I enjoyed reading
Vitaliy N. Katsenelson
The Little Book of Sideways Markets
, now added to our list of recommended books. You will, too. Most
individual investors will profit greatly, and even experienced
investors will pick up some valuable pointers.
The basic thesis for the book is that investors should expect a
long period of time with the market going sideways. Katsenelson's
argument is that the recent rally in stocks has seen most companies
borrow against future earnings. He sees mean reversion behavior in
profits. He made a similar prediction a few years ago, earning
widespread acclaim. He is now repeating it. He also sees various
global economic headwinds which he describes in some detail,
identifying several species of "grey swans."
The author has support from some influential voices. John
Mauldin contributes the Foreward. While he did not know it at the
time of writing, the major thesis also has the endorsement of Doug
Kass. Kass has made the unusual prediction of a flat market for
2011. He emphasizes mean reversion in earnings, which he thinks
will lead to a compression in P/E multiples. For those who have a
serious interest in making money, you should consider the entire
Kass interview cited below. (HT - Mike C.) For those who want to
focus on the question of P/E multiples, scroll ahead to the eight
Here is where the fun starts!
Regular readers know that
I completely disagree with this thesis.
analysis of data
shows that when market participants have an obsessive concern about
a recession, the P/E multiples reflect this. There is plenty of
evidence that most people think we are still in a recession, so
there is intense skepticism about earnings growth. Even a modest
level of economic growth will restore some confidence. I already
see this in many indicators that I follow each week. I predict an
expansion in the P/E multiple, and each point is about 7-8% of
My conclusion is that the economy can grow modestly, earnings
growth can slow, and yet ---- some confidence can be restored,
increasing the multiple. Unlike other contestants in this
discussion, I actually
have some data
on my side. Time will tell who is correct.
This raises a good question. If I disagree with the major
thesis, why do I like the book?
First, we all should read a very wide range of sources. I spend
much of my time each day reading viewpoints at wide variance from
Second, and more important,
Vitaliy's book will empower you as an investor.
Let us consider this proposition in further depth.
The book provides quite a number of investing lessons. The basic
price to cash flow analysis is described in a charming fashion --
easy to understand. Sophisticated investors can just enjoy this as
a lesson for the newbies.
In the middle chapters we can see the real analysis. Here are
the key precepts:
- Look for real value on a price-to-cash flow/ return on equity
- This is not "buy-and-hold."
- Sell when a stock reaches your fair value target.
Emphasizing, don't reach for a "top valuation."
These are all very good points. My summary does not do justice
to the persuasively written text in the book.
Why You Should Read the Book
This is a book that teaches you about finding good stocks. It
does so in a well-written and colorful fashion. You will enjoy
reading the discussion and the examples, and nearly everyone will
learn. You really need to dip in and read to enjoy the colorful and
This is an investment lesson that any intelligent
reader can understand.
Attention: Self Perceived Experts
If you think you know what is going to happen -- bullish or
bearish -- Vitaliy has a chapter just for you!
You need a reality check! Chapter 13 will deliver! The real
question is how to test yourself with alternative outcomes.
I would be lying if I said that I learned something about
investing from this book. Realistically, it describes what I do
every day -- finding value with key metrics, avoiding buy and hold,
selling when there is no longer any edge.
Yet even for me the provocative discussions helped to focus on
the key questions.
In Chapter 17 the author expains why his approach would still be
strong even if markets (to his surprise) make a big rally. I think
this is the key point.
You will enjoy and profit from this book regardless of
your opinion about the market.
This book describes what many of us do in picking stocks, and it
does it very, very well. Even if you do not embrace the sideways
market thesis, I strongly recommend the book. Most readers will
learn a great deal, and the lesson will be an easy one.
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