I read Active Value Investing and has subscribed to Vitaliy’s blog for while some time. It is an insightful book that helps me formulating my approach to investing. Vitaliy’s Absolute PE model is very interesting. I’ve been using it as a sanity check and it came pretty close to my subjective judgments. To a certain extent, it’s very similar to Graham’s formula (http://en.wikipedia.org/wiki/Benjamin_Graham_formula). But there are a couple of things I have reservations:

- Vitaliy briefly mentions in the book one needs to adjust the formula if long-term bond yield is in abnormal range. But he doesn’t elaborate further. So, how to adjust?

- Vitaliy uses expected growth to offset required margin of safety. (e.g. if growth is 10%, you can reduce your MoS by 10%.) This goes against the original spirit of Graham’s margin of safety. The MoS is there to protect you from making mistake and one of the easiest places to make mistake is growth projection. Using growth to offset MoS is going around in circle.

- If you follow Vitaliy’s blog, you will notice he’s bearish on China and he has repeatedly stayed his case many times using the same set of evidences and arguments. That worries me a bit that Vitaliy suffers from “confirmation bias”. If he were open-minded on the China case, he should’ve quoted newer observations, data and evidences throughout the year, not the same thing over and over again.

Overall, this is a great book.