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Vitaliy Katsenelson – Active Value Investing. Making Money in Range Bound Markets
  • Vitaliy Katsenelson – Active Value Investing. Making Money in Range Bound Markets

Vitaliy Katsenelson – Active Value Investing. Making Money in Range Bound Markets


Vitaliy Katsenelson – Active Value Investing. Making Money in Range Bound Markets

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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

Table of Contents

Preface xiii

PART ONE What the Future Holds

CHAPTER 1 Introduction: Range-Bound Markets Happen 3

Fasten Your Seat Belts and Lower Your Expectations 3

Let’s Identify the Animal 4

Secular versus Cyclical 4

Distinction between Secular Bull, Bear, and Range-Bound Markets 6

Is 100 Years Long Enough? 7

Stocks Carried the Torch in the Long-Run Marathon 8

International Stocks Were Bright Lights, Too 10

Will Gold Shine Again? 11

Gold’s Recently Emerged Competition 13

The Deception of the Long Run (Marathon) 14

Range-Bound Markets Erode Bull Market Returns 15

The Long Run for Us May Be Shorter Than

We Think 17

CHAPTER 2 Emotions of Secular Bull, Bear, and Range-Bound Markets 23

Bull Market Euphoria 23

Bear Market Doldrums 25

What Does a Secular Range-Bound Market Feel Like? 29

Volatility of Bull and Range-Bound Markets 31

CHAPTER 3 Stock Market Math 37

Sources of Capital Appreciation: Earnings Growth 38

Sources of Capital Appreciation: Price to Earnings 48

Sources of Dividend Yield 57

Why Range-Bound Markets Follow Bull Markets 61

It Is Not Over Until It Is Over 62

CHAPTER 4 Bonds: A Viable Alternative? 67

Why Not Bonds? 67

Asset Allocation Role Is Diminished in Range-Bound Markets 69

PART TWO Active Value Investing


Introduction to Analytics: The Quality, Valuation, and Growth Framework 77

CHAPTER 5 The ‘‘Q’’—Quality 79

Competitive Advantage 79

Management 82

Predictable Earnings 89

Strong Balance Sheet 91

Significance of Free Cash Flows 95

High Return on Capital 102

Conclusion 102

CHAPTER 6 The ‘‘G’’—Growth 103

Sources of Growth: Earnings Growth and Dividends 103

Past Has Passed 111

Future Engines of Growth 112

Dividends 114

Growth Matters—A Lot! 117

CHAPTER 7 The ‘‘V’’—Valuation 119

Tevye the Milkman’s Approach to Valuation 119

Review of Relative Valuation Tools 128

Absolute Valuation Tools—Discounted Cash Flow Analysis 132

Relative versus Absolute Tools 134

Absolute Models Overview 136

The False Precision of Math 137

Absolute P/E Model 139

Discount Rate Model 148

Margin of Safety Model 151

The Marriage of Absolute P/E and Margin of Safety 155

Bring Out the Toolbox 155

The P/E Compression and How to Deal with It 157

CHAPTER 8 Let’s Put It All Together 165

The Added Clarity 165

One Out of Three Is Not Enough 165

Two Out of Three Is Better, But Is It Enough? 167

Conclusion 174


Introduction to Strategy: The Value of Process and Discipline 177

CHAPTER 9 Buy Process—Fine-Tuning 179

The Value of the Process and Discipline 179

Think Long-Term, Act Short-Term 181

Meet Your New Best Friend—Volatility 182

Time Stocks, Not the Market 183

Cash Is King 185

Be Ready to Strike When the Time Comes 186

CHAPTER 10 Buy Process—Contrarian Investing 187

Contrarian Is the Name of the Game 187

You Don’t Have to Own It 189

Be a Myth Buster 190

Quantify Everything and Be a Contrarian Headline Investor 191

Time Arbitrage 192

Finding New Ideas 193

Do In-Depth Primary (Your Own) Research and Document It 200

CHAPTER 11 Buy Process—International Investing 201

The World Has Flattened: Hola, Bonjour, Guten Tag, Buon Giorno to the Rest of the World 201

Same Difference 202

Location of Corporate Headquarters Abroad May Not Constitute a Foreign Company 203

You Are Exposed to More Foreign Political Risk Than You Realize 204

What About the United States? 205

Pick Your Comfort Zone and Go from There 206

Don’t Confuse a Fast-Growing Economy and a Good Investment 207

Currency Risk 207

How Much Is Too Much? 208

Conclusion 209

CHAPTER 12 Sell Process—Make Darwin Proud 211

Selling When Stock Price Has Gone Up 212

Selling When Fundamentals Have Deteriorated 215

Conclusion 221


Introduction to Risk and Diversification 225

CHAPTER 13 A Different View of Risk 227

What Is Risk? 227

Properties of Randomness 228

The Crocodile Hunter, Randomness, and Investing 229

Understand the Linkage Between and Inside QVG Dimensions 234

Identify Impact of Randomness on Value Creators 235

The Cost of Being Wrong 238

Conclusion 239

CHAPTER 14 A Different View of Diversification 241

Don’t Bet the Farm! 242

Too Many Eggs or Too Many Baskets 243

Mental Accounting and Diversification 244

Mental Accounting and Randomness in a Stock Portfolio 246

Randomness Could Be Your Friend 248

CHAPTER 15 Conclusion and Implication 251

I Could Be Wrong, But I Doubt It 251

Bull Markets 252

Bear and Range-Bound Markets 253

Bonds? 255

No, I Am Not Wrong 256

Appendix—Years to Bull Market 257

Acknowledgments 267

Notes 273

Index 275


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 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: or


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