Active Value Investing Book Review
Active Value Investing is written by Russian born value investor Vitaliy Katsenelson. I've been a reader of his blog Contrarian Edge and his content is insightful and stock analysis is wonderful. His analysis of American Express in 2008 was probably the best one out there for why AXP was cheap.
So that's how I knew about Vitaliy, but it's only now that I finally got around to reading his book, Active Value Investing: Making Money in Range-Bound Markets (Wiley Finance)
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Range Bound Markets
The reason why it took me so long to get a copy of this book was the title "Active Value Investing" and the price tag. I figured the book would be dry and read much like a text book. Thankfully I was wrong.
The first part of Active Value Investing is all about the economic and historical performance of past markets. Before reading the book, I had always thought the market went up, down or sideways. The author expands on the idea of secular bull, bear markets as well as introducing the "range bound market" which includes bull and bear markets that trade within a range.
I'm not much of an economist or market analyst so until this book, I avoided this type of reading, but surprising, Vitaliy's case was very clear and the supporting evidence even helped me to understand what the heck it was all about.
Active Value Investing
The rest of the book is comprised of value investing concepts, fundamentals, valuation and strategy.
This second part goes through the QVG (Quality, Value, Growth) framework. It's very much like my own spider graphs, but simplified with three axes.
Quality of an investment discusses topics such as
- Competitive advantage
- Management
- Predictable earnings
- Strong balance sheet
- and significance of FCF
In the Growth section, the vital point made by the author is that you need to understand the company and the industry it is in to determine the growth rate. This is exactly what I preach when it comes to choosing a growth rate for the premium stock valuation calculator users. There are many engines to drive growth and while I prefer to take a conservative stance in my growth calculations, the book covers various aspects that I had not considered before.
Up to this point, I was breezing through the content but the Valuation section is what caught my attention. There are several of pages on margin of safety, diversification and discounted cash flow explanations that I skimmed through. It's when discussions of relative and absolute valuation methods came up that really interested me.
I'm a sucker for learning new valuation methods and in the investing world, it seems like it's mostly just refined to DCF and multiples. At least in the value investing world, we have additional methods such as Graham's NNWC and Greenwald's EPV.
Vitaliy provides his own method called the Absolute P/E Model.
I won't get into the details of the absolute P/E model, but it certainly is interesting and while not perfect (what is?), it definitely is a welcome new addition to my toolbox. There is even a model to incorporate margin of safety.
I'll eventually include this in the premium stock analysis tools and provide working examples as I grasp a better understanding of how to use it effectively.
If you can't wait so long for me to post about it, I recommended you read this section of the book yourself.
The Process
The final chapters of book bring everything together and deals with the process of finding ideas, buying, selling, risk and diversifcation.
Summary
- Learnt more about the way the market works
- Good review of value investing principles and fundamentals
- Great discussion of valuation and the process of active value investing.
Get a copy of Active Value Investing: Making Money in Range-Bound Markets (Wiley Finance) through Amazon.
Disclosure
I received a complimentary copy of Active Value Investing. I was not paid to write this review. Links to Amazon are affiliate links.
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