SIDEWAYS MARKETS explains what sideways markets are, discusses how they will impact the market, and provides a framework for stock analysis that takes into account the lingering effects of the Great Recession, the financial conditions crisis of 2008-2009, and the coming impact of the economic conditions in Japan and China so that investors will triumph even when the market is stalled.

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