Active Value Investing

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. Katsenelsons 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

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 Minyanville.com. 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: ContrarianEdge.com or ActiveValueInvesting.com

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 Lets 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 Golds 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 Analytics Introduction to Analytics: The Quality, Valuation, and Growth Framework 77 Chapter 5 The QQuality 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 GGrowth 103 Sources of Growth: Earnings Growth and Dividends 103 Past Has Passed 111 Future Engines of Growth 112 Dividends 114 Growth MattersA Lot! 117 Chapter 7 The VValuation 119 Tevye the Milkmans Approach to Valuation 119 Review of Relative Valuation Tools 128 Absolute Valuation ToolsDiscounted 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 Lets 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 Strategy Introduction to Strategy: The Value of Process and Discipline 177 Chapter 9 Buy ProcessFine-Tuning 179 The Value of the Process and Discipline 179 Think Long-Term, Act Short-Term 181 Meet Your New Best FriendVolatility 182 Time Stocks, Not the Market 183 Cash Is King 185 Be Ready to Strike When the Time Comes 186 Chapter 10 Buy ProcessContrarian Investing 187 Contrarian Is the Name of the Game 187 You Dont 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 ProcessInternational 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 Dont Confuse a Fast-Growing Economy and a Good Investment 207 Currency Risk 207 How Much Is Too Much? 208 Conclusion 209 Chapter 12 Sell ProcessMake Darwin Proud 211 Selling When Stock Price Has Gone Up 212 Selling When Fundamentals Have Deteriorated 215 Conclusion 221 Risk and Diversification Introduction to Risk and Diversification 225 Chapter 13 A Different View of Risk 227 What Is Risk? 227 Propert