On the heels of the Great Depression, Benjamin Graham introduced the world to the market-beating value investing strategy by publishing Security Analysis and The Intelligent Investor. In the ensuing decades, several successful practitioners of the strategy continued sharing it with anyone who cared to read their works. Former Fool contributor Vitaliy Katsenelson has joined those auspicious ranks with his new book, Active Value Investing: Making Money in Range-Bound Markets.
Katsenelson's style 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.
For instance, Katsenelson's Everyman, named Kenny, has an IRA invested in just five stocks: Oracle (Nasdaq: ORCL ) , Cisco (Nasdaq: CSCO ) , Sun (Nasdaq: JAVA ) , Microsoft (Nasdaq: MSFT ) , and Intel (Nasdaq: INTC ) . While those companies have all been excellent long-run investments, Kenny happened to own them at the peak of the dot-com bubble. Katsenelson weaves Kenny's situation through several key discussions throughout the book, including:
- The dangers of a herd mentality.
- The blinders an investor may put on when his portfolio seems to move in only one direction.
- The critical sell decision.
- The importance of diversification.
A foundation of strength
The core of Katsenelson's strategy is to break down into three key pieces what you need to look at when analyzing a company: quality, valuation, and growth, or QVG. Through this framework, Katsenelson's way of investing comes to life. In the Quality section, Katsenelson discusses a business's strength, its competitive advantages, and the intelligence of the way management handles its capital structure. In the Valuation section, he describes how to figure out what a company is really worth, no matter what the market thinks. And in the Growth section, Katsenelson analyzes the drivers, sources, and risks to the per-share earnings growth that ultimately drives stock prices.
All by itself, Katsenelson's chapter on valuation makes Active Value Investing a worthwhile investment. It provides an easily understood overview of the strongest and most powerful analysis and valuation techniques known to value investors today. His analysis of value of dividends both to investors and to the companies that pay them should be required reading in every company's board room.
What's not to like?
Active Value Investing is an excellent primer of the world's most long-term, successful market-beating strategy. There are, however, two areas where I would have presented the material differently.
First, I believe Katsenelson sold his strategy and his book short by focusing only on range-bound markets. It's true that even Warren Buffett's Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B ) has fallen behind wild bull markets. Even so, value investing performs well over long periods of time no matter what the prevailing market conditions. Katsenelson's implementation aligns well with core value-based strategies, and I believe it will serve investors well over the long run, regardless of overall market trends.
Second, throughout the book, Katsenelson does a thorough job in discussing risks and the tools investors use to manage them. For instance, his example of Tevye the milkman and Golde the auction-bought cow ranks among the best illustrations of critical investor risk-mitigation strategies that I have ever seen. The chapter on risk, however, views risks largely through the prism of randomness.
While randomness is a factor, experience has shown me that cases of value investing gone awry have more to do with missing the signals of ever-deepening operational troubles. His investing risk analysis elsewhere in the book is truly top-notch. I would have appreciated more exposition of those examples and further clarification on what to guard against in the section of the book dedicated to risk.
Great work for all investors
Truth be told, my concerns are few and quite minor. All in all, Active Value Investing accomplishes the feat of being both a great introduction to value investing and a solid reference manual for experienced investors. I'm glad to have it in my collection and am sure I'll refer to its QVG framework in reviewing my own investments in the future.