Book Review by Ruth Pelchat: Active Value Investing

Editor’s Note: This is the 13th book review we are publishing as part of our Get Paid to Read contest. Last week, we published Market Wizards by Jack D. Schwager which was reviewed by Peter Obermeyer.

You can explore the rest of the reviews we’ve published in the Reading List section here.

This week, Ruth Pelchat, a retired value investing enthusiast, reviews Active Value Investing by Vitaliy Katsenelson.

I came across Active Value Investing more than 15 years ago when Vitaliy sent me a copy of the book around the time it was published. I finally got a chance to meet him at ValueX Vail last year and am forever thankful for his warm introduction to my publisher Harriman House.

In “Active Value Investing: Making Money in Range-Bound Markets” (2007), Vitaliy Katsenelson presents a detailed process for valuing stocks based on Quality, Valuation, and Growth. He argues that this approach is the most effective way to invest, particularly during times when markets are sideways for an extended period.

Katsenelson begins with a four-chapter foundational introduction of the types of markets, how to identify which market you are in, and a review of sources of capital appreciation, including touching on multiple compression and dividend yield. Second, he presents a four-chapter granular examination of the Quality, Valuation, and Growth framework that serves as a “how-to” guide for valuing individual securities. Third, he offers a four-chapter discussion on the day-to-day process of structuring your identified investments with a disciplined buy-and-sell process. Fourth, Katsenelson dives headfirst into risk management and diversification. The conclusion of the book is a summary as well as a call to action.

Strengths:

• Extensive discussion of shifting market regimes and how to identify them.
  • Katsenelson effectively outlines different market environments and provides practical guidance on recognizing their characteristics.
• Identifying market regimes and their emotional context.
  • The book delves into the psychological aspects of investing, highlighting the importance of understanding investor behavior in different market conditions.
• The QRG Valuation framework “Quality, Value, Growth.”
  • Detailed, step-by-step instructions for a comprehensive valuation framework that incorporates multiple dimensions of stock analysis. This framework serves as a valuable tool for investors seeking to identify undervalued opportunities.
    • “The marriage of Absolute P/E and Margin of Safety” (page 155)
  • The day-to-day of being an active value investor. The book goes beyond theoretical concepts and provides practical insights into the daily activities of a value investor, including stock selection, portfolio management, and risk control.
    • Buy and Sell decisions.
    • Process and discipline.
    • Risk management.

Weakness:

• Technical, better understood with some finance/accounting/mathematical background.
  • The book assumes a certain level of financial literacy and may be challenging for newer investors. See Katsenslson’s “The Little Book of Sideways Markets – How to Make Money in Markets That Go Nowhere” for a lighter treatment.

There are numerous books and articles with “Value Investing” in their titles. Overall, Katsenelson differentiates himself and makes a significant contribution by providing readers with a comprehensive framework for navigating the complexities of value investing in a market characterized by extended periods of sideways movement.

In light of current economic conditions, characterized by markets at all-time highs, persistent inflation, and global uncertainty, this book offers renewed relevance. Its focus on identifying and capitalizing on undervalued opportunities in challenging market environments is particularly timely.